What Is The Difference Between A Startup And A Regular Small Business?
Posted on October 12, 2015 by Natasha Zena
What is the difference between a startup and a regular small business? The words startup, entrepreneur and small business are thrown around constantly – sometimes interchangeably. So how do you know if you are launching a startup or small business?
I started The Lioness Group, our umbrella company, back in 2009. Our aim was to serve solopreneurs, nonprofits and entrepreneurs who needed public relations. I was ultimately starting a small business because I was looking to provide a service and I would employ subcontractors if the workload was more than I could handle. Of course, based upon growth, I could hire permanent part-time or full-time employees if necessary.
In the midst of serving those entrepreneurs, I stumbled upon the fact there was no mainstream media outlet solely dedicated to providing news to female founders looking to launch or scale a startup. That is when I launched our startup Lioness magazine. I was looking to prove that there was a need for this outlet and find a business model that allows me to scale and grow it quickly. Startups focus on growth and fast, high-end revenue. They also tend to involve tech and monies from venture capital.
A friend of mine explained it to me like this early on: you could take The Lioness Group, the PR firm and call it anything. It’s a standard business that you can over time grow to be sustainable. But the magazine, Lioness, is a startup because it doesn’t exist anywhere else and I am trying to bring it to market and scale it quickly.
Here startup guru Steve Blank simplifies the explanation:
Here Blank describes the six types of startups:
Lifestyle Startups: Work to Live their Passion
On the California coast where I live, we see lifestyle entrepreneurs like surfers and divers who own small surf or dive shop or teach surfing and diving lessons to pay the bills so they can surf and dive some more. A lifestyle entrepreneur is living the life they love, works for no one but themselves, while pursuing their personal passion. In Silicon Valley the equivalent is the journeyman coder or web designer who loves the technology, and takes coding and U/I jobs because it’s a passion.
Small Business Startups: Work to Feed the Family
Today, the overwhelming number of entrepreneurs and startups in the United States are still small businesses. There are 5.7 million small businesses in the U.S. They make up 99.7 percent of all companies and employ 50 percent of all non-governmental workers.
Small businesses are grocery stores, hairdressers, consultants, travel agents, Internet commerce storefronts, carpenters, plumbers, electricians, etc. They are anyone who runs his/her own business.
They work as hard as any Silicon Valley entrepreneur. They hire local employees or family. Most are barely profitable. Small business entrepreneurship is not designed for scale, the owners want to own their own business and “feed the family.” The only capital available to them is their own savings, bank and small business loans and what they can borrow from relatives. Small business entrepreneurs don’t become billionaires and (not coincidentally) don’t make many appearances on magazine covers. But in sheer numbers, they are infinitely more representative of “entrepreneurship” than entrepreneurs in other categories—and their enterprises create local jobs.
Scalable Startups: Born to Be Big
Scalable startups are what Silicon Valley entrepreneurs and their venture investors aspire to build. Google, Skype, Facebook, Twitter are just the latest examples. From day one, the founders believe that their vision can change the world. Unlike small business entrepreneurs, their interest is not in earning a living but rather in creating equity in a company that eventually will become publicly traded or acquired, generating a multi-million-dollar payoff.
Scalable startups require risk capital to fund their search for a business model, and they attract investment from equally crazy financial investors—venture capitalists. They hire the best and the brightest. Their job is to search for a repeatable and scalable business model. When they find it, their focus on scale requires even more venture capital to fuel rapid expansion.
Scalable startups tend to group together in innovation clusters (Silicon Valley, Shanghai, New York, Boston, Israel, etc.). They make up a small percentage of the six types of startups, but because of the outsize returns, attract all the risk capital (and press).
Just in the last few years we’ve come to see that we had been building scalable startups inefficiently. Investors (and educators) treated startups as smaller versions of large companies. We now understand that’s just not true. While large companies execute known business models, startups are temporary organizations designed to search for a scalable and repeatable business model.
This insight has begun to change how we teach entrepreneurship, incubate startups and fund them.
Buyable Startups: Born to Flip
In the last five years, Web and mobile app startups that are founded to be sold to larger companies have become popular. The plummeting cost required to build a product, the radically reduced time to bring a product to market and the availability of angel capital willing to invest less than a traditional VCs—$100K to $1M versus $4M on up—has allowed these companies to proliferate, and their investors to make money. Their goal is not to build a billion dollar business, but to be sold to a larger company for $5-$50M.
Large Company Startups: Innovate or Evaporate
Large companies have finite life cycles. And over the last decade those cycles have grown shorter. Most grow through sustaining innovation, offering new products that are variants around their core products. Changes in customer tastes, new technologies, legislation, new competitors, etc. can create pressure for more disruptive innovation—requiring large companies to create entirely new products sold to new customers in new markets (i.e. Google and Android). Existing companies do this by either acquiring innovative companies (see Buyable Startups above) or attempting to build a disruptive product internally. Ironically, large company size and culture make disruptive innovation extremely difficult to execute.
Social Startups: Driven to Make a Difference
Social entrepreneurs are no less ambitious, passionate, or driven to make an impact than any other type of founder. But unlike scalable startups, their goal is to make the world a better place, not to take market share or to create to wealth for the founders. They may be organized as a nonprofit, a for-profit, or hybrid.”
Was this helpful? What type of business do you run? Tell us the name of your business and its mission in the comments below.
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