Startup vs Small Business: The Differences that Matter

Let's get right down to the matter at hand: startup vs. small business. Here are the three main elements of a startup:

• Creates new products, markets, and business models.
• Takes on high levels of risk to achieve rapid growth.
• Typically has outside funding from private investors.

And here are the three main elements of a small business:

• Improves existing products for established markets, using proven business models.
• Takes on less risk with the goal of maintaining stability and sustainable growth.
• Often raises money through personal savings, bank loans, and other traditional funding sources.

With that framework in mind, read on for more details and in-depth information.

Key differences between a startup and a small business

Some people use the terms interchangeably, but there are important distinctions between startups and small businesses:

Business model

Startup: A startup's goal is typically to provide something new that its founders hope will disrupt the market. Startups may begin as tiny businesses—the stories of startup companies that were founded in dorