Entrepreneurs have existed since agricultural tribes traded their first stone tools in the marketplace. King Croesus minted the first coin in the sixth century, and up until the 19th century, most businesses were small businesses.
So what’s so special about a startup vs. small business?
Once technology entered the picture, business models began to diverge. The term “startup” first appeared in 1976 in a Forbes article in reference to data processing. After the dot-com boom of the late ʼ90s, we began to hear “startup” everywhere.
This gives a big clue to the difference between a startup and small business: the term “startup” usually refers to a tech company. The use of technology allows them to follow a different, accelerated business model that does set them apart from small businesses.
If you’re thinking of starting a company, it’s essential that you know the difference between a startup and small business. Only then can you choose which model matches your business identity.
Startup vs. small business: Which is right for you?
Startups have been given an almost mythological status thanks to wild success stories, cults of personality and the entertainment industry. They look exciting – but they’re also filled with risk, and they work better for some types of products and services than others.
Don’t make the mistake of thinking that startups are the only way to get rich. You can still grow a small business into a well-oiled machine that makes money for you while you’re not there. Every restaurant franchise, global law firm and regional car dealership chain started out as a small business.
Deciding between a startup vs. small business has less to do with making money and more to do with the industry you’re in, as well as your own personality, leadership style and risk tolerance.
Differences between a startup and small business
The term “startup” is so common today that entrepreneurs think that’s what they’re building – even if they’re not. There are some differences between a startup and small business.
In the startup vs. small business debate, company vision is one of the most important factors. Startups are focused not just on creating a product, but on taking over the world. They want to be the most innovative, creative, disruptive force in their industry, market and universe.
Small businesses are more focused on being profitable within an already-determined paradigm. They serve a more local market, and personal relationships are their lifeblood. They’re often driven by an artistic passion or passed down through generations of family.
Startups get most of their funding from venture capitalists (VCs), who make major investments – up to $1 million at a time! In exchange they receive equity in the business, so if it’s successful, they profit along with the owner.
Small businesses usually take out loans from traditional banks or online lenders. The lenders make money by charging interest, which means the business owner pays more over time, but hasn’t given up any of their equity in the company.
Growth strategy may be the biggest difference between a startup and small business. Startups want to grow as quickly as they can, increasing top-line revenue through a business model that can be easily replicated and scaled. This is why startups are typically seen in the technology industry.
Small businesses use a slower, more cautious growth strategy focused on building profits before expanding. They look for long-term, stable growth that will create a sustainable, long-lasting business. This model is much more suited for founders with lower risk tolerance.
Revenue is related to growth, so it’s no surprise there are contrasts in a startup vs. small business. VCs know that their initial investment in a startup may not return results for years – or at all. Startups are not built to return profits immediately. The goal is to take the company public and profit that way.
Small businesses usually don’t have investors and VCs to worry about. They are also often set up to generate a profit right away, because they’re following well-established business models. They don’t need time to figure out what works because they’re not necessarily doing anything that differently.
The leaders of startups vs. small businesses will usually have different innate gifts. Tony teaches that there are three different gifts of labor: you can be an artist, a manager or an entrepreneur. Startups are usually founded by true entrepreneurs: risk-takers, vision-makers and energetic business-builders who can jump from one company to the next like putting on a new suit.
Small businesses are often founded by artists: passionate creators and connectors who want to use their greatest skill to inspire others. Managers, who are people and process-obsessed, run an efficient small business as well. Keep in mind that any person can be entrepreneurial – anyone can build a business – but you must realize your true business identity in order to find success.