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With the launch and exponential growth of businesses like Airbnb, Uber, and Snapchat, it's no surprise that the word "startup" has become so quickly integrated into the everyday vernacular of the business community. In fact, if you work in the tech industry, or live in a big tech center like New York or Silicon Valley, you're probably very familiar with the idea of startup businesses and startup culture.
This being said, although the term startup is now often used synonymously with "new business," many people still don't understand the difference between a startup vs. small business. So, what is the difference between these two entities?
Let's break it down.
What is a startup?
To start, let's take a closer look at what classifies a company as a startup. Although you might define a startup in many ways, most people refer back to the definition put forth by Silicon Valley entrepreneur Steve Blank in 2010; he says: "A startup is an organized form to search for a repeatable and scalable business model."
According to Blank, however, not only is a startup looking to find and execute on their business model, but they're also looking to do so quickly—and in a way that significantly impacts or disrupts the current market.
Think of Airbnb as an example here. What was the vacation rental market like before Airbnb? And after?
Differences between startup vs. small business
So, now that you have an overarching sense of what a startup is, let's dive a little deeper into the characteristics that differentiate a startup from a small business.
One of the biggest differences between a startup vs. small business is the growth intent behind your operations. As we mentioned above, startup founders are looking to significantly impact and disrupt the current market with their startup business idea—meaning they're not looking to maintain a small, limited team forever.
Instead, they're looking to grow—quickly. As you might imagine, this is why so many startups are founded within the tech industry—technology has a wide reach, is easily scalable, and can fund fast.
In contrast to this concept of a startup, the SBA defines a small business as a "for-profit business of any legal structure, independently owned and operated, not nationally dominant in its field."
Based on this description, the growth intent of a startup is very different from the intent behind most small businesses. Whereas a startup is very literally created for the purpose of growth, this isn't necessarily the case for a small business.
Tied directly to the growth intent of a startup are its goals and objectives. Again, a startup founder is looking to disrupt the market with their scalable and impactful business model, grow as quickly as possible, beat out competitors, etc.
With a small business owner, on the other hand, this isn't necessarily the case. To run a small business, you don't need to disrupt the market or break into a completely new market; instead, you simply need to have the desire to start your own business and find a market that you can reach effectively. As long as you can do so while earning revenue, you can successfully run your small business.
In this way, whereas startups are typically founded in the tech industry, small businesses are often what we consider "main street businesses"—local coffee shops, grocery stores, auto repair shops, hair salons, plumbers, and more. Although these businesses aren't disrupting the market, they are the cornerstone of local economies and employment—employing nearly 60 million people in the U.S.
Here, you can see how growth and business goals are intertwined. Startups want to grow with the goal of disrupting the market. Small businesses, on the other hand, are created for the purpose of entrepreneurship and serving a local market—and therefore, aren't concerned with growth on such a large scale.
When you start a small business, it's very likely that you plan to continue to run that business for some time—until you eventually pass it on to a family member or sell it to an interested buyer after you retire. Therefore, until that time, your goal is simple—to stay in business. With a startup, on the other hand, this isn't the case.
According to Blank, a startup is a temporary organization designed to search for a repeatable and scalable business model. The startup may change business models multiple times to find the right one—but once it does, the goal of the organization then shifts to execute on that model. At that point, the organization is no longer a startup and, instead, is a company.
Although Blank's approach may seem philosophical, you can see how it may be applicable in a real-world scenario. When is a startup no longer a startup? Perhaps when they're bought by another larger company. Or when they go public with an IPO (initial public offering).
In either of these cases, however, you can see how the end goal of the startup is very different compared to a small business.
Another of the biggest differences between a startup vs. small business? The way they're funded.
Although it will certainly be more difficult for both startups and small businesses to find funding in comparison to more established businesses, startups are much more likely to turn to and find success with equity financing in comparison to small businesses.
With equity financing, startups can look for angel investors or venture capitalists who are willing to offer large amounts of capital in exchange for equity, or ownership, in the company. Typically, these investors offer minimum amounts of capital in "rounds" and then with each series of funding, the startup gives up equity.
Therefore, as the startup continues to raise money, it may reach a point where it no longer exists as an independent entity. This being said, although equity financing diversifies ownership of the startup, it allows the founders to raise large amounts of capital, as well as earn the mentorship and guidance of the investors.
In contrast, equity financing just doesn't make sense for most small businesses. Most small business owners don't want to give up control of their businesses—and most angel investors and venture capitalists only want to work with high-growth-potential startups that are disrupting their industries.
Level of risk
Whenever you're trying to launch a new company, there's always some level of risk involved. However, when it comes to comparing a startup vs. small business, there is certainly an added level of risk associated with a startup.
As we've discussed at length, the operating principle behind a startup is creating a product or service that can disrupt or significantly impact the market. Therefore, by going through the process to research, raise money, test the product or service, etc. you're taking a huge leap of faith that your startup will succeed and be able to make that impact.
On the other hand, of course, you're also taking a huge risk—if you don't succeed, you have a lot to lose.
Although there are also a variety of risks associated with starting a small business—and 20% of them fail within their first year—small businesses have the benefit of launching within an already established market. In this way, the risks are much lower and therefore, can be much more manageable than they are for startup owners.
As you can see, startups and small businesses are actually much more distinct than most people would initially think. So, why does the difference matter?
At the end of the day, the difference between a startup vs. small business goes beyond our everyday usage of these words. Instead, it's much more significant for future entrepreneurs. When you're starting your own company, you can ask yourself: Am I launching a startup or a small business?
With that answer, you'll be better prepared to set goals, acquire funding, and generally create a plan for the future of your business.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet.