So you’ve got that exciting business idea. You call it “your business.” But have you ever worried about using the wrong word – “small business” or “startup” – and feeling a bit awkward? The truth is, these two are not the same. If you mix up the terms, people who know the difference might see you as less informed.
This blog post will explain clearly the difference between a startup and a small business. We will look at how they grow, how they get money, and the risks involved. If you’re thinking of starting a business, knowing these differences will help you talk about your idea clearly and understand the path you’re choosing.
First, let’s understand what a small business is.
What is a Small Business?
A small business is an organization that operates on a smaller scale compared to large corporations. It usually focuses on serving a specific local area or a particular group of customers with traditional methods.
Characteristics of a Small Business
So, what exactly makes a business a “small business”? There are some common things you’ll often see that define them. Let’s take a look at the typical features of these kinds of businesses.
1. Local Focus
Its main group of customers lives or works nearby. The business’s success is often tied to the well-being and needs of this local community. Building relationships with these customers is often a key part of how the business operates.
2. Traditional Business Model
It generally follows established ways of operating that have been used in its industry for some time. Innovation might be present, but it’s usually within the existing framework of the business type. This often means relying on methods that have proven successful for similar businesses.
3. Established Market
It typically sells products or services in markets where the customer needs and the competition are already known. The business aims to gain a share of this existing market. Understanding the local competition and customer preferences is important for success.
4. Owner-Operated
The person or a small number of people who own the business are usually directly involved in its day-to-day management and decision-making. Their personal involvement is often crucial to the business’s operation. This direct control allows for quick decisions and a personal touch in customer service.
5. Gradual Growth
The business tends to expand slowly and naturally over time. Growth is often funded by the profits the business earns, leading to a more controlled and steady increase in size. This approach prioritizes sustainability over rapid expansion.
Examples of Small Businesses
1. A neighborhood bakery serving local residents with freshly baked goods. They might expand by adding new products or opening another location within the same area.
2. A retail store catering to customers in a specific town, selling clothes or household items. Their growth could involve increasing inventory or improving the store’s layout.
3. A freelance consultant providing services like writing or web design to individual clients or small organizations. Their expansion might involve taking on more clients or hiring other freelancers.
Now that you have a basic idea of what a small business looks like, let’s take a closer look at what makes a startup different.
What is a Startup?
A startup is a young company that is typically focused on creating and offering a new product or service. It often aims for significant growth and to change existing markets.
Characteristics of a Startup
So what are the key things that usually define these kinds of young companies? Here are some common features you’ll often see in startups.
1. Innovation
Startups usually introduce new ideas, technologies, or business methods. They try to solve problems in a different or better way than what is currently available. This often involves creating something that hasn’t existed before or significantly improving an existing solution.
2. Scalability
The business model of a startup is designed to grow quickly and efficiently. This means that as the number of customers increases, the cost of serving each additional customer should not increase at the same rate. The goal is to be able to serve a large number of people without a proportional increase in resources.
3. Rapid Growth
Startups often aim to expand their customer base and revenue at a very fast pace. This growth is usually a key indicator of their potential success. Achieving this often requires aggressive marketing and efficient operations.
4. Disruptive Potential
Many startups aim to significantly change or even replace existing businesses and industries. Their new solutions can challenge the way things are traditionally done. This disruption can come from offering better value, convenience, or a completely new approach.
5. Venture Capital
Startups frequently seek funding from investors who provide capital in exchange for a share in the company. This investment is often crucial for fueling their rapid growth. These investors are often looking for companies with high growth potential and a strong return on their investment.
6. Focus on a Unique Solution
Startups typically center around a specific product, service, or approach that they believe offers a unique advantage in the market. This uniqueness is often their core value proposition. It’s what makes them stand out from existing alternatives.
Examples of Startups
- Tech companies that create new software or hardware products, like a new social media platform or a revolutionary medical device. Their innovation and potential for widespread adoption define them.
Ather Energy is a good example. Based in Bengaluru, India, Ather designs and manufactures electric scooters with smart features and charging infrastructure. They innovated in the electric vehicle market in India by focusing on design, performance, and a connected user experience, aiming for widespread adoption of their electric scooters.
