When people mention small business and startups in the same breath, there’s a tendency to get confused. If you’re not in the world of tech, everything could be considered a “startup” because, well, every new business has to start somewhere.
In tech, startups are the lifeblood of the industry. Household name brands like Google, Instagram, Etsy, and even Apple were all young startups at one time. But, small businesses these are not. The key difference? Goals. Startups aim big—really big. Small businesses may have lofty goals, but they’re usually not out to become the next Google. More often, they’re trying to help a group of people.
Because goals have an effect on every decision a business owner makes, startups and small businesses also tend to differ in their approach to managing and growing their businesses in everything from how they fund growth to how they hire. Here are some of the key differences.
What’s a Startup?
Here’s how most startups get off the ground.
The founder comes up with an idea that they think will change everything. They start to tell other people about their idea and maybe even start working on a MVP, or minimum viable product. If other people get excited, they’ll start to seek out funding to bring their great idea to life.
Note: For a quick overview of the startup funding process, check out this post.
Along the way, a startup’s job is to prove that there’s enough of a market for their idea to be profitable (insanely profitable) one day and that they are starting to pick up loyal customers. Many startups spend more than they bring in through revenue at first. That’s because they’re investing so much into growing the business as fast as they can.
Startups that aren’t yet generating profits should pay close attention to their burn rate and cash runway, two metrics that help these businesses understand how long their investments will hold them over at their current rate of spending.
What About Small Businesses?
Small businesses get off the ground with a different set of goals. These business owners usually notice a problem in their community and believe that they’re the best ones to solve it, so they start a business.
Maybe they went to school for a specific skill, like an electrician or a veterinarian. They could choose to work for someone else with those skills, but the demand for these kinds of businesses is evergreen. So they could also choose to go into business for themselves.
Startups may be out to change the world, but small businesses are the steady foundation of the economy. We rely on them every day for everything from our morning coffee to repairing our cars.
How Startups and SMBs Think About Money
Raising money from investors is one of the hallmarks of a startup. In fact, many startups talk about their fundraising efforts as a measure of success. Publications love to cover young companies that are raising huge sums, just as they love to cover huge companies that are on the road to going public.
The lone standout from this model is Amazon, which raised only about $10 million from investors before going public.
The reason it was able to do this? Amazon started bringing in revenue almost right away. After that initial investment, revenue propelled the company’s growth, and Jeff Bezos has become notorious for investing company profits back in the business—rather than handing them off to shareholders.
While Amazon works on a massive scale, their way of investing money in the business is more in line with what small businesses can expect.
A small business (hopefully) starts generating revenue right away and doesn’t require ongoing investments. The cost of getting a small business off the ground isn’t typically as high as a startup, so most rely on the business owner’s own savings to get going.
Small businesses often follow the “bootstrapping” model, or financing growth through profits. However, some may also look for investors or small business loans to give them a boost along the way.
End Game: How Startups and Small Business Think About the Future
If you’ve been around startup founders, or just read about them, you’ve probably heard them talk about “exits.” An exit, put simply, is an endpoint, at which it’s expected that all those investors will start earning back their investments. It can come in the form of a sale to a bigger company or a public offering.
A successful exit is often one of the biggest motivators and drivers of those who work at startups. Founders and early employees with equity in the company can stand to gain quite a bit from a successful exit, and the lure of that payout is often hailed as a reason to take the risk of working at a startup.
Small businesses usually play a longer game. Business owners are in it for the long run. They started the business because they’re passionate about the work or about helping people, and starting a business was as much a lifestyle choice as it was an economic opportunity.
Startups & SMBs by the Numbers
While startups tend to dominate popular conversation and media coverage, they’re vastly outnumbered by small businesses in the United States. On top of that, they’re often much riskier than small businesses.
Here are some stats about both groups:
- There are over 30 million SMBs, while only about 18,000 startups received any funding in 2018.
- In 2018, those startups received a total of $254 billion in venture-backed funding.
- The failure rate for startups is rumored to be around 90%.
So while startups may appear to be the best route for many people on the cusp of starting a business, there are pros and cons to both business strategies. If you’re on the fence about starting a business and aren’t sure how to proceed, remember that it all comes down to goals. Consider your personal definition of success, how long you want to be engaged in a business, and how much risk you’re comfortable with. These questions will steer you in the right direction quickly.
And whether you start a small business or a startup, your business—and the ideas you put out there—will benefit your community and the economy at large. Both options are a lot of work, but we’re all rooting for you to succeed.
Want to make sure you’re starting your business off on the right foot? Download our new business checklist.