When an entrepreneur starts a business, they may see startups and small businesses differently. While these two types of businesses have a lot in common, there are some key differences that you should know about when creating your company so that you don't make any critical mistakes early on.
The initial decisions that you make when forming your business will fuel your early success or cause you to experience numerous hurdles at a time when you likely don't know how to navigate such problems. While there are no strict guidelines that determine what a startup is, the general definition of a startup is any company that's in the initial stages of operations but expects significant growth in the near future.
On the other hand, a small business is any kind of business that only has a certain amount of employees, the maximum of which differs by industry. Though these types of businesses may sound the same, understanding the differences between the two will be integral to your future success as an entrepreneur.
Business Growth and Revenue
Likely the most notable difference between a startup and a small business involves the type of business growth and revenue goals that they have. Small businesses are driven primarily by profitability as well as consistent long-term value. When a small business is starting out, they aim to be profitable immediately. While a small business will attempt to grow over the years, this growth is meant to be stable and consistent, which means that a small business will always remain a small business. Growth for a small business only happens when necessary and is mainly fueled by the need to remain profitable.
There are also size standards that dictate how large a small business can be depending on the industry. For instance, a small business within the agriculture industry must earn less than $750,000 in yearly receipts. As for wholesale trade, the maximum number of employees allowed for a small business is between 100-250.
Any small business in the real estate, leasing, or rental industry must earn a maximum of $7.5-$37.5 million in annual receipts. While the majority of industries set relatively high cutoffs for small business employees and revenue, the vast majority of small businesses in the U.S. have less than 20 employees. In fact, it's estimated that nearly 90 percent of all businesses in the U.S. are comprised of fewer than 20 employees.
Startups are entirely different than small businesses when it comes to business growth and revenue. For instance, startups are focused primarily on top-end revenue and growth potential. A startup is considered to be a temporary business model wherein the focus is on rapid growth. Unlike a small business, there are no restrictions or limitations placed on growth. While small businesses are perfectly content with operating in a small portion of a large market, startups usually want to obtain as much market share as they can with the product or service that they provide.
Startups won't be profitable in the initial stages of business development since they want to grow within the shortest time possible. It will sometimes take years for a startup to make its first dollar of profit. The main goal is to create a product or service that can be successfully placed on the market, which could bring in millions of dollars worth of profit in the long run. Among the most successful startups is Uber, which now has a market value of $50 billion. Whether your goal is to create a small business or startup, you should know the difference between these two business types when forming your own company.
Different Funding Solutions
The difference between startups and small businesses can also be felt in the types of funding solutions that they use. Small businesses and startups have very different relationships with funding. A small business can be funded with numerous types of financing. However, this funding is relatively low in most cases and usually doesn't exceed a couple thousand dollars from a single source. In fact, nearly 33 percent of all small businesses will start out with less than $5,000 in funding.
While this likely sounds like a very small amount of money for starting a business, many small businesses can get by without much funding since they focus on profitability from day one. Since these businesses immediately bring in a profit, obtaining significant amounts of funding isn't necessary. The main sources of funding for small businesses include private savings, banking credits, and investments from family and friends. It's also possible to obtain small business loans with competitive terms if your company qualifies as a small business.
Startups obtain funding in a very different way. Since these businesses are attempting to create a product or service that's viable on the market, they will usually need to put in significant amounts of capital for product development, which usually can't be done without the right investments. In many cases, startups will obtain funding from angel investors or venture capital firms.
The first round of funding for most startups involves seed funding, which means that the startup will approach potential angel investors for money. These investors are individuals who want to invest in a company that they believe is going to eventually make it big. These investors will get a share of the business for their money, which usually equates to 5-10 percent. The average funding provided by an angel investor is anywhere from $10,000-$100,000.
When a startup has developed their business idea and is looking to expand their market, venture capital firms may invest in the company, which is the best kind of investment available to startups. Venture capital firms may participate in Series A, B, and C rounds of funding. While startups will need to make an extensive pitch of their business to a venture capital firm, these firms can invest anywhere from $1 million-$100 million into a single startup depending on the financing stage that the startup has reached.
While this funding is appealing to many young startups, it's important to understand that venture capital firms typically want a high return on investment of at least 20 percent, which means that the best time to obtain venture capital funding is when you're ready for substantial growth.
What are Your Company Objectives?
It's important to understand that small businesses and startups have different company objectives and scopes with the services and products that they provide. While a small business wants to make progress, their main objective is to focus on meeting the needs of their target audience so that they can continue being profitable. The growth of a small business is centered almost entirely on keeping their customers satisfied.
As for startups, the first objective of a startup is to turn an intriguing idea into a product or service that can reach a large market. When entering a market, a startup wants to be as successful as possible, which allows them to obtain a high market share. The end objective for a startup is to become a leader within the industry that they've entered.
Before you decide on whether you should pursue the creation of a startup or small business, it's essential that you're fully aware of the risks involved with these two approaches. Nearly 33 percent of small businesses will fail and need to be shut down within the first three years of operation. If this number seems high to you, more than 90 percent of startups will be shut down within that same time period, which means that creating a startup comes with much more risk. If your product or service idea doesn't pan out like you imagined it would when first creating the startup, you'll need to adapt quickly or risk needing to shut down your startup.
Since small businesses don't have as much funding as startups, the venture is less risky. However, the ROI for a startup can be astronomically higher than what it is with a small business. Both of these options are fantastic. If you want to create a business that's successful, each method can provide you with tangible benefits. However, you must be certain that the decision you make is right for you. If you have a great idea that you think can be a very successful product or service, it's likely that a small business won't be enough to contain such an idea.
Innovation is the name of the game for startups. You'll need to either create something new or improve on something that already exists if you want your startup to be successful. The same isn't true with a small business. Small businesses can be anything from a restaurant to a hair dressing salon, which means that the idea behind the business doesn't need to be unique.
Before making your final decision, you should also understand the exit strategies of these companies. With a small business, you can either sell the company or turn it into a family business. On the other hand, startups that have proven to be successful are usually acquired by a larger company or converted into an IPO, which is an initial public offering that allows for the issuance of stock.
Am I Building a Startup or a Small Business?
If you've begun to form a company, you may be wondering if you're building a startup or a small business. To identify what type of business you're creating, it's best to think of a startup as the initial stage of a business. For instance, Amazon effectively began as a startup and is now among the largest companies in the world.
If your goal is to become a leader in a given industry, a startup is perfect for you. Keep in mind that startups begin with with a focus on product development, high amounts of growth, and innovation. Almost as important as the product development that your startup performs is the amount of customer research that you conduct. In order for a startup to become successful, they must know their customer and understand how to grow their company to larger markets. You need to be ready for the challenges and stress that you'll experience in the early years of your startup.
On the other hand, small businesses focus on less revenue and profitability, a small market area, and smaller numbers of employees. When you create a small business, it's important to understand that growth will be slow and limited. You're never going to experience rapid growth and shouldn't want to with the type of business that you create. If you would like to set your own hours and work in an industry that you're interested in, creating a small business is a great way to accomplish these goals.
Whether you're in the process of building a startup or a small business, it's important that you know the difference between these two types of companies. Since the growth outlook is significantly different with each type of company, you need to determine how much you want your business to grow before your company is fully up and running.