Startups have a fast growth entrepreneurial mindset. They often disrupt the market they are in. Uber, Google, Yahoo, and even Microsoft, were all startups. These types of companies, due to their cutting edge and disruptive nature, have a high rate of failure.
A small business, on-the-other-hand, generally, is setup to provide products and services that have already been proven in the market place. They are often privately held family businesses. They are established to provide income right away, and then build gradually and sustainably. The Small Business Administration further defines what a small business is based on the industry it is in. They do this to determine which companies are eligible for federal grants, funding, and contract preferences. For our purposes we will stick to comparing them to a startup company.
Beyond these descriptions, there are many other factors that make the two different, including:
Objectives: The primary focus of a small business is generating profits and ensuring longevity for the company. Stakeholders seek to build a strong financial base, establish credibility, and develop a quality reputation with customers.
A startup company is motivated to attain maximum revenue and growth potential in the short term. They want to prove there is a market for their product or service and that it is scalable. The risks are much higher given the time frame, considering that the point is to create a organization dedicated to developing a repeatable strategic model that disrupts the relevant industry and produces large returns for its investors. Think Facebook, and the returns its early investors garnered.
Funds and Financing: Because stakeholders in a startup and small business have diverging views on growth, their approach to financing is also very different. Those creating a small business may invest their savings, or the entity itself may take out a loan. However, the need for funds is much more extreme for the objectives of a startup. Angel investors, venture capital firms, partnerships, and even crowd funding may be the source of funds. Under some circumstances, startup financing may even come through an initial public offering in the securities markets.
Business Life-cycle: Many owners view their company as their lifeblood, a legacy they want to pass down to family members or individuals they know and trust. Others may take the view that selling the company off for a hefty profit is their version of success. Though it may not actually live on eternally, the perspective of an owner is that operating the organization is a long-term plan.
By its nature, the startup is a temporary organization. Once the entity disrupts the market, hits an established distribution volume, or reaches certain trigger events as intended, stakeholders will begin working toward the agreed-upon business wrap up. The exit strategy will have been negotiated and bargained for when kicking off the company. From the point of view of investors, the startup’s termination should provide some positive return on investment to be a success.