Startup vs Small Business
A discussion about the difference between startup and small business can be commenced by considering the scale of operation. The scale of business is not considered for a business startup or a startup and the scale of operation is considered for a small business. Putting it simple, business startups can be formed as a large business or relatively small business while small business as the term implies is grounded to certain criteria and labelled as a small business. In relation to small business, certain accepted criteria are used. Some of those criteria are the number of employees in the firm, annual turnover, owners’ equity, etc. Depending on the context, those criteria differ. Therefore, the point that one should remember in categorizing a startup and small business is the scale of the business. For business startups, the scale is considered and vice versa. Also, being entrepreneurial is important for both the types, startups and small business, but it is not indispensable. Being entrepreneurial typically requires opportunity seeking dimension of the firm and thus it would be a strategic tool for both types of firms. As a similarity, it is discussed that, both types of firms explicitly or implicitly follow the venture life cycle.
What is a Startup?
The definitions of startup or business startup are proposed by Low & MacMillan (1988) and asserted the notion of ‘creation of new enterprise’ (p.141). This notion is addressed differently. Explicitly, the creation of new enterprise can be a large firm or a small firm. This refers to the scale of the business. The general understanding among the people is that startups should be relatively small in nature. However, that is not true literally. Importantly, implicitly or explicitly, all the firms (start-ups and small businesses) run through the venture life cycle.
Theoretically, the life cycle begins with the development stage. Relatively large startups involve with high capacity product/service developments. Research and development are performed in this stage depending on the capacity of the owner. The launching stage refers to startup stage. At this stage, minimum sales are obtained since the product is just launched. This stage is considered as crucial since the firms pass the stage of survival attain growth potentials subsequently. In the rapid growth stage, the firm enjoys good harvest as sales increase gradually. But a considerable level of competition is also observed in this stage. Finally, early maturity stages are considered as declining stages since competitive and imitative products are launched in the market. As a result, sales are declined and it is advised to all the firms to reap the harvest or divest the business. Having mentioned the venture life cycle, once more it is important to identify that each startup goes through this venture life cycle.
Generally, startups are funded in various ways. Relatively small firms invest the owner’s savings, angel financing, loans, micro-financing, etc. while relatively large firms are funded by franchise agreements, licensing agreements, merger agreements, etc.
What is a Small Business?
As defined above, small firms operate in a framework. That framework is provided by the criteria that are used to define small firms. Commonly accepted criteria for small firms are number of employees, equity invested, asset value, etc. Also, it is very important to note that the extent and the complexity of those criteria vary across countries. In the United States, small business are categorized and defined based on the industry considered. For some industries, employees less than 1500 are considered as small firms and, for some, employees less than 500 are considered as small firms. Meanwhile, in a country like New Zealand, firms that employee less than 19 are considered as small firms. These two examples confirm that the definition criteria and measurements of a small business differ across countries. Usually, small firms are referred to as small and medium size enterprises (SME), which are business entities whose number of employees fall below a certain limit. In many cases, small firms are funded by owner’s savings, micro loans, angle financing, etc. as they are small in scale.
In the discussion of startup, venture life cycle was introduced. As in startup, small firms too follow the same life cycle implicitly or explicitly while enjoying the benefits of each.
What is the difference between Startup and Small Business?
• Factor to Distinguish:
• In startups, the scale of the business is not considered.
• In the small firms, scale of the business is considered and usually are defined considering certain criteria.
• Both types of firms are important for a country’s economic development.
• Entrepreneurial Nature:
• Being entrepreneurial is important to both types of firms in order to attain success.
- Low, M.B. & MacMillan, I.C., 1988. Entrepreneurship: past research and future challenges. Journal of Management, 35, pp.139–161. Available at: http://search.ebscohost.com/login.aspx?direct=true&db=bsh&AN=7201347&site=ehost-live.
- Startup Financing Cycle by Kmuehmel (CC BY-SA 3.0)
- Small businesses on Dalrymple Street in Greenock, Scotland by GeographBot (CC BY-SA 2.0)