- Innovative service platforms that use technology to connect people or solve problems in new ways, such as a ride-sharing app or an online education platform. Their ability to scale and disrupt traditional service models is key.
For example, Practo is an online platform that connects patients with doctors, clinics, and hospitals. It allows users to book appointments, consult doctors online, order medicines, and access health information. Practo used technology to disrupt the traditional healthcare service model by making it more accessible and convenient for users to find and manage their healthcare needs.
Also Read: 6 Zero-Budget Side Hustles in India You Can Do With a Full Time Job
With both definitions in mind, it’s time to directly compare the two and understand how startups and small businesses differ in structure, goals, and growth.
What is the Difference Between a Startup and a Small Business?
Now that we’ve looked at what generally defines a small business and a startup on their own, let’s put them side-by-side and see the key ways they differ.
Here are some main ways in which startups and small businesses differ:
1. Growth Potential and Scalability
One of the biggest differences between a small business and a startup is how they think about growth. Let’s look at how each one typically plans to expand.
- Small Business: Typically aims for steady and gradual growth. Expansion is usually limited by resources and the local market they serve. The focus is often on maintaining a stable business rather than rapid expansion to many new locations or markets.
- Startup: Designed for very fast and widespread growth. The business model is built to easily serve a large number of customers with minimal increase in costs for each new customer. The goal is to quickly reach a large scale, often leveraging technology or innovative processes to achieve this.
- Example: Consider your neighborhood tailor. Their growth strategy might involve attracting more customers from the local area or perhaps opening an additional shop within the same city – this represents gradual growth.
Contrast this with a ride-sharing application. Once it establishes a functional model in one city, it can quickly expand its services to many other cities and even countries. This growth happens without needing to set up physical storefronts in every new location. It shows how the business model supports rapid, widespread growth and scalability.
2. Innovation and Disruption
Another key difference is how much they focus on bringing new ideas and changing the way things are done. Let’s see how small businesses and startups typically approach this.
- Small Business: Usually operates within existing markets and uses established ways of doing things. It often competes with other similar businesses by offering good service or products at a competitive price. They might introduce minor improvements, but their core operation remains within the known market.
- Startup: Often tries to create new markets or significantly change how things are done in existing markets. It introduces new products, services, or methods that can be very different from what is currently available. This can involve challenging established players and creating entirely new customer behaviors.
- Example: Consider the difference between a traditional local grocery store, which sells food through in-person shopping, and online grocery delivery services like BigBasket or Blinkit.
These online platforms didn’t just create more physical stores. They fundamentally changed how people buy groceries by offering the convenience of ordering online and having items delivered to their homes. That shift in how consumers access groceries is an example of disruption.
3. Risk and Uncertainty
Starting any business involves some risk, but small businesses and startups usually face different levels of uncertainty. Let’s take a look at how they compare in terms of risk.
- Small Business: Generally involves a lower level of risk because it operates in known markets with proven models. The outcomes, like revenue and expenses, are usually more predictable based on the history of similar businesses. Owners often take on personal financial risk, but the overall business uncertainty is typically lower.
- Startup: Carries a higher level of risk due to its innovative nature and unproven business model. It’s not always clear if their new idea will be successful or if they can attract enough customers. However, if they succeed, they also have the potential for very high rewards and significant returns for investors.
- Example: Opening a new restaurant in a well-trafficked area involves some risk, but there’s usually a clear understanding of the local market and consumer behavior. This makes it easier to predict outcomes and plan accordingly
In contrast, a startup developing a completely new virtual reality experience faces much greater uncertainty and risk due to untested technology and unknown customer demand.
While the restaurant’s risk is relatively lower, the VR startup, if successful, holds the potential for significantly higher rewards due to its innovative nature.
4. Funding and Investment
How small businesses and startups get the money they need to operate and grow is also usually quite different. Let’s look at how they typically handle funding.
- Small Business: Commonly funded by the owner’s savings, loans from banks, or other traditional financing methods like small business grants. The owners often have a direct financial stake and may reinvest profits for gradual growth.
- Startup: Often seeks investment from venture capitalists, angel investors, or through initial seed funding to fuel its rapid growth. This external investment is usually essential to scale quickly and cover the high initial costs associated with innovation and market disruption.
