Today, we’ll find answers to the question: ‘What’s the difference between a startup and a small business’?
This is one of the most Frequently asked questions by our newcomer entrepreneurs who want to know the difference between the two and know which one they are – a startup owner or a small business owner.
You know it really didn’t occur to me too just how confused I have been of the difference between these two forms of entrepreneurship – startup and small business – until recently.
So a few weeks ago, as usual, I was reading an EBook, this time, about vital lifelong digital skills entrepreneurs of today should possess and then it occurred to me just how ignorant I have been of the difference between a startup and a small business.
The author of the EBook so distinctly separated the two types of entrepreneurship while exploring his subject matter that I decided it was time I did some research on what’s really the difference between these two buzzwords.
So, as the fast learner that I am, I have thoroughly carried out my research and I will be letting you into my findings in this post.
So now, all I can say is, sit down, relax and have a great read.
Difference Between A startup and Small Business – Some Similarities
To start with, we need to understand that both startup and small business are types of entrepreneurship.
But what exactly is entrepreneurship? According to BusinessJargon.com, entrepreneurship refers to the process of creating a new enterprise and bearing any of its risks, with the view of making the profit.
And this basic definition does it for us. Every other definition of entrepreneurship simply expands on this basic idea.
So, if the definition above describes you, you are an entrepreneur. And as an entrepreneur, you either own a startup or a small business.
So, are you a startup owner or a small business owner?
You should be able to answer this question after this write-up.
There are some key differences between a startup and a small business, even though they are often erroneously used as one and the same. Below, we discuss some of their differences.
Small business is profit driven. The purpose for which a small business owner started his business is to be able to make as much profits as he can while offering his products or services to his customers.
A small business owner wants to start making earnings if possible from day one of the business.
A startup may not start gaining traction until after many months or years of launch.
Yet, a startup owner keeps working at creating a product that will disrupt the market. If a startup is able to achieve its set goals, it will make million-dollar profits.
Small business is generally not known for innovativeness. It builds its business model on other existing business such as tailoring, provision shop, blogging, graphics, hairdressing salon, pharmaceutical shop etc.
Whereas, innovation is the most important thing to a startup. A startup creates a new product or services or improves significantly on something that is already existing. A startup may create a new business model i.e. Airbnb or use a new technology i.e. Uber.
A small business owner may want to use his personal savings; funds from family and friends, bank loan and other forms of loans to start his business. Most small business owners are weary of these funds because they know they have to pay them back. So, they’ll rather work hard and be self-sufficient than borrow loan from a bank.
A startup, however, may also want to bootstrap, reach out to family and friends to raise money to start his project. But once a startup has proven itself to investors, it may be able to raise even more fund – to the tune of millions – from venture capitalists and angel investors. Crowdfunding is another source of fund for startups.
While a startup does not have to pay back funds from investors, investors may want some form of equity from the startup which could sometime mount pressure on the founders.
Small business does not need any special technologies to achieve their profit goals. They may use common technology for their marketing i.e. digital marketing. But without such technology, they will still function well.
At the very least, however, startup uses new technology to drive growth and achieve goals.
Often times, technology is the main product of a startup. Uber, Facebook, Hotels.com, Jumia etc. are good examples.
Compared to startups, small businesses take less risk. But they make a lot of sacrifices for their business to survive. If a small business has borrowed money from any financial organization, it has to work hard to be able to return such loans.
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Because startups create a new product or services that do not exist before, they face more risks that small businesses. For this reason, successful entrepreneurs advice new startup owners to validate their business ideas through research before launching such ideas. This will give them a clue of the total addressable market (TAM) and thus, they will be able to reduce their risks.
Small businesses place more emphasis on profit making so growth is secondary to them. Some small businesses, however, grow to become big companies. Growth for small business is optional depending on the focus of the owner.
Startups, on the other hand, are created to grow fast within the shortest period of time. If a business model has worked in Nigeria, the startup owner will want to reproduce the business model elsewhere. So growth is very important to startups.
- Exit strategy
Most small businesses end abruptly when business owners relocate or die. A few make it a family business or sell to a buyer who is willing to continue the business.
As for startup, they usually get a large deal through an Initial Public Offering or other exit strategies.
So, now that we are done explain, I pose the question to you: Are you a small business owner or a startup?
Ok, so I’ll start first.
I think I presently run a small business but fast growing into a startup. Yeah, Y’all should wait and see.
What about you?
In our next post, we will be narrowing down and discussing the types of startups and small businesses there are.