Choosing Your Entrepreneurial Path: Small Business or Startup?

Girl showing roadmap for Idea to Success

You've finally decided to bring your dream venture to life! The one that you've been nurturing and developing in your heart and mind for so long. It's time to take the leap and start building your baby - the first venture that has kept you up all night perfecting the idea. The question you need to answer now is, what exactly are you building? Is it a startup or a small business?

It's common for entrepreneurs to confuse startups with small businesses. However, distinguishing between the two is crucial for informed decision-making. The initial decision made while structuring the business can transform it from one to the other and determine its future.

Understanding the difference between startups and small businesses is crucial for entrepreneurs to make informed decisions that can shape the future of their ventures. Even a single decision in structuring a business idea can transform it from a small business to a startup or vice versa. Although no fixed criteria define the distinction between the two, we can generally classify a small business by its size, annual revenue, and industry.

On the other hand, startups are characterized by innovation and are any company in its early stages of operation. They are founded on fresh and original ideas and are ideal for introducing revolutionary innovations to the market. A significant feature of a startup is its potential for rapid growth, as it is structured to scale quickly. It is worth noting that startups do not have to be tech-oriented, despite common practice. 

Neil Blumenthal, co-founder and co-CEO of Warby Parker, said, "A startup is a company working to solve a problem where the solution is not obvious, and success is not guaranteed."

Understanding the fundamental concepts of a startup and a small business allows us to distinguish between the two entities. The differences between startups and small businesses are highlighted below:

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Business Model / Scalability.

In terms of Business Model and Scalability, small businesses prioritize profitability and long-term stability, relying on established models that work from day one. These businesses generate revenue from the outset and don't require significant investments. Their primary goal is to efficiently reach and serve their market, often by bridging gaps within an established industry. Examples include local delis, coffee shops, plumbers, and electricians. They are not necessarily focused on disrupting their industry but on profitability.

In contrast, startups prioritize high-end revenue and potential for growth. Their founders aim to disrupt and eventually dominate the market. Since their business models are untested and risky, startups often require higher investments that may yield little results. Although a startup may not be profitable for its first few years, it is designed to explore and find a scalable business model that can transform its market or create a new one.

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Funding.

‍Access to funding is a common challenge for both small businesses and startups. Small businesses usually opt for less risky financing, such as debt financing through small business loans or personal loans from friends, family, or other lenders, which must be repaid. This type of financing is suitable for small businesses because it preserves the entrepreneur's complete control over the business and is relatively easy to acquire. 

In contrast, startups require significant investments right from the beginning, which is typically provided by investors seeking to make substantial investments in young, high-growth businesses with the potential to bring in a high amount of revenue quickly.

Venture capitalists and angel investors often invest a minimum of $1 million in rounds, in which founders usually give up equity in the company in exchange for the capital. Equity financing can bring in more money, allowing startups to launch and scale their companies entirely. Bringing on equity partners means having others with a vested interest in seeing the venture succeed, which can make a significant difference in scaling the venture faster.

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Life Span.

‍Small businesses aim to establish a sustainable and long-lasting enterprise. They are built to stand the test of time and provide the owner with a stable source of income. On the other hand, startups are established with the intention of being temporary. If successful, a startup may go through an IPO, become a publicly traded company, or be acquired by a larger corporation.

The early stages of a venture are critical to its success. It's important for entrepreneurs to make informed decisions about the type of venture they want to build and what kind of entrepreneur they want to be. This early decision-making helps map out a plan for the venture and defines the eventual success of the venture.

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Concluding Thoughts

What are some common myths you've heard about startups and small businesses? How did this article help to clarify them? Please leave your comments and questions in the comment section below.

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