Understanding The Difference Between A Startup And A Small Business

Whether you're looking to start a new business or simply enjoy reading up on the latest business news, chances are you've come across the phrases "startup" and "small business." You've possibly even seen these two phrases used interchangeably, which might've begged the question, what is the difference? The answer to that is a lot. From profitability and taxes to growth models to industry placement (and even high failure rates), small businesses and startups operate in fundamentally different ways. This becomes even more clear when it comes to long-term goals and operational expectations where startups are motivated by a desire to disrupt existing industries and the small business tends to want to become a part of an existing industry.

At a basic level, a difference comes down to sheer size. According to the U.S. Department of State, small businesses are categorized as such either because of their average number of employees or their average annual receipts over a certain amount of time. On the flip side, startups are categorized more for their innovation and rapid growth model as opposed to their size. Startups generally begin with a concept or the basic outline of a product as opposed to small businesses that tend to operate in a more traditional business model of supplying products to consumers. As someone who's previously created and run two small businesses (both as an individual proprietor), I can tell you the two most important distinctions to remember between small businesses and startups are their long-term goals and their funding structures.

When discussing long-term goals for a business you might be thinking that every business has the same goal of making a profit, right? While this isn't technically incorrect, how a business type might choose to approach profitability is another matter altogether. This is especially true for startups that might not have an actual physical item to sell to consumers yet.

For instance, startups geared toward technology or medical innovation (like AI) tend to be more focused on scaling up the production or output of their specific program or invention. Since startups are generally focused on being disruptors in their industry, a high premium is placed on speed and growth. Closely related, this emphasis on immediate growth requires fundamentally more funding out of the gate in order to actually develop whatever their product might end up being.

Small businesses, on the other hand, tend to have slower growth models than startups, with a focus more centered on a physical location, product, or point of entry. Keep in mind this could be anything, from a physical restaurant to a point-of-sale website to an offered service. For example, my small business experience was largely service-based, as a communications consultant for nonprofits. In my case, the "product" I was selling was my own expertise and know-how rather than something like food or any physical items. With more local or targeted goals, growth is generally limited for small businesses. Plus, depending on the type of small business, the ability to scale up might not even be possible.

Understanding the funding of each business type can help in understanding their differences. For starters, startup businesses are much more likely to use equity financing in comparison to the small business, which tends to use personal savings or even loans. The high price tag attached to the kind of innovation typically found in startups means that they usually seek out money from larger funding sources like venture capitalists or even angel investors. This need for significant upfront capital can make funding startups particularly difficult, and it can also lead to a high level of eventual startup shutdowns (keep in mind that a high rate of startup shutdowns can have a lot of implications for the greater economy). Further, the startup model is inherently rooted in being a temporary label for an organization that hopes to become a much larger company.

Small businesses, meanwhile, generally rely on the savings and loans available to the owner or owners of the business in question. Since most equity financing (such as the kind seen in startups) requires ownership stakes or growing control for the investor, small businesses typically steer clear of this financing type in order to remain independently owned. This means small businesses tend to rely on things like small business loans, lines of credit, or even asset-based financing to get their business started. This also means that small businesses, unlike startups, aren't built with the idea of being temporary, but rather in the hopes of creating a business that serves the market.