Startups vs. Small Businesses: What’s the Difference?
What do Uber, Airbnb, and Facebook have in common? They’re all massively successful startup businesses. What does your local bar have in common with your dentist’s office? They’re both small businesses. While some similarities can be found between small businesses and startups (like owners taking on multiple roles, the small number of employees, and the motivation to quickly make a profit), they usually differ when it comes to long-term goals.
What is a Startup?
Often rooted in innovation, startups are young companies that provide a unique service or product, and usually have an overall goal of scaling the business fast. Startups are often known within their industries as disruptors because they bring a new perspective to the old way of doing business. For example, if you’re starting a used car dealership in your hometown, you’re forming a small business. If you’ve built an app that changes the way customers buy and sell cars, you’re a startup business.
What is the best legal structure for a startup?
The best legal structure for a startup depends on the goals of the business. Startups are often structured as corporations because, like LLCs, they provide liability protection in the event of a lawsuit or bankruptcy. But unlike LLCs, corporations attract investors hoping to recoup their money if the startup goes public.
What is a Small Business?
Small businesses are often operated by a single owner or a small group of owners. A small business can be a sole proprietorship, partnership, or organized as an LLC, corporation, or nonprofit. Small businesses are present in every industry—from construction, retail, food service, manufacturing, web services, even your local handyman—and often have a sustainable vision for the growth of the business.
|
Startup |
Small Business |
|
|
Purpose |
Disrupts an industry by bringing new technology, products, or services to a wide market |
Provides products or services in an established industry, often on a local level |
|
Funding |
Often seeks external funding from angel investors, venture capitalist firms, or other sources |
Usually self-funded or funded by friends, family, or traditional bank loans |
|
Risk |
Very risky due to size and scale of the business and its goals |
Less risky because they generally operate in established industries at a small scale |
|
Growth |
Rapidly expands services or products to gain market share |
Aims for slow and steady growth with the aim of financial sustainability |
|
Exit Strategy |
Aims to get out quick with a high dollar sale of the business or initial public offering (IPO) |
Aims for long-term ownership, with possible plans to pass down the business to the next generation or sell for a profit at a later date |
Funding Sources
Almost every business requires some amount of funding to get off the ground. The difference between a small business and a startup is typically where the funding comes from and how much is required. For the most part, small businesses rely on local funding sources, their own savings, family and friends, or traditional bank loans. Startups can raise money from friends and family as well, but as they grow they might also be funded by angel investors or attract Venture Capitalist (VC) funding.
Looking for ways to finance your business, check out our article on 5 Ways to Finance Your Business.
Business Risk
Small business aren’t looking to change the way industries work, which means they have a more stable strategy for growth and may not require the same type of funding in order to be successful. On the other hand, startups are looking to hit a home run and take on major industry players. For example, Airbnb disrupted the hotel industry and changed the way people book their vacations. Uber disruped the taxi industry and changed the way people travel. Going after an established industry carries a lot more risk and requires a lot more money than starting a local plumbing business.
Growth Potential
While small businesses tend to focus on measured growth, startups often have a much more robust growth strategy. Small businesses often focus their energy on earning trust with local customers—a long-term strategy. Startups, on the other hand, focus on developing a product or service that they can bring to a nationwide market. The exponential growth of startups is what makes them so attractive to investors and venture capital funds.
Exit Strategy
If you’re running a small business, you’re probably not thinking of an exit strategy. Small business owners are often looking to build something they can pass their business down to their children or sell it when it’s time to retire. Startups, on the other hand, typically have an exit strategy in mind. The goal of a startup may involve getting acquired by a larger company (like when Facebook bought Instagram) or an initial public offering (IPO) of stock that provides massive returns for early investors and founders.
What kind of business do you want to be?
It’s important to understand that the differences between startups and small businesses aren’t set in stone. There can be overlap between the two. A business that initially started out as a small business may find that as it matures, the goals of the business change, and the appetite for growth and risk can shift more towards a startup model. The direction you choose will help to define the future of your business.
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