Startups are everywhere on the news. You see them on CNBC, Tech Crunch, and Shark Tank. A startup is a company designed to search for a repeatable and scalable business model, usually in a disrupting market. A small business on the other hand, focuses on stable growth in an existing market. I like to consider startups as fast growing small businesses. The main difference is startups focus on scale and driving revenue at a fast pace. Small businesses, on the other hand, often set their goals on long-term and stable growth. Remember, “fast growing” tends to go with “scale”.
To further understand how a business is defined as a startup or a small business, we must look at business structure, business category, and fundraising.
1) Business Structure
The business structure is important when defining a startup. Most tech and internet startups have lots of room for investors and operate as a Delaware C Corp. A Delaware C-Corporation refers to a corporation formed within Delaware pursuant to Subchapter C of the Internal Revenue Code, which allows the corporation to be taxed separately from its owners. Having a Delaware C Corp structure helps a startup attract investors. The advantages of a C Corp is that it allows for a company to grant stocks, grant options, and be taxed as a corporation. You may be curious, what’s so special about Delaware? In Delaware, court systems are more advantageous to the corporation than almost anywhere else in the country. This allows for a regulatory advantage.
On the contrary, small businesses are structured as an LLC. The difference here is that, LLCs allow for lower tax payments because they are not double taxed like C Corps, in which both the individual’s income and the company is taxed. In an LLC, the individual’s income isn’t taxed at the company level, but rather at the level of income for its owners.
2) Business Category
Another important factor to determine if you are running a startup or a small business is the company’s business category. It is essential to have a strong understanding of your own business category as it can help in approaching the right type of investor. If you are starting a business that is a consulting firm, growth marketing firm, or a development service firm, then you should not focus on startup-type investors.
If instead, you are tackling a big market problem, that will make the company worth millions to billions of dollars, then you should approach startup-type investors. Most of these companies are able to provide their users software services that are easy to scale and can acquire millions of users in a short time span (5–10 years).
3) Business Fundraising
Fundraising is fundamentally different for startups and small businesses. If a startup is fundraising, it will first go for a seed round (initial round of investing), then go for a series A, B, C, etc (different rounds of investments). On the other hand, for most small businesses, fundraising can be very difficult in the early stages. Crowdfunding is a common way that small businesses can acquire capital by offering services in the future in exchange for your money. Another way a small business can acquire capital is by bringing a partner onboard who can contribute personal investments or connections to clients. Most investors stay away from small businesses because they cannot scale and getting a lucrative return from their investment is just not possible.
An investment return from a startup on the other hand is more rewarding. A startup with the right business idea, right timing, and some luck can allow for investors to get up to 10x their investment. If an investor gave you $100,000 for your seed round as a startup, they will expect 10 times their money back, $1,000,000. This means that The initial investor thinks that another investor will value your company 10 times more than it currently is in the future. Let’s say the investor gave $100,000 for 50% of your company, making your company worth $200,000. The investor will expect your company to be valued 10x, $2,000,000 in 5–7 years.
A startup and a small business are the same at some point. In the very beginning, they are indistinguishable. A startup and a small business are both trying to solve a problem in the market. It is important to understand which route to follow, so you don’t waste time chasing the wrong investors or creating a business with the wrong structure. Whatever route you decide to choose, make sure it’s something you love doing!
