What’s a better business decision - a small business or a startup? The business model you choose will depend on your goals, target audience, available resources, and many other factors. Today, we lay down the differences and similarities between a small business and a startup, so you'll know how best to build your business.
What is a small business?
A small business is an independently owned and operated company that has limited size and revenue depending on the industry. The definition of a small business varies depending on the country and industry.
The most common traits of this business model are:
Employee headcount: In the United States, a small business owner typically has fewer than 500 employees.
Revenue: Small business owners are typically limited in revenue, based on their industry and location. Businesses in the United States have a revenue of anywhere between $1 and $41 million per year.
Ownership and risk management: Small business owners are fully in charge of a business, as opposed to large companies that can be part of conglomerates. The owner also takes on all of the risk.
Operations and decision-making: A small business is managed directly by the owner and does not necessarily have a formal management structure. The owner makes the most important business decisions.
What is a startup?
A startup is a young company that aims to develop a unique product or service, bring it to market, and scale it rapidly so that it can be used by a large target audience.
While startups are commonly associated with the tech industry, they can be found in just about any industry out there, from agriculture to textile.
Here are some key characteristics of this scalable business model:
Innovation: Startup founders aim to create new products and disrupt the existing markets.
Scalability: Startups are easy to scale and grow from a handful of customers to a profitable business.
Risk and funding: This is an impactful business model but the risks of failure are quite high compared to other business models. Also, many startups have to rely on venture capitalists to get funding resources.
Agility: Startups can adapt quickly and change the direction of the market demands so.
Vision: S startup entrepreneur typically sets the mission and vision that guide the business and its direction.
Key similarities between a startup and a small business
There are a few similarities between small businesses and startup models including:.
- Company size: small businesses and startups usually start with very small team and grow as their business idea gets more traction.
- Ownership: both businesses are independently owned and operated by a business or startup founder or a small number of people.
- Flexibility: in both business types, you can quickly pivot and adapt to the changing market conditions.
- Customer focus: both models are focused on understanding customers' needs and pain points and solving them most efficiently.
- Innovation: both models are highly innovative and aim to find new ways to solve old problems.
- Resource constraints: in both startups and small businesses, founders begin with scarce resources, often having to rely on angel investors and venture capital for sustainable growth.
- Growth potential: both business models aim to reach profitability as quickly as possible and grow rapidly.
- Community impact: both startups and small businesses contribute to their local market and economy and provide jobs and services.
Key differences between a startup vs small business
While sharing some similarities, there are some key differences you should have in mind if you want to launch your own business.
Growth intent and objective
Startups are typically focused on explosive growth and capturing a large share of the market. Meanwhile, a small business is more concerned with stable income and sustainable growth.
Funding
Startups are funded by private investors, venture capital, angel investors, and online lenders and usually have to raise money to get their new company on the map. On the other hand, small businesses rely on personal savings, small business loans from traditional banks, or revenue from their operations.
Risk and reward
While startups are high risk, the potential for reward is greater and successful startups often get initial public offering and large payouts. Small businesses tend to go after established markets, which means there are lower risks with a new business. This means they're going after a smaller market share and the rewards such as average annual receipts are smaller too.
Scalability
A successful startup is designed to scale quickly and relies on technology to increase headcount, grow into a larger company, and get more business. Small businesses are mainly preoccupied with serving a specific target market meaning they’re in no hurry to scale.
Business goals
Startups are driven by a mission and vision to solve a specific problem for a specific target audience. Small businesses aim to create a stable source of income by securing part of a big market.
Operational structure
Startups have a flat and flexible organizational structure with a focus on innovation and agility. Small businesses have a more traditional established hierarchy in terms of operational and legal structure.
Exit strategy
Most startups have a clear exit strategy, such as getting to an IPO (initial public offering) or providing returns to their investors. Small businesses aim for long-term operation and sustainability without a specific exit plan.
Which business model should you choose?
Still qondering which business model to go for?? Lets break things down a bit more simply.
Choose a small business model if
- You have a local market focus
- Your goal is maintaining stability and growing sustainably
- You work within traditional business models and markets (e.g. retail, restaurants, local services)
- You don't need funding methods to find success and you can rely on personal savings
- You want long-term operation
- You need a more established operational structure
- You have a lower risk tolerance
Learn more about how to write a business plan here.
Choose a startup model if
- You want to focus on innovation
- You need to achieve high growth
- You rely on external funding (e.g. seed funding, bank loans, Silicon Valley investors)
- You want to have the option of scaling quickly
- You can endure high risks in the expectation of great rewards
- You want a model that is agile and flexible
- You have a clear exit strategy in mind
Build your business on strong foundations
No matter which business model you choose, you need manpower and reliable tools to take care of the basics. A customer relationship management tool helps you keep your operations in order and empower your sales team to crush their goals.
CapsuleCRM is ideal for start-ups and small businesses due to its ease of use and ability to scale with your business. As your team grows, so can your Capsule subscription, with all the features you need to manage a business.
And the best part is that you can get started today, completely free.
Frequently Asked Questions
As explained above, not every new business is a startup. Depending on the focus, the funding, and business goals, a new business can be considered a small business too.
The one where your company can solve a specific pain point for a specific target audience. While some industries (such as tech) traditionally have a high number of startups, it's not necessarily the best industry to pursue if you don't have a clear mission, vision, and business plan.
It depends on the industry and location, but most startups have fewer than 100 employees.
