Are All Startups Small Businesses?

Startups and small businesses have a similarity in that they are often referred to as newborn companies. However, are all startups small businesses? The simple answer is no; not all startups are small businesses.

Many people do describe all businesses that are still in the early development period as startups. In this case, they view startups as a "stage" rather than a "type" of business. However, the generally accepted definition says otherwise. Startups and small businesses refer to two very different entities.

What is a startup?

Before discussing differences, let's define what a startup is and what businesses we can consider as one. Steve Blank, an entrepreneur from Silicon Valley, defines a startup as "an organization searching for a business model that is repeatable and scalable."

Pay attention to the word "searching." Small businesses, unlike startups, are not searching for something. Small businesses expect to have a sustainable business model from day one so that they can generate revenues. It's not a problem if the amount of generated profit isn't satisfactory just yet. Small businesses focus more on keeping the company afloat and -- if necessary -- limiting their growth.

Startups, on the other hand, are those who experiment. They follow a specific scientific method to find a breakthrough product without incurring too many risks. Still, startups are generally much riskier compared to small businesses. Nevertheless, if startups manage to release a unique product that can disrupt the market, they can become a large company quicker than small businesses.

Key differences: startup vs. small business

Now that you understand startups and how it differs from small business, let's talk about more critical differences between them.

Product

Startups are looking to create something innovative to impact the market. Their products are usually something new that people have never seen before, or improve what is currently available. To get the funding for their business, startups will most likely use equity financing, meaning they receive money from investors in exchange for ownership.

An example of this is the developers behind WhatsApp Messenger, who provided an easier way for people to communicate. During WhatsApp Inc.'s early years, Brian Acton, one of the app's founders, kept working on several startup ideas before nailing it with the messenger app. Acton, along with the other founder Jan Koum, actively raised funds through investments for the app development until the app could take off.

Small businesses are not one for innovation. They look for other people's business models and incorporate them into their own. Restaurants, clothes stores and car shops are a few examples of small businesses. They are not dealing with something new, but there's a decent chance they can generate net income regularly, no matter how small it is. As for funding, small business owners aren't keen to share ownership. Instead, they rely on debt financing from lenders like a traditional bank.

Technology

Startups treat technology as one of the main tools to make their endeavor successful. In a few cases, even if modern technology isn't the main focus, startups still depend on technology to promote the business's growth and scale. For small businesses, though, it's different.

Small businesses don't have the same dependency on technology as startups do. Some may still use technology like accounting software to ease the business's running, but in most cases, it's hardly a key component.

Risks

In a quick breakdown, to establish a startup, founders research and test the product and raise investment money. After creating the main product, the founders will take the product to market. The main goal is to grow as quickly as possible. The risk involved is significant to all parties involved. Around 90% of them fail within three years, according to Amazon.

Differently, small businesses don't take as many risks. Mind you, there will always be risks in running businesses, but it's smaller in comparison. An article from LinkedIn states about 35% of small businesses fail in three years. The tamer percentage is thanks to the fact that small businesses focus more on becoming a long-lasting company rather than a big one.

Goals

The main goal of startup founders is to make a massive company in the shortest amount of time. Once they find and execute the right business model, they can turn the startup into a massive, established company. Afterward, the company may experience an initial public offering (IPO), or a larger company may purchase the startup.

For small business owners, creating an independent company is the primary goal. They aren't concerned whether they can be a big enough company down the line. The main goal will always be to keep the business alive and benefit their community and themselves. Once the owners wish to retire, they may pass the business down to their offspring. Or, they can sell it to an interested party. For small businesses, the legacy of the business tends to be more important than the wealth earned.

Conclusion

Most people define startups and small businesses as two different things, depending on their goals, level of risks and innovation. On the other hand, others treat all new businesses like startups, though this definition is not widely accepted.