The Difference Between a Startup and a Small Business

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If you work in the technology industry, or live in a tech hub such as Silicon Valley, Hong Kong, or New York —it’s likely that you or someone you know is in the process of conceptualizing or even launching his or her own startup venture.

A startup venture is often misunderstood for simply a small new business. The truth is, there is a significant difference between a small business vs. startup.

What is a Startup?

For years, investors treated startups as smaller versions of large companies; this was problematic because there is a vast ideological (and organizational) difference between a startup venture, small business, and large corporation, which necessitates different funding strategies and KPIs.

According to serial entrepreneur and Silicon Valley legend Steve Blank, a startup is a “temporary organization designed to search for a repeatable and scalable business model.” A startup business plan, which he argues in the context of the tech industry should be short for “scalable startup,” searches to not only prove their business venture, but to do so quickly in a way that will have high growth and impact on the current market. This brings us to our first major difference between a small business vs. startup.

A “Scalable” Startup has the Intent to Become a Large Company

As Blank describes it, a scalable startup founder and CEO doesn’t just want to be her own boss; she wants to take over the universe. From day one her intent is to grow her startup into a large, disruptive company. She believes that she has come across the next “big idea,” that will shake up the success of her industry, take customers from existing companies, or even create a new market.

This stands in stark contrast with the definition of a small business, which the U.S. Small Business Administration (SBA) describes as “independently owned and operated, organized for profit, and not dominant in its field.”

Therefore, the driving force behind the two business models is different: The Intent of the startup founder and CEO, is to disrupt the market with a scalable and impactful business plan; whereas the intent of the small business owner is to be her own boss and secure a place in the local market.

To be sure, the latter is the prevailing model of entrepreneurship in the United States: grocery stores, delis, hair salons, plumbers, electricians, etc. and their contribution to the local economy cannot be overstated. However, for better or for worse, the ultimate motivation behind a small business is fundamentally different from that of scalable startups.

A Startup is Temporary

The organizational function of the startup is to search for a repeatable and scalable business model. According to Blank, this means that a startup founder and CEO has three main functions:

  1. To provide a vision of a viable product with a set of features.
  2. To create a series of hypotheses about all the pieces of the business model: Who are the customers? What are the distribution channels? How do we build and finance the company, etc.
  3. To quickly validate whether the business plan is correct by seeing if customers behave as your model predicts (which he admits they rarely do).

Given this definition, it stands that once a business model is proven, the function of the organization must shift to produce outcomes of success and execute said model; in many cases removing the agility and innovation that once existed in the early days of the business.

A Startup is Funded Differently

While both a startup and small business will likely start with funding from the entrepreneur‘s savings, friends and family, or bank loans; if a startup is successful, it will receive additional series of funding from angel investors, venture capitalists, and eventually, an initial public offering (IPO). With each series of funding, the startup founder’s equity is eroded, while ownership of the company diversifies.

Eventually, a startup business venture may cease to exist as an independent entity via a merger or acquisition. To a small business owner, relinquishing control would defeat the purpose of running their own business; however, for the startup it may be necessary to scale growth and capital.

Although the startup founder is an entrepreneur as is the small business owner, the intent, primary function, and funding of their respective business models are radically different and garner different types of strategy. Watch Steve Blank describe the difference further in the video below.

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