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Considering a new business venture? When it comes to starting a small business, one of the most important factors to consider is whether you’re launching a startup or a small business. While the terms are frequently used interchangeably, they have distinct meanings.
When starting a business, an entrepreneur may have a unique perspective on startups versus small businesses. While these two types of businesses have many similarities, there are some key differences to be aware of when forming a company so we don’t make any mistakes early on. Given the launch and exponential growth of companies like Airbnb, Uber, and Snapchat, it’s no surprise that the term “startup” has become so quickly integrated into the business community’s everyday vocabulary.
What is a Startup?
A startup is a type of young company that aims to impact the industry and gain market share quickly. Typically, the founder seeks outside funding to help the company grow quickly. These businesses operate similarly to any other, with a single employee or a group of employees working to produce a product. Their main goal, however, is to expand into a larger, more influential company and to pioneer a completely new way of providing a service or product. Uber, for example, revolutionized the on-demand hiring of drivers, while Airbnb revolutionized the vacation rental market.
A small business, whether it’s a sole proprietorship, partnership, or corporation, is a privately owned company. While small businesses can employ up to 1,500 people (depending on the industry), nearly 90% of them have 20 or fewer employees. According to the US Small Business Administration, a venture must be for-profit, independently owned and operated, and not nationally dominant in its field to be considered a small business (SBA). Small businesses are also more likely to sell locally and develop personal relationships with their customers.
Product or service innovation is one of the most significant differences between startups and small businesses.
For a startup, the most important thing is innovation. Startups are intended to create something new or improve something already existing. For example, one could create a new category of goods (wearable devices), a new business model (Amazon), or a technology that no one has ever heard of (3D printing).
Small businesses do not make claims to being unique. Small businesses can be one of many similar businesses (for example, a hair salon, restaurant, law firm, blog/video blog, and so on). Can easily follow out-of-the-box solutions when starting a business.
Another significant distinction between a startup and a small business? The way they’re supported financially. Despite the fact that the funding for both startups and small businesses will be more difficult than for more established businesses, startups are far more likely to turn to and succeed with equity financing than small businesses.
With equity financing, startups can seek out angel investors or venture capitalists who are willing to provide large sums of money in exchange for equity, or ownership, in the company. Typically, these investors provide small amounts of capital in “rounds,” with the startup relinquishing equity with each round of funding.
In contrast, most small businesses cannot afford to take out equity financing. Most small business owners don’t want to give up control of their companies, and most angel investors and venture capitalists only want to work with startups with high growth potential that can disrupt their industries.
Instead, small business owners typically use various forms of debt financing to fund their operations, such as loans, lines of credit, asset-based financing, and so on.
The growth intent behind the business operations is one of the most significant differences between a startup and a small business. As previously stated, startup founders want to make a significant impact and make an impact in the current market with their business idea, which means they don’t want to keep their team small and limited forever.
Instead, they want to expand quickly. As you might expect, the tech industry attracts a large number of startups because it has a broad reach, is easily scalable, and can raise funds quickly.
In contrast to this definition of a startup, the Small Business Administration defines a small business as a “for-profit business of any legal structure, independently owned and operated, and not nationally dominant in its field.”
How soon will the business be paid off, and how much can it earn?
Small businesses are focused on generating revenue and, if possible, profit from day one. The company’s closing profit is dependent on the appetites of the CEO, let alone plans for business expansion.
A startup’s first cents could take months or even years to earn. A primary goal is to develop a product that consumers will enjoy and will sell. If this goal is met, the company will make millions of dollars. (For example, the Uber company is currently valued at $50 billion.)
There is always some level of risk when starting a new business. When comparing a startup to a small business, however, there is undoubtedly a higher level of risk associated with a startup.
The operating principle of a startup, as we’ve discussed extensively, is to create a product or service that can disrupt or significantly impact the market. As a result, by going through the process of conducting research, raising funds, testing the product or service, and so on, you’re taking a huge risk that your startup will succeed and have the desired impact.
Despite the numerous risks that come with starting a small business—20 percent of them fail within the first year—small businesses have the advantage of entering an already established market. As a result, the risks are much lower and, as a result, much more manageable than for startup owners.
At the end of the day, the distinction between a startup and a small business extends beyond our common understanding of these terms. It is, however, far more important for future entrepreneurs. It’s important to consider whether you’re a startup entrepreneur or a small-business owner when planning how you’ll implement your new business idea. Why? Making the distinction early on will assist in determining the direction of future business. We will be able to set growth goals, investigate funding options, develop a business plan, and define what “success” means to us.
With that answer, we’ll be better prepared to set goals, secure funding, and develop a long-term strategy for our company.
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