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

The startup fever has engulfed urban Nigeria. But while it has ignited a lot of positive entrepreneurial passion and creativity, it has also brought some unintended consequences with it.

One of the less talked about downsides to the whole startup craze is that many people don’t really know what a startup is in the first place. Just about every other entrepreneur these days says they’re running a startup. And when they say this, they might be referring to their hair salon, which has a fairly large presence on Instagram; or a regular pastry shop they started up just five months ago.

In fact, hair salons and pastry shops are (almost always) small businesses, not startups. And no, ‘startup’ isn’t a sleek synonym for ‘small business’.

So what’s the difference then?

Small business vs Startup: Defining Terms

Startups and small businesses differ in a number of crucial ways.

A startup is a venture that’s founded as a vehicle for discovering and developing a viable business model. In other words, it’s a bold, short-term experiment of sorts, which you embark on with the hope that it turns out as a great company with a fabulous business idea.

Actually, you begin a startup hoping that it turns into a dominant, niche defining, market-disrupting giant. This is one way to tell a startup apart from a small business. A regular roadside doughnut store which runs pretty much like “the others” isn’t going to do any disrupting. Compare this to, say, a fintech startup which aims to drive a continent-wide shift from physical cash transactions to digital payments, and you’ll get the point.

In a nutshell, startups are running on big dreams and aim to grow big fast. They want to dominate their space by disrupting the way things are done there. Small businesses, on the other hand, are more keen on being profitable than they are on speedy growth, and maintaining a stability is key for them.

Levels of Risk

A direct consequence of the startup’s focus on speedy growth by disruption is that it is quite risky. As we’ve already noted, startups are experiments of sorts and are more about trying out less used or novel ways of doing things. And you’re more likely to fail if you’re experimenting with new recipes than if you’re just recreating an existing one. Small businesses also come with risks (every business does); but they’re generally less risky, precisely because they’re using tried and tested models, not some new, barely tried systems.

However, risks tend to be positively correlated with returns. In simple terms, “the greater the risks involved, the greater the return on investment.” Startups are extreme things: they usually become either spectacular successes or spectacular fails. Small businesses may grow into big companies, but they mostly either remain small or fold up.

Technology

Some try to make the point that startups can be distinguished from other business types by their use of contemporary technology. But using technology doesn’t make a business a startup. Rather, startups use technology because they operate as startups.

Here’s what I mean. Startups want to disrupt their space. But this means they need to come up with a novel and viable alternative to the way things are done in that space. They’ll need to be creative and innovative. For many in today’s world, innovative solutions are achieved by tweaking existing technologies or applying them in new ways. It’s how most big unicorns have become successful. That’s why a large fraction (but not necessarily all) startups are big on tech.

Small businesses are also using technology. They own websites, they’re on social media, and they use digital solutions. But so do many other businesses these days. This isn’t market disrupting behaviour. It’s just keeping up with the trends.

Funding Sources

Most businesses are begun with their founder’s savings, perhaps with help from friends and family. This is true for small businesses and startups.

However, the ultimate goals of startups and small businesses mean that they eventually seek funding further funding from differing sorts of sources. SMEs request for (and receive) loans and grants from banks and other financial institutions; startups get investment from angel investors and venture capital firms.

There are reasons for these differences. Angel investors and venture capitalists put their money into startups in exchange for a stake in it. That is, they have a share in its profits. Startup founders are happy to have their ventures funded even at the cost of losing some of their control over it. What matters is that it helps scale up the venture. Small business owners aren’t so eager to give up their hold on their business; it’s their project, and they’ll steer it to greater heights themselves.

Conclusion

Here is a sweeping description of the differences between small businesses and startups. Now you know which one you’re running.

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Ikenna Nwachukwu

Ikenna Nwachukwu holds a bachelor's degree in Economics from the University of Nigeria, Nsukka. He loves to look at the world through multiple lenses- economic, political, religious and philosophical- and to write about what he observes in a witty, yet reflective style.

1 Comment

1 Comment

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    FAJI

    18th September 2018 at 9:47 am

    Brilliant and articulate article !

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