How do you know if you’re a startup or a small business? Is there a difference? And why does it matter?
By definition, a startup is designed to scale aggressively. In fact, the key attribute of a startup is its ability to grow, according to well-known expert Paul Graham in his popular essay on business growth: “A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of ‘exit.’ The only essential thing is growth. Everything else we associate with startups follows from growth.”
In other words, a startup is looking to move fast, maximize profits, and either sell or get really big with a scalable business model. By this definition, a startup is a small, early version of a future large corporation.
Small Businesses are Harder to Define
Small businesses are more varied. Small businesses include privately owned corporations, partnerships, and sole proprietorships. In the U.S., the Small Business Administration defines small businesses based on industry “either in terms of the average number of employees…or annual average receipts.” Neither of those definitions are particularly clearcut.
The U.S. government has definitions on what constitutes a small business; the SBA has a table of size standards (broken down by industry) you can use to find out if your business is defined as small. Though it varies industry to industry, the maximum number of employees tops out at 1,500 and annual receipts at $38.5 million. A small business usually has a business model that works from day one. It’s self-sustaining (once it gets going) and should start generating revenue the day it opens.
Knowing which you are—a startup or a small business—is important for understanding where you’re headed, what you’ll need, and how to define expectations/success.
Here are three key questions to ask in order to define your business and your goals, as well as where you fit on the startup-or-small-business continuum.
What Are My Growth Targets?
Startups want to take their business model and disrupt, or take over, an entire market. Unfortunately, that doesn’t happen right away and results take time. Startups might not be profitable for years, if at all. The goal, however, is to scale quickly and aggressively once their business model starts to succeed. This is why most startups are in tech. Online businesses can reach a much larger market and scale quickly.
Small businesses don’t need that type of market. They just need to exist in a market and efficiently serve it. Though they run the gamut from mom and pop shops to larger, even multimillion-dollar revenue generators, small businesses are not in the business of taking over an entire industry or market; they’re in business to be profitable.
How Will I Fund My Business?
Something these two have in common? Initial financing woes. Both need it but they typically go about it in two different ways.
Startups search for investments in rounds by selling their business model to investors who are looking to make a big investment. Small businesses typically fund their business through small business loans, also known as debt financing, to hit their initial funding goals. Their targets are traditional banks and/or online lenders offering smaller amounts of funds at interest.
Startups trade pieces of ownership for lots of funds. Small businesses trade a higher long-term cost of funds for maintaining sole ownership. Or, simply, startups look for financing partners and small businesses seek transactions.
Fundbox partner Lendio provides financing options for businesses of all shapes and sizes. When it comes to startup loans—these are typically for those with less than 6 months time in business—a business credit card or a business line of credit are both common sources of capital because they are easier to get and generally more flexible.
What Are My Long-Term Goals?
Startups are typically temporary. If everything hits, it turns into a massive company (perhaps gets an IPO) or a larger company purchases it.
Small businesses aim to stay in business and (hopefully) turn a profit. All small business goals are different but generally the aim is to be self-sustaining and a long-lasting business in the community or market.
Between the official startup definition, the (complex) small business definitions, and answering those three questions, it should be pretty clear where your business stands.
So, are you a startup or a small business? If you’re still in the initial stages of launch knowing the answer will set you on the best path to success.
Launching a small business? Read on for 4 of the biggest mistakes to avoid.