- Example: Consider the funding approach of an individual opening a small bookstore. They might rely on personal savings or a traditional bank loan to cover initial expenses like rent and inventory, with future growth potentially financed through reinvested profits.
Contrast this with a tech startup developing a new mobile application. Such ventures often require significant capital for development and marketing. They source the funding from angel investors or venture capital firms who provide funds in exchange for equity in the company.
5. Business Model
The way a small business makes money is usually pretty straightforward and well-understood. Startups, on the other hand, sometimes try out completely new ways of doing business. Let’s see how their models differ.
- Small Business: Usually follows a traditional and well-tested way of making money. The model is often similar to other businesses in the same industry, like selling goods in a store or charging an hourly rate for services. They understand how they will generate revenue and manage costs based on established practices.
- Startup: Often uses a new or significantly different way of creating, delivering, and capturing value. The business model might not be immediately profitable and could require experimentation and adjustments over time to find a sustainable and scalable approach.
- Example: Consider a neighborhood bakery that produces and sells its goods directly to walk-in customers – this represents a traditional business model. Now, contrast this with a company offering a curated snack subscription box delivered regularly to customers based on their individual preferences.
This subscription service illustrates a newer business model focused on a different way of delivering value and encouraging ongoing customer relationships.
6. Time Horizon
Small businesses and startups often have different ideas about how long they plan to be around and what their long-term goals look like. Let’s take a peek at their typical timelines.
- Small Business: Often intended to operate for a long time, potentially being passed down through generations. The focus is on long-term sustainability, building a stable business, and serving the community for years to come.
- Startup: Frequently aims for rapid growth and a significant event in the future, such as being bought by a larger company (acquisition) or going public (Initial Public Offering – IPO). This “exit strategy” provides returns for the founders and investors.
- Example: A long-established, family-owned textile shop in a city often operates with a long-term perspective. It aims for continued service to the local community and potential generational succession.
This contrasts with a successful tech startup, where the founders and investors frequently anticipate a future “exit strategy,”. That includes an acquisition by a larger corporation like Google or Microsoft, or an Initial Public Offering (IPO) to allow public trading of company shares.
7. Goals and Objectives
What a small business sets out to achieve is often different from what drives a startup. Let’s look at their main goals.
- Small Business: Primary goals often include providing a stable income for the owner and their family, creating jobs in the local community, and building a reputable business within that area. Their focus is often on serving their existing customer base well.
- Startup: The main objectives usually involve capturing a large share of the market and expanding quickly to new regions or demographics. Another key goal is achieving a high financial valuation to attract more investment or prepare for an eventual exit.
- Example: A local tuition center often has primary goals centered around providing quality education to students in their vicinity. It ensures a stable income for the owner and establishes a positive reputation within the local community.
This contrasts with the goals of the founders of an online learning platform. They usually aim for widespread user adoption across a larger geographic area and rapid growth of their student base. Their objective is often to achieve a high company valuation to attract further investment or be acquired by a major education firm.
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Even though they have many differences, startups and small businesses also share a few similarities that are worth noting.
Similarities Between Startups and Small Businesses
Despite their differences, startups and small businesses also share some common characteristics:
1. Both require hard work, dedication, and entrepreneurial spirit
Starting and running any business demands significant effort, commitment, and a proactive mindset from the founders and those involved. Success in either requires perseverance and a willingness to work diligently.
2. Both involve creating value for customers
At their core, both startups and small businesses aim to offer something useful or desirable to their customers, whether it’s a product, a service, or a solution to a problem. Satisfying customer needs is essential for their survival and growth.
3. Both face challenges related to funding, marketing, and operations
Both types of businesses, no matter their size or growth goals, face challenges in securing enough funding to operate and grow. They also struggle with reaching the right customers and managing daily operations efficiently. These are fundamental aspects of running any business venture.
Now you might be wondering—can a small business ever become a startup? Let’s understand this shift.
When Does a Small Business Become a Startup?
The line between a small business and a startup isn’t always clear. However, a small business can transition into a startup when it experiences significant changes in its approach and goals.
Here are some key transition points:
1. Shift in Growth Ambition
If a small business decides to pursue rapid and scalable growth beyond its initial local or regional focus, it takes a significant step toward expansion. When it aims for a much larger market and faster growth, it can start to resemble a startup. This often involves seeking external investment to fuel this accelerated growth.
