What’s the Difference Between a Small Business and a Startup?

It has become common, perhaps even fashionable, for new business ventures of all kinds to be described as startups. In truth, however, most of these entrepreneurial undertakings would be better classified as small businesses.

Understanding the distinction between the terms isn’t just a matter of semantics, but an important question that can have implications for a budding business, informing everything from goals and expectations to strategies and funding models.

Innovation and intent

The roots of the differences between a startup and a small business begin with their respective approaches to two things: innovation and intent.

Innovation is essential to every startup, because the whole enterprise is typically based on a big idea or new way of doing things, one designed to disrupt the existing order and offer an improved alternative.

In terms of intent, a startup has high hopes for growth, and seeks to bring its idea to as big an audience as possible, as quickly as it can. The process is highly uncertain and may take years to come to fruition. At that point, the startup evolves to become an established business, and isn’t really a startup anymore.

In comparison, not every small business idea needs to be especially innovative in order to succeed. It’s not a novel concept to open a pizza parlour or a plumbing company, but if your products and services are good enough, your small business may be able to turn a profit.

Sustained profitability and stable value, rather than rapid and total market domination, are the desired outcomes for most small business owners. You might expand to a second location, or even open a small chain of local stores, but you’re probably not seeking to become a national or international success story the same way a startup generally does.

Where the money comes from, and when to expect a profit

Startups typically turn to investors and venture capitalists to fund their fledgling businesses, offering an equity stake in exchange for cash infusions. With each new round of investment, the ownership structure becomes more diffuse.

It may take several years of development and investment before a startup delivers a successful product and becomes profitable. In an overwhelming majority of cases, the startup is not successful and shuts down within three years, never having generated any revenue.

Small businesses, on the other hand, attempt to turn a profit as soon as they open, and tend to rely on loans from financial institutions and other lenders for the funds they need. Rather than relinquishing an ownership stake in exchange, they pay interest on the borrowed sums.

The End Game

Startups aren’t meant to last forever. If a startup proves successful, it might turn into a big company that goes public or get bought up by a bigger business. Either way, it will ultimately evolve into something different than the innovative, idea-driven enterprise it was at the outset.

Small businesses don’t tend to share such grand goals of growth. They’re mostly trying to stay profitable, although some experience varying degrees of expansion, change, and development. For many small business owners, the idea of relinquishing control to outside investors or shareholders is the opposite of what they want: continuing to be the boss of a steady, consistent business that might one day be sold or passed on.