A lot of the news out of the tech industry involves tales of upstart businesses disrupting stagnant industries, growing rapidly, and ultimately going public via an initial public offering (IPO). If you’re looking to scale quickly, this startup model may be one you’re considering.
Or, you may have something different in mind. Perhaps your business idea is something that intentionally doesn’t scale, like creating luxury products by hand for a niche market. World domination may not be on your mind, but having a profitable full-time career is. This is a more traditional approach to small business and differs from the startup model.
Here’s a comparison of startups and small businesses, emphasizing the ways that these entrepreneurial models differ from one another.
What is a startup?
A startup is a company designed to develop and scale an innovative product, service, or business model. Startups initially operate with outside funding rather than revenue generated by the company. This funding could come from venture capitalists or angel investors, who finance the company in exchange for an equity stake, or from bootstrap funding from the founders. A successful startup may require significant capital investment to create a proof of concept, so startup founders may find themselves spending a significant amount of time courting investors.
Startups typically shoot for exponential growth and market disruption. Rather than striving for steady, incremental expansion, a typical startup aims to capture large market shares quickly. Because of these expectations, startups are frequently associated with technology—and Silicon Valley—because of its possibility of nearly limitless scale and ability to fundamentally change the way we live and work. But startups can emerge in any sector.
Because they need substantial outside investment to get off the ground, startup founders often aim to generate an outsized return on investment (ROI) for their early investors—and themselves. As they work toward their IPO, startups must prove that they can resonate with their target market and reach profitability for the long haul.
What is a small business?
A small business is a privately owned and operated company with a limited number of employees and relatively low revenue when compared to large corporations. The US Small Business Association (SBA) defines a small business as “an independent business having fewer than 500 employees.” Small businesses tend to focus on establishing a stable, sustainable presence within a specific market niche. Some small business owners, particularly those who start service businesses and work with their clients face to face, may focus exclusively on their local market (e.g., a cleaning service paying house calls within specific ZIP codes).
Many ecommerce stores qualify as small businesses. They might ship goods all over the world, but they nonetheless focus on their specific retail niche. Eventually, these businesses may expand to serve broader market segments. Yet if they remain independent, with fewer than 500 employees, they still meet the SBA’s definition of a small business.
Most small business owners prioritize consistent revenue and long-term stability over rapid growth. Small businesses often rely on personal savings, reinvestment from the founder(s), small business loans, or grants. Those with physical storefronts may play a prominent role in their local communities, and they may want to impact their supply chain in a positive way.
Startup vs. small business: What are the differences?
- Goals and vision
- Speed of growth
- Innovation
- Funding sources
- Risk level
- Customer base
- Operational structure
Startups and small businesses share common aspects, but these two entities notably differ in their goals, growth strategies, and risk tolerance. Here are some of the significant differences between a startup and a small business:
Goals and vision
Startup
From the very early stages, startups aim for rapid, exponential growth and industry disruption. Their goal is often to scale up from a small enterprise, capture a large market share, and potentially achieve an exit through acquisition or an IPO.
Small business
The archetypal small business prioritizes stability, profitability, and long-term sustainability. Its goal is often to serve a specific niche or local market and maintain a consistent customer base with stable income, rather than pursue large-scale expansion.
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Speed of growth
Startup
One key difference between a startup and a small business is how they define success and growth. Startups prioritize aggressive growth by rapidly acquiring users, expanding into new markets, and iterating their products.
Small business
Most small business owners typically adopt a more traditional business model, where they try to keep debt to a minimum and reach profitability quickly. While they seek to grow, they pursue that growth at a more measured pace, focusing on customer retention and serving their existing market.
Innovation
Startup
Innovation is a frequent component of the startup business model. Startup businesses aim to disrupt the current market with new products or services. If a startup’s innovations are truly novel, the company may create a brand new market within the business landscape. Think of how Uber and Lyft disrupted the taxi market and created an impactful business model for passengers and drivers alike.
Small business
Small businesses traditionally focus on consistency and reliability, offering familiar products or services. If existing business models work, they stick with them. These businesses may prioritize customer satisfaction over industry disruption.
Funding sources
Startup
Startups often require significant amounts of money to get off the ground. Founders typically raise money from venture capitalists (VCs) or angel investors, who invest in exchange for equity. Startups may also leverage crowdfunding platforms. Startups may go through multiple funding rounds to finance their rapid expansion.
Small business
A small business typically requires significant investment from its founder, who may tap into personal savings to fund their own business. But the goal is to fund the business with sales and revenue, rather than with debt or sizable outside investment. When they do need funding, small business owners often borrow money from banks, either via business loans or business lines of credit.
*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.
Risk level
Startup
Given their association with new technologies and market disruption, startups are inherently high-risk ventures. Their business models are often unproven, and no entrepreneur can fully guarantee a product-market fit from the outset. Many startups fail within their first year, but the potential for massive returns attracts investors in search of the next brilliant business idea.
Small business
Small businesses come with less risk than startups, since they often operate in an established market using a proven business model. Banks may be more willing to loan money to a conservatively managed small business. Small business owners should generally have an appetite to run their businesses for a long time.
Customer base
Startup
Startups are often underpinned by a vision of dominating the market, aiming for nationwide or even global adoption of their product or service. Serving a big market can help them attract deep-pocketed investors. A number of startups start as the brainchild of social entrepreneurs who wish to change the world through their businesses, and those entrepreneurs intrinsically aim big in service of their goals.
Small business
Small businesses aim to reach a comparatively small number of customers. They focus on specific, local, or niche markets, aiming to build long-term brand loyalty and repeat business.
Operational structure
Startup
Startups often have a flexible, fast-paced, and experimental structure, with small, agile teams. Roles are fluid, and employees may wear multiple hats. It’s common for early startup employees to get equity stakes in their company, which can help inspire an “all hands on deck” mentality. As the startup scales to a larger company, it may take on a more traditional management and operational structures.
Small business
Small businesses tend to have a more traditional and stable organizational structure, with defined roles and responsibilities. Employees typically receive all their compensation in the form of wages and benefits. Small business management teams prioritize efficiency and consistency over experimentation. Of course, a really small business may consist of a single owner handling all aspects of business operations.
Small business vs. startup FAQ
What’s the difference between a startup and a small business?
Traditionally, a startup focuses on rapid growth and scalability, with high risk and potential for massive returns. A typical small business prioritizes stability, sustainable profitability, and serving a specific market with lower risk.
What qualifies a startup?
A startup is a newly established company designed for rapid growth and scalability, often seeking to disrupt existing markets with innovative products or services.
How long is a business considered a startup?
A business is generally considered a startup during its early stages of development. During this phase, the business may grow quickly and experiment to find a scalable business model. A business exits the startup phase once it’s achieved significant market share or locked into consistent profitability.
