The Difference Between a Startup And a Small Business

Startup vs Small Business

Unless you’ve lived under a rock or on an isolated island with no internet connection whatsoever for the last three decades, there is no way that you have never heard of Amazon, Snapchat or Airbnb. Small businesses of all types are springing up like mushrooms. Making us familiar with the startup culture without necessarily working in the business industry or living in Silicon Valley. 

In common parlance, the expressions startup and small business are used interchangeably. Since many people still have these two notions confused, we will try and clarify the difference between them. 

First, let’s get the definitions straight. 

What’s a startup ?

In order to have a clear definition of a startup, why not start with what’s not a startup. 

Small local businesses

A coffee shop, a bakery, a hair salon… or any kind of small local business is most definitely not a startup. They are one of thousands of businesses alike. The common point between them is their relatively small target market: they are not bound to become billion-dollar stores. Franchises aside, a single store will generally stay small. It doesn’t mean that it cannot enrich its owners, but it simply implies that that one store doesn’t have the potential to be worth billions alone. Not to mention the fairly slow growth of the business : a small business  must show growth, but not at the expense of making a profit. Startups on the other hand make it their objective to grow in the shortest period possible. That’s why they create a business model that can be replicated worldwide.

Non-innovative businesses

Another similarity is  the lack of innovation: there is nothing new about the concept of a local restaurant, which makes it the same old business that we’re all familiar with. So what could be qualified as innovative is something that introduces new ideas, devices, or methods on something that might exist already. For instance, a spaceship-restaurant that orbits around Earth while you’re having dinner. Sounds like an absurd idea straight out of a sci-fi movie that only Richard Branson would bet on. But it has the merit of being unique and innovative at least, which puts it in the startup idea category. So innovation is the biggest concern for startups whereas small businesses don’t make any effort to stand out.

Lifestyle businesses

Another form of small business  would be lifestyle businesses. (You can check our article on why you need to start a lifestyle business here.)  A simple way to define it would be a business that is created and run by its founder to fund their life and nothing more but offers them flexibility. One great example is being an online seller on Amazon, the infamous American multinational technology company founded by Jeff Bezos. It’s not usually  the most enriching lifestyle business, but it allows the freedom and independence of being your own boss. So the lifestyle business is the online store, but the startup is Amazon itself. They innovated and disrupted the e-commerce industry by offering such a revolutionary platform.

Other criteria

Now let’s go over the other characteristics of a startup :

Disruptiveness

Startups tend to be disruptive. According to Steve Blank, a startup is not limited to finding and executing a business model only; they have to do so rapidly and in a significant way that allows them to impact and disrupt the current market. It’s not a total requirement. But the fact that they are different and have a somewhat unique concept, makes them for the most part disruptive in some way. For example, Netflix is continuing to disrupt the industry company although other streaming services have existed for a longer time. Same goes for Google and older search engines or for Uber and less popular taxi apps. In other words, innovations can be disruptive without necessarily being revolutionary. 

Low budgets

Startups normally run on low budgets. The startup category of business is usually software or tech-related. Once the software is built for example, millions of people can use it without any additional expenses. For startups, technologies are more often than not the main focus or the product itself. And even when it’s not the case, startups often resort to using new technologies to get faster results and scale up. So being resourceful can easily replace being rich. 

Small teams with complementary skill sets

Another thing that startups have in common is that they only need small teams with complementary skills, in contrast to teams with  overlapping skill sets. So if  the service requires important human resources, meaning employees on a payroll, we are probably on the small business side of the spectrum. In order to stay in the startup category, the number of service users shouldn’t require a proportional number of employees.

Exceptions

Last but not least, we need to keep in mind that these definitions are not rigid. They are lenient because there are certainly exceptions we can’t ignore. For instance, the local restaurant we referred to in the beginning of this article as a small business. It starts acquiring some properties of a startup once the owner aims to start a chain of restaurants or a franchise. We can now define it as an innovative company and a growth business that targets a big market. Makes it now in the middle between a small business and a startup. But overall the criteria of a startup are clear. We note : high growth, big opportunity, innovation, technologies and a perspicacious and resourceful team

Bottom line

As you can clearly see, the distinction between a startup and a small business is much more noticeable than most people would assume.  It’s fundamental to keep these differences in mind, as it goes beyond our usage of the two words in our everyday life; it is especially significant for future entrepreneurs. 

It’s critical that they understand their own business category, so they don’t waste time approaching the wrong type of investors. And that’s how defining the right business size will help them be aware of  all the risks and potential rewards of their investments.

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