2. Introduction of Significant Innovation
When a small business develops and launches a highly innovative product, service, or business model, it can start to stand out. If this innovation has the potential to disrupt existing markets or create entirely new ones, the business may begin to take on the characteristics of a startup. This innovation is often technology-driven, but can also be a novel approach to an existing problem.
3. Focus on Scalability
If a small business intentionally designs its operations and technology to handle a large increase in customers or users without a big rise in costs, it shows a focus on scalability. This is a key trait often seen in startups. This often involves automation and efficient systems.
4. Seeking Venture Capital or Angel Investment
A small business that starts to actively seek and secure significant funding from venture capitalists or angel investors is a strong indicator of a transition towards a startup model. These types of investors typically look for high-growth potential and scalability.
5. Adoption of a Disruptive Business Model
If a small business changes its core way of operating to challenge established players in the market, it takes on a more aggressive growth mindset. This shift aligns more with the disruptive nature of a startup.
Real-World Examples
To really see the difference between small businesses and startups in action, let’s look at a few familiar companies and how they started and grew. These examples show how some businesses can change from a smaller idea into a fast-growing startup.
Zomato (Initially Foodiebay)
- Small Business Start: It began as “Foodiebay” in 2008, a website in Delhi that simply allowed users to see restaurant menus online. This was a service focused on a local area with a basic online directory model.
- The Shift to Startup: The company then made key changes. It rebranded to “Zomato” in 2010, signaling a broader ambition. It focused on rapid scaling by expanding to many cities and eventually countries. It introduced innovation by adding online ordering and delivery. To fuel this fast growth, it secured substantial venture capital in multiple funding rounds starting in 2011.
- Startup Outcome: These steps helped it evolve from a local directory service into Zomato, a large and disruptive food-tech startup that changed how people discover and order food.
- Approximate Current Valuation: Around $28.55 billion as a publicly listed company.
OYO Rooms
- Small Business Start: OYO started in 2013 as a small chain of budget hotels, initially under the name Oravel Stays. This was a traditional hospitality business model with a limited number of properties.
- The Shift to Startup: OYO then adopted a highly scalable model by bringing together and standardizing many unbranded hotels under its platform. Its strategy focused on rapid expansion across India starting around 2014, and then globally. This growth was significantly fueled by venture capital from prominent investors.
- Startup Outcome: This shift transformed OYO from a small hotel chain into a tech-driven hospitality startup. It disrupted the traditional hotel industry by using technology to aggregate and manage a vast network of rooms.
- Approximate Current Valuation: While not publicly listed, its valuation has fluctuated significantly. Recent estimates suggest a valuation in the range of $3.79 billion.
Nykaa
- Small Business Start: Nykaa began in 2012 as an online retailer selling beauty and wellness products. While online, it initially operated with a more limited selection and focused on building an initial customer base.
- The Shift to Startup: Nykaa then differentiated itself through a carefully chosen range of products, strong branding, and a deep understanding of the Indian market. Its ability to scale rapidly throughout the 2010s, attract significant investment over several funding rounds, and eventually go public (IPO) in 2021 demonstrates its evolution.
- Startup Outcome: Nykaa transitioned from a relatively small e-commerce operation into a major beauty and lifestyle startup with a large market presence and a high valuation.
- Approximate Current Valuation: Around $6.7 billion as a publicly listed company.
In these examples, the initial small businesses evolved by adopting rapid growth, innovation, scalable models, and often external funding to become what we recognize as startups today. The key is the shift in ambition and operational strategy towards high growth and market disruption.
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Understanding the differences and overlaps can help you make better decisions. So, how do you decide which path—startup or small business—is the right fit for you?
Which Path is Right for You?
Deciding whether to start a small business or a startup depends on several personal factors. Here are some things to think about:
1. Risk Tolerance
How comfortable are you with the possibility of failure and losing your investment? Startups generally involve higher risk than small businesses. If you prefer a more stable and predictable path, a small business might be a better fit.
Imagine two scenarios. In the first, you invest your life savings into a local restaurant. If it doesn’t do well, you might lose a significant portion, but the risk is somewhat contained to your local area and initial investment.
