The term ‘startup’ is often thrown around in much the same way ‘entrepreneur’ was thrown around in the 90s. Back then, everyone was an entrepreneur, and now, every new business pursuit gets labelled a ‘startup’. This is especially true in the tech world, and in new enterprise hubs like Silicon Valley. Airbnb, Uber, and Snapchat were all startups once, emerging from the financial crisis of 2008. It’s not just a business term, it’s a culture. It’s reminiscent of youth, energy and innovation, conjuring images of fake grass carpets and beer pong Fridays. It’s much less corporate than ‘small business’ or ‘small enterprise’, terms which tend to make us think of offices, shopfronts, and late nights doing your own accounts.
Although the lines between a startup and a small business can blur, the difference often comes down to the company’s growth goals and revenue forecast. Startups focus on disrupting markets and driving top-line revenue at a fast pace. Small businesses often set their goals on long-term, stable growth in an existing market.
Let’s break down the key differences between the two.
Startups and small businesses can be viewed through the lens of disruptors vs. challengers (if you’re into analogies, this Quartz piece has another great one - zebras vs. unicorns).
The goal of a startup is to create an impact that dramatically disrupts a market and its status quo. Their ambition is usually to grow exponentially, advance technologically, and make a lot of money. Startups tend to be agile, and will adapt over time according to the evolving needs of its customers. A startup founder will be more likely to retain shares and control in the case of a merger or acquisition, as they are often “the brains of the operation”. Classic disruptor startups include Netflix and Tesla - both succeeded in changing decades-old consumer habits in the way we watch TV and power our cars.
A small business plays to the rules of an existing market, but challenges its established competitors by seeking to do things better, faster, or more affordably. A small business will often be less aggressive than a startup, in some cases even treating competitors as collaborators. A small business founder is not necessarily looking to dominate the market or change the world, but to acquire a certain portion of an existing market in order to maintain steady sales, and a comfortable lifestyle for the founder long-term.
Within a scalable and impactful business model, a startup founder aims to dominate the industry, expand as quickly as possible, and see competitors fall by the wayside.
For a small business owner, this isn't always the case. To run a small business, you don’t need to disrupt the market, patent an invention or develop a whole new product category. You don’t need to destroy the competition. You just need an awareness of and access to a non-oversaturated market, and to generate enough revenue to maintain steady growth, cover your overheads, and pay your staff.
With high reward and high ambition comes higher risk. A startup is more likely to venture into unmapped territory. They will have a much bigger challenge ahead of them in terms of business planning, research and development, competitor mapping, and establishing new branding and marketing strategies. Due to the capital requirements of these processes, a lot of cash is on the line from the get-go.
A small business will often replicate existing business models and strategies. This may present fewer challenges, as there will be an abundance of data from those who have gone before. In the words of Hugh Stevens from Smart Company, ‘Not all things need to have fuel poured on them by venture capitalists to see if they 1000x in 10 years or burn to a crisp’. A startup’s mentality is often ‘all or nothing’. A small business is happy with a piece of the pie.
The type of investment a founder is able to secure depends on one thing: returns. Due to their high scalability and profitability potential, startups are often able to move from friends and family rounds of investment to venture capitalists and angel investors. They may also have a much stronger pull in crowdfunding circles.
Generally speaking, small businesses are not likely to multiply an investor’s contribution by hundreds or thousands of %. Their funding is more likely to come from personal savings, government grants, or bank loans than from outside investment.
Startups will have built-in exit strategies in order to repay their investors, and in some cases, to move into other projects.
Because small companies are not built on nearly as much investment capital, small businesses founders are less likely to be seeking an ‘exit’, at least in the short term. They are aware that sale of the business is unlikely to provide a substantial enough nest egg or retirement fund.
STAX enables you to invest in Australian startups from anywhere in the world using FIAT or cryptocurrency. Sign up to stay up to date with investment opportunities on STAX.