Startup vs. Small Business: What is the difference?

Let's analyse the fundamental differences between opening a small business and launching a startup, as it will help you to properly structure your company development strategy.

In Today's blog:

1. What are the differences between a startup and a small business?
2. Definition and the Essence
3. Development Goals
4. Your business growth rates
5. Emphasis on new technologies
6. Views on funding and profits
7. Which form of enterprise to choose

What are the differences between a startup and a small business?

Steve Blank, the founding father of Silicon Valley, in one of his articles begins by saying: “Everyone knows what a startup is. Right?" Well, the practice shows that it isn't always the case: a small business often calls itself a "startup" without properly understanding the essence of this term.

Definition and the Essence.

According to Blank's theory, a startup is a temporary organisation created to find a scalable business model. 

A startup is an alpha version of a future corporation that will go through all the options and possibilities in search of a way to make an impact on the market as quickly as possible. For example, Twitch, a video gaming platform, was originally a website where its founder was live streaming his own life 24/7. Afterwards, when such streams became possible for the subscribers to stream themselves, the project gained not only wild popularity, but also a new business idea, and with it, a completely different level of monetization.

Speaking of small business, we must remember that it is primarily a form, and not the organisation itself. Its owner does not seek to prove anything, and its main goal is to generate income, preferably from the first day of existence. Cafes, hairdressers or private stores - anything that can have a standard business model and match the definition of a cooperative, partnership or individual entrepreneurship can be called a small business.

Development Goals.

The owner of a small business does not seek to invent something new. He aims to choose a suitable sector, and then just make a profit in the chosen sector.

Startup founders also follow certain development patterns. But instead, they choose an idea that will potentially allow them to earn big, and at least two to three times faster than other players in their industry would. A good example is a MedTech startup Neuropix, which entered the Medical Devices Market that has long been occupied by large players and offered customers not just a good product to treat common brain disorders, but an innovative and non-invasive approach to self-administration therapy as a whole . 

Therefore, we can say that any startup is built around the idea of developing a product but taking up an innovative approach. For example, opening an art studio in your local area is considered to be a small business. However, launching an online project in which novice artists could upload their work to the network, and receive donations, and the founders of the project - a percentage from these donations - would be considered a start-up.

Neuropix on how an innovative approach can revolutionise the treatment of major brain diseases including epilepsy, migraine and depression/anxiety.

Dr Daniel Ko, the founder of Neuropix, is very passionate about improving health and well-being using innovative neurotechnology and is combining world-leading biomedical engineering & neuromodulation expertise when it comes to treating major neurological disorders.

Neuropix's innovations in medtech offer hope with easy-to-use and effective treatments that help reset the balance of neurotransmission in the brain. Their clinically developed treatments offer a solution for people who have been living with drug-resistant neurological conditions. It also helps patients who are using medications to manage their condition, as the novel medtech can supplement drug treatments without major side effects.”

Your business growth rates.

Small business has to always stay within certain frames. In several European countries, a small business company can employ no more than a hundred employees and is limited by the amount of revenue it can generate. Nevertheless, a small business may grow and scale up as needed, for example, opening a few more stores or hiring new employees would allow you to gradually move into a different stage of existence.

Startups, on the other hand, grow in leaps and bounds, and sometimes even make pivots in the process of their growth. In the long term, their development is unstable and depends on several factors: the state of the market, the prevailing circumstances, the consumer's reaction to the presented product, etc. According to statistics, the life of 60% of new companies in the UK does not exceed three years, and 70% of foreign startups fail even earlier. Therefore, the founder of a startup must not only choose the right business model but also be able to correct it according to the business climate he is in.

Emphasis on new technologies.

It is worth noting that distinguishing between a startup and a small business using this criterion is quite difficult. Paul Graham, theorist and the founder of the Y Combinator startup accelerator company, believes that the use of new technological solutions does not matter. And the quite successful existence of Airbnb clone companies around the world proves his theory.

On the other hand, what else can be the “engine” of a startup, if not innovative technologies, says the pioneer of interactive entrepreneurship, Eric Rees?

Well, modern history remembers several major business failures, where the emphasis was on innovation. For example, the legendary medical startup Theranos, tried to combine all known blood tests in one sample.

Small businesses, as a rule, use ready-made and proven technological solutions. This is rational and beneficial, especially when the entrepreneur does not have a goal to bring a new product into the market.

Views on funding and profits.

In the choice of funding sources, small businesses are conservative. To open a flower shop or a fast food outlet, it is not necessary to have start-up capital, even more so - take it out of your own pocket. To do this, it is enough to ask for a loan from a bank or use any suitable government program. The risks here are relatively small, and the numbers are clear.

Startup companies also have their own "places of power" - accelerators, studios or incubators. They can be supported by a university, a technology park, or launched with a grant, as is the case in Silicon Valley. However, the financing of each startup, as Paul Graham points out, differs in the general scheme of the investment process:

1) Seeding stage. At the very beginning, money for development can be given by relatives, friends or third-party stakeholders, aka the three F (friends, family and fools) method.

2) Stage of angel investments. This is where private investors (“angels”) come into play, somehow interested in the fate of the startup.

3) Attracting venture capital. The latter is usually accompanied by one or more rounds of funding and expansion of the startup structure. There is however a “but”: a venture fund will always look for a project only with very high potential. 

Another detail that distinguishes a small business from a startup is the approach to understanding profit. An ordinary entrepreneur sets himself a goal of receiving revenue from the first days of existence of the enterprise, while the startup founder’s focus is on testing the hypotheses, searching for “his” product or a path that will lead to massive receipts of profit in the future (of course, the sooner the better.)

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Which form of enterprise to choose?

Startups have to grow to avoid becoming zombie companies, and they tend to do so in leaps and bounds. A prime example of this is EverBlock Systems, a giant building block company. During the first wave of the pandemic, its products were used to build temporary hospitals throughout North America, which caused the company's revenue to triple (compared to 2019). But with the mass pandemic coming to an end, demand for their products fell, and the company had to then fight other players in the construction market. 

In turn, being a small business is simpler, and more convenient. A small business similar to a startup also has growth potential - this is seen in the examples of a small pizzeria scaling up to a regional chain.

Does this mean that a startup is initially a loss-making business, and it is safer or even better to not bother and open up a small enterprise? Well, everyone chooses for themselves. But, based on this philosophy, Elon Musk would still be inventing computer games, rocket science would stop at the level of the 20th century, and millions of people would continue to drive cars with internal combustion engines.

So what does an entrepreneur need to understand to position their enterprise correctly? Try answering these questions first:

• Is your idea innovative for the industry?
• Is there a realistic way to increase the number of future customers by several tens, or even hundreds of times, almost simultaneously?
• Which audience will be interested in your product, would it be exclusively local or something that has the potential to go global?

Have any questions about your development strategy or the way to position your enterprise? Talk to our experts, that will help you find the right path for your business.