In the second, you invest the same amount into a tech startup with a brand-new app. If the app doesn’t catch on, you could lose everything, but if it becomes the next big thing, the returns could be huge.
Reflect: Which of these scenarios makes you feel more anxious? Your comfort level here is a good indicator of your risk tolerance.
2. Goals
What do you hope to achieve with your business? Do you want to build a long-lasting, community-focused enterprise that provides a steady income? Or are you driven by the desire for rapid growth, large-scale impact, and potentially a significant financial exit? Your ambitions will point you in different directions.
Picture your ideal future in five years. Are you envisioning owning a well-regarded boutique, known for its unique collection and loyal customer base, providing a comfortable living for you and your family?
Or do you see your tech platform being used by millions across India, with talks of acquisition by a major company?
Reflect: Which of these visions excites you more? The scale of your ambition often aligns with either a small business or a startup.
3. Passion
What truly interests and motivates you? Are you passionate about serving a local community with a specific product or service? Or are you driven by a novel idea that could change how things are done on a larger scale? Your passion can sustain you through the different challenges of each path.
Think about what you genuinely enjoy doing, even if you weren’t getting paid. Do you love the process of baking and bringing joy to your local community with your creations? Or are you constantly thinking about how technology can solve everyday problems in innovative ways?
Reflect: Where does your natural enthusiasm lie? Passion for the core activity will be crucial for the long hours and challenges of either path.
4. Resources
What resources do you currently have, or can you realistically access? This includes your personal savings, potential for loans, and your network. Startups often require significant upfront capital and access to investors, while small businesses can sometimes be started with more limited personal funds.
Make a realistic list of what you currently have access to. Do you have personal savings and a good network of local contacts who might be early customers? This might be a good starting point for a small business.
Or do you have a groundbreaking tech idea and connections to angel investors or venture capitalists who might provide significant seed funding? This points more towards the startup route.
Reflect: Honestly assess your starting resources. Trying to force a startup without the necessary capital or network can be very difficult.
Your answers to these questions will help you understand which path aligns better with your personality, goals, and circumstances. There’s no right or wrong answer; it’s about finding the best fit for you.
Conclusion
To sum up, even though both small businesses and startups are about building something new, they work in different ways with different aims. Small businesses usually concentrate on serving their local areas with familiar methods and want to grow at a steady pace that lasts. Startups, however, are often about new ideas and the chance to grow very quickly to a large size, even if it means taking bigger risks.
If you’re thinking of starting your own thing, knowing these main differences is really important. It helps you understand what you want to achieve and the best way to get there.
Thinking about building your own thing or finally breaking free from the regular workday? Startup Words can help you understand the language of business, whether you’re leaning towards a steady small business or a fast-growing startup. Visit Startup Words today to learn more and make your entrepreneurial dreams clearer.
FAQs
What is the primary motivation behind starting a small business?
The main driving force for many starting a small business is often to create a sustainable livelihood for the owner and their family, along with serving a specific community need. While growth is desired, the initial focus is typically on building a stable and profitable operation within a defined market.
How does the team structure typically differ between a startup and a small business?
A startup often begins with a small, agile team focused on innovation and rapid execution, where roles might be fluid. As it scales, it looks to attract specialized talent. A small business might also start with a small team, often centered around the owner, with more defined and potentially less rapidly changing roles as the business matures.
What is the role of external advisors in a startup versus a small business?
Startups frequently rely on external advisors, mentors, and industry experts to guide their growth, fundraising, and strategic direction, especially due to their novel nature. Small businesses might seek advice from accountants or legal professionals, but typically have less reliance on a broad network of external strategic advisors in their day-to-day operations.
How does the failure rate generally compare between startups and small businesses?
Startups generally have a higher failure rate due to the inherent risks associated with innovation and unproven business models. While small businesses also face risks, their operation in more established markets with proven models can sometimes lead to a more predictable path and potentially lower failure rates overall.
What are some common exit strategies for a startup investor?
Investors in startups often look for returns through specific events. These events include the company being acquired by a larger corporation or undertaking an Initial Public Offering (IPO) to trade shares on the stock market. Sometimes, returns come through secondary sales of their shares to other investors. These “exits” allow them to realize their investment gains.
Small business owners typically don’t plan for these kinds of exits, focusing instead on long-term ownership and generational transfer.