The Difference Between a Small Business and a Startup
For many years business investors have lumped startups and small businesses together by treating them each as smaller versions of large corporations. However, there are some significant differences between a small business and a startup you may want to consider before making the same mistake.
A small business is simply put, just that: a business that for all intents and purposes will always be a small business. Small businesses tend to be owned by a single person, a partnership, or a family. They typically serve a smaller community or a small set of needs for a larger community without any inherent plans to be dominant in their chosen field.
This is quite a stark contrast, however, from a startup, whose very existence depends on scale. Quite often, in fact, startups have a goal to shake up the industry or produce “the next big thing.” So, startups, even though they are similar in size to a small business, are organized very differently, based upon significantly different strategies that are intended to maximize profit and eventually position the startup as a major player with significant competitive advantages in their chosen market.
Based upon these goals, the model for small businesses tend to focus on security and the freedom that owning a business can provide. This is the prevailing model of entrepreneurship in the US and can be seen in all kinds of business from plumbers and electricians to butchers and hair stylists. These businesses, together, represent a massive section of local US economies.
In contrast, the model for a startup is one that positions the company to “disrupt” a chosen industry or market with a new way, or model, to facilitate business in some sort of improved manner.
Different Life Cycles
Ultimately, success for a startup and a small business are where they differ the most. A small business considers itself successful when it produces a secure spot in the market that has significant longevity, with no respect to scale or disruption.
On the other hand, a startup, if successful, is very temporary. Thus, it has some very specific goals it wants to achieve before leaving the incubation stage and scaling to a business that can achieve the intended market disruption. A startup is trying to establish a vision that can grow to dominate a market. This is a vision the startup needs to validate and test. Primary concerns, therefore, are not about establishing longevity or security, but rather finding and improving a model that will enable their vision to quickly scale.
Once a vision has been proven by a startup, its goal shifts to producing outcomes and executing upon that model to scale. The end game for a startup may not even be to remain as an independent business entity as a merger or acquisition may deliver the return the founder originally sought.
Lastly, funding for startups and small businesses differs vastly. Though both initially originate with the founder, a startup will also receive additional investments and continue to work to the point where it can make an Initial Public Offering (IPO) and go public. At each step, the ownership of the company becomes slightly more diversified while the founder’s equity erodes.
As we’ve discussed, there are several significant differences between startups and small businesses. If you have any legal questions about formations of small businesses or startups, give us a call at (214) 434-1017 or fill out the form on our site today.