Startup vs. Small Business: Which One Are You?

Startups and small businesses are born of the same lineage, but they differ in as many ways as they are similar. Depending on who you ask, you will hear that the 2 are either synonymous, or completely unique; nevertheless, there is a reason for different titles. So which type of business do you have—and what does it mean for you? Here we take a look at the key characteristics of the two types to find out what defines you as a startup, or a small business.

Startup vs. Small Business: Primary Motivations

It is generally held that a startup sets out with an ambitious idea and intends to “break in” to the business world by inventing or reinventing a market for itself. A small business, on the other hand, generally intends to find its own place in a niche or large, existing market, such as those staples of the economy: Restaurants, electricians, flower shops, etc. One is breaking new ground, while the other usually builds on what’s already there, like a prospector discovering a developing town in the Old West. But startups don’t get to have all the fun; small businesses still have the opportunity to redefine the industry standard through innovation and by creating an outstanding, original company.

Definition of Risk

If you’ve got a startup, then you’re essentially making an educated attempt to see whether your vision and its business model actually work. Startup founders are a different breed of business owner. They are the ones who bet the farm on an idea that could change the world, or go down in flames. This is why new tech companies are typically dubbed, “startups” because as the realm of online business and technology is constantly on the move and cannot survive without bold innovation, more and more brave startup companies are required to represent the ever-changing tech world.

Small Businesses Secure the Economy

You could say that they stabilize the economy, but individual small businesses do not dominate the market in their field. In the case of this type of venture, an entrepreneur utilizes the customer base supplied by reliable markets like food service or construction. That is not to say that opening a small business is easier—growth and competition is still an important factor—but it is more difficult for a new startup to attract and define its market.

Scalable vs. Non-Scalable

“Scalable” is one of those tough little words that takes on a meaning beyond how it initially sounds. It makes you think of size, or the equalizer between different sizes; it makes you think of a model representing the larger version to illustrate certain values. This definition is applicable to business, although the scalability of a startup has more to do with reach, than it does with size. It helps to think of it as the ability to continually reach new customers without exerting new cost. A restaurant only has the ability to reach a certain number of customers within their locality, but a universal service provider like Talkroute, for example, has the potential to reach millions of business customers. The restaurant would be considered a non-scalable model, as the only way to increase revenues would be to open multiple locations in different regions.

Slow Burn/High Gain vs. Fast Burn/Low Gain

It becomes much clearer what distinguishes a startup from a small business when you look at its burn and gain rates. Most startups have an extremely slow burn (7-10 years), but extremely high gain potential. This means that a successful startup will experience negative cash flow for a much longer period, but as it has been cultivating growth, promotion, R&D, etc., all this time, it stands to achieve much higher profitability when revenues start to come in. A small business generally has a fast burn, reaching maximum potential revenues within a couple years, but those revenues are considerably less (low gain) when compared to successful startups. For example, a restaurant may reach maximum monthly revenue in as little as 3-4 months with a good service, good marketing, and a good product, but it will grow very little past that point unless it opens a second location.

The Necessity for Growth in a Startup Company

The peculiarity of a startup is that after its inception, it is almost always forced to change its business model to adapt to the market’s reaction, a perpetual metamorphosis necessitated by its nature: the imperative to sell a visionary idea to an unsuspecting public. In the process of doing so, a startup may end up being absorbed, merging with a large company for mutual benefit, or even turning itself into its own, larger corporation. All of the above are acceptable outcomes because no matter what it takes, a startup has to grow fast, or it will die.

A startup company is by no means superior to a small business, or vice versa. Founding a startup can be more exciting, and more risky. Small business owners may have more precedent to work from, but we certainly couldn’t say that it’s safer. To run a new business, startup or otherwise, always involves keen instinct that requires entrepreneurs of every kind to stay frosty—adapt to change, and manage risk. Either way, the key to success is to, as always, prepare well and aim high.

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