This article by Mandela Schumacher-Hodge about the difference between a small business and a startup company is one of the best we’ve seen. So, for those readers who’ve been pondering this, look no further.
The full title of her article is “You Think You’re a Startup, But You’re Really a Small Business (and that’s totally cool too)” – and we at Startup Peoria totally agree. In fact, we can provide resources for either one.
So what are the 10 differences between small businesses and startups?
How much will you have to create from scratch?
- Small Business: There are plentiful examples of people who’ve already done what you’re about to do (e.g. hair salon, restaurant, law office, blog/vlog), and you’ll be able to reference their blueprints to construct your own business.
- Startup: Innovation is a must. As a startup, you’ll be creating something new and/or something better than what currently exists. For example, you may create a new category of products (e.g. wearables), a new kind of business model (e.g. Airbnb), or a new kind technology altogether (e.g. 3D printing).
How big will your business get?
- Small Business: A small business operates within fixed boundaries set by yourself. In other words, you intentionally limit your growth and focus on servicing a certain number of customers.
- Startup: A startup usually does not place limits on its growth, and has aspirations to get as big as possible. You aim to gain so much influence that you can be deemed “disruptive” to the market.
3. Growth Rate
How fast will your business grow?
- Small Business: Of course, you’d love to grow as quickly as possible, but your primary concern is making a profit. Once that happens, then you may consider expanding with caution.
- Startup: You’re interested in growing as fast as possible, and creating a repeatable business model. You want to be able to replicate your success throughout the world.
How long will it take to make money, and how much can you make?
- Small Business: You’re set up to generate revenues from Day 1, and if possible, a profit too. How much profit you aspire to make depends on how much money you want to personally pocket, as well as what your expansion plans are.
- Startup: It may take months or years before you make a single dime. You’re primarily focused on building a product people love, which results in tremendous user acquisition. If your plans work out, the financial upside can be astronomical. (Uber’s current valuation is $50 Billion — yes, billion with a “b”).
How much money will you need to borrow?
- Small Business: In order to get started, you’ll need to rely on your personal funds, contributions from family and friends, bank loans, and/or investor dollars. Your goal, however, is to be self-sustainable, so you carefully monitor how much money you’re financing, recognizing that it will all need to be repaid with interest.
- Startup: Many startups are initially self-funded, or supported by contributions from family and friends. Crowdfunding campaigns are also increasing in popularity. Still, the most common funding route startups pursue involves raising capital from angels, investors, and venture capitalists (VCs). As a startup, you’re hoping to achieve rapid growth and expansion and need additional capital to sustain you, until you can generate your own revenue and become profitable. Be mindful that your investors will expect the greatest financial return possible, so there will be additional pressure to succeed. (It’s important to note, though, that some argue it is not necessary for startups to rely on VC funding).
Is technology required to operate your business?
- Small Business: No, it’s not required, but there are ample technological offerings out there that you may find helpful to service your core business needs (e.g. marketing, accounting).
- Startup: Technology is often times a startup’s core product. However, even in cases where it’s not, startups will still likely depend on technology to help them achieve their goals of rapid growth and massive scale.
How long will your business be around?
- Small business: 32% of small businesses fail within the first 3 years. Not bad compared to startups…
- Startup: 92% of startups fail within the first 3 years. Yikes! (I know.)
How many people will you oversee?
- Small Business: You can expect to lead however many people will be required to operate your business within your pre-established growth structure.
- Startup: Because you’re aiming to grow as big as possible as quickly as possible, you’ll really need to zero in on developing your leadership and management skills. As your business grows, you will have to effectively lead an increasing number of employees, investors, advisors, and other stakeholders you’re beholden to.
How much work/life balance will you have?
- Small Business: Compared to startups, your risks are considerably lower, as is your commitment to VCs to grow as fast as possible. This reality may give you the opportunity to establish a work/life balance that you’d deem acceptable. But then again, you are going into business for yourself, which always presents interesting challenges most 9–5’ers never have to deal with. So I’ll say this: it’ll be taxing, especially at first, but there is hope you can establish a work/life balance you’re satisfied with.
- Startup: If you take investor funds, you have an obligation to grow your company to a point where your investors get as big a return as possible. With that in mind, there’s simply not a lot of down time to “dilly dally.” You have a ton of people waiting on you to crack the code and succeed at the improbable, which means what used to be a work/life balance looks more like this: work/work/work/life — what’s that?
10. Exit Strategy
Will you be able to move on to pursue other projects?
- Small Business: Your aspirations may fall into the categories of passing on your small business to the next generation of family members, or selling it to a larger establishment.
- Startups: You’re typically aiming for a very big outcome, such as a sale or IPO.