Startups seem so glamorous. The awkward college dropout who locked himself in a garage for a few years to create technology that would go on to revolutionize the world. That’s a narrative we’re all very familiar with at this point. And thanks to shows like SharkTank and Silicon Valley, as well as movies like The Social Network and Jobs, more and more people are quitting their 9–5, throwing out their suits and briefcases, and buying a one-way ticket to Startuplandia in pursuit of creating the next big thing.
But what’s becoming increasingly more apparent to me is that startups are not for everyone. After mentoring hundreds of startup founders the past two years, it’s become obvious that many of them aren’t as informed as they should be about what it really means to launch a startup versus develop a small business. And this is an incredibly important distinction to make. It’s important because depending on how big you want to make your business, how fast you want it to grow, and what role you’d like to play in its future, you’ll need to enlist a certain strategy. And that strategy doesn’t always mean the typical startup approach.
So with this blog post, I’m aiming to provide a bit of clarity to those thinking about launching a startup. Hopefully, by the time you’re done reading it, you’ll be able to identify the major differences between a startup and a small business and feel better equipped to make a decision about which one’s best for you.
Oh, and let me get this out of the way up front: in some circles, the term “startup” is not used to describe a type of business, but rather the stage of development any given business is in (i.e. all businesses are a startup when they first begin). For this article, however, I am positioning “startup” as a type of business that does differ from a small business. I am doing this because from my experience, there appears to be a difference in intent on the founders part. For instance, a founder launching a startup intends to grow her/his business as big and as fast as possible; whereas a founder of a small business intends to grow his/her business within particular limits that she/he is comfortable committing to.
Ok, so here it is…
10 Differences Between Startups and Small Businesses:
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.
But can’t a startup turn into a small business, or a small business turn into a startup? Yes, it just depends on if you decide to make that shift. Sometimes the shift is triggered by a personal decision you make (i.e. a change in your intention or dream for what you want your business to be), and sometimes it’s triggered by external factors (e.g. product demand, market changes).
Either way, understanding the differences between a startup and a small business, and recognizing your personal power to choose the one that’s best for you, is an important skill to have. It’s a skill that will help you align your actions to your expectations and empower you to select the right plan to reach your desired destination.