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The collocation “startup vs. small business” can be heard everywhere, and sometimes the first one is misused. A fancy coffee shop – startup, a teenager clothing brand – startup, a new mobile app – double the “startup”. It was recently hinted that launching a startup will equally mean that you are doing handmade souvenirs!
It may sound hilarious at first, but the reality is: a confusion of terms hurts the economy. A business owner can mistakenly take advice from startup founders. From our own experience, working with various international startups and small businesses, we want to clearly explain the difference between a startup and a small business. There would be fewer such misunderstandings.
For that reason, to set things once and for all, we prepared this particular article round of startup vs. small business so that you can understand what makes them so different and choose your winner in this battle.
Definition
According to Forbes, a startup is working to solve a problem where the solution is not apparent, and success is not guaranteed. For the business to live, the founder simply has to check whether the theoretical problem is correct constantly. Most startups may change it several times within just a few months of preparation time.
This is the alpha version of the future corporation going through all the options and possibilities, looking for a way to impact the market as quickly as possible. For example, the video platform for gamers, Twitch, was originally a site where its creator showed his own life online around the clock. When it became possible to broadcast such broadcasts to subscribers themselves, the project gained not only frenzied popularity but also a new business idea, and with it, a completely different level of monetization.
On the other hand, small business is first and foremost a form, not the organization itself. Its owner does not strive to prove anything, and its primary goal is to generate income, preferably from the first day of existence. Shops, restaurants, barbershops, or private stores – anything that can have a standard business model and fits the definition of a cooperative, partnership, or sole proprietorship can safely be called a small business.
And, figuratively speaking, if these two concepts were to be depicted graphically, the first would resemble a spiral and the second a chaotically galloping broken line. Such is the begging of the battle between startup vs. small business.
Startup vs Small Business: Differences
The main difference is in the rate of growth. A small business may not grow at all or grow relatively slow while a startup overgrows. It is his essence, after all. An exciting definition was given by the “Godfather of Silicon Valley,” Steve Blank. He said that a startup is a temporary organization whose main task is to find a repeatable and scalable business model. When that model is found, the startup can accelerate growth dramatically.
A startup is an entirely different type of company that has little in common with small entrepreneurship. A startup is unstable and very unpredictable in long-term development. Most of the time, a startup business plan will be rewritten multiple times due to its development path’s inconsistency. Founders have to control the situation, but they cannot predict everything, so they eventually have to adjust their startup to current circumstances. That is how the first round of startup vs. small business goes by. Let’s see some other great contrast between these business entities.
Innovation and Technology
It is not uncommon to call a startup a business that has innovations or creative tech solutions. Indeed, a startup often has innovation at its core and uses original and advanced technology. However, these attributes are secondary.
Although most startups are innovative in one way or another, growth is primary. Still, as a rule, it is reaching through the expense of innovation in the product, marketing, or business model. However, it may just be a successfully repeated business, with much faster and better execution.
An e-commerce shop with average growth is hardly a startup, even if you make a unique handicraft that no one ever did before. Blue Bottle Coffee Shop, on the other hand, can be called a startup due to its super explosive growth across the U.S.
It’s not a service or product that can be innovative, but a business model or specific tools. Many of the projects that come to us are mainly oriented on some target market segments that were practically unoccupied. Most of the time, they have a tough time finding the right technical partners they could easily trust. But what exactly made them come directly to us? To prepare a young startup for the correct development path and surpass all of the hidden milestones, we created the Product Development Strategy Session. Our professional business consultants will give you a ballpark estimate of your project, adjust your future development direction, and advise how you can improve your current product. All of that with no penny charged. Schedule an introductory call with us, and we will take it further!
Investment: credit vs. venture capital
Another essential difference is in raising investment rounds. Startup capital for a small business can be taken from another business, borrowed from a bank, or asked from your business acquaintances. Such a company has a clear business plan, which guarantees profit in a short time. The risks are minimal, and the figures are precise. A small grocery store or an account on a site like Aliexpress can give “profit” in as little as a month.
It’s completely different in a startup. A startup is an expensive venture that may not yield any return for months or even years. In some cases, you can’t even take a loan from a bank to launch a startup because it is too unpredictable. So it does require significant investments and long and serious work, but in the end, it may bring worth much more than a small business. During the initial stages, a startup can develop either with the entrepreneur’s capital or with the help of venture angels or any other means of investment source. The first option is preferable because it allows for a prolonged existence without any 3d party involvement. Starting from the Series A stage and further on, the primary source of money for any startup will be VC funds.
The mechanics of venture capital
A venture capital fund is always looking for a project with billion-dollar potential. It is better to explain the reasons for this choice with an example. Let’s say there is fund X, which is going for about ten years. Its goal is to increase the initial capital by at least three times during its existence. The first half of this period will be spent on the conclusion of investment deals, the second half, to profit. According to statistics, a third of all investments will simply “burn out”. Another third will come back. And finally, the last third will bring money to the fund.
Let us assume that fund X initially has $100 million, and approximately equal investments from it receive 30 startups. Only 10 of them will make a profit, as we remember. The assets will take place in the seed round or Series A stage. The initial investment will be $1 million each at 20% of the capital, plus the option to invest additional funds later to hold their share.
Let’s get right to the point where ten companies have become successful, and investors can sell their stakes in these companies and make a profit. Fund participants own 20% of these companies, and the sale of all shares should provide investors with a total of three times the money invested – $300 million. For simplicity, let’s divide $300 million by ten companies – and get 30 million from each company. For 20% of the company brought $ 30 million, its total value should be $ 150 million. That’s the minimum bar. If the price is lower, the fund will not get what it has been working for ten years.
The chances that all ten companies will be worth $150 million or more are incredibly slim. The venture capital fund is betting that the clear leader – a company worth about a billion dollars – will be in the top ten. The leader recovers most of the fund, and the other companies’ task is to help the fund reach the desired state. It is essential to understand that the risks are high, and no one knows at the start which startup will become a billion-dollar “unicorn” and which will not. And that’s how we end this battle today of a startup vs. a small business.
In Conclusion
In the end, calling a small business a startup for the sake of a fancy term is a bad idea. A small business is just as good as a startup, and it has the potential and benefits. A small bakery can develop into a large enterprise company if the founders have that desire. A startup is an entirely different type of company. It snowballs, sometimes out of the determined scope and boundaries.
To understand how to position a company and resolve the fight between a startup vs. small business, you need to assess its growth potential. If you genuinely see real potential in your project, all that’s left is to assemble a team, create a business plan, and spread the idea across the world. If you don’t see it, but you like the idea, go ahead and do it, just don’t call it a startup. Create a small business and make it successful.
If you can’t understand or determine how exactly you should spend your capital to reach your product’s full potential, then JetRuby is the right place for you. Specifically for young startups and beginning entrepreneurs, we created a unique program called the Product Development and Strategy Session. Where we analyze your project, produce a ballpark estimate on your development plan, and adjust your current flow to the correct one. All of that you can get on our free business consultation. Leave a short description of your business and schedule a call with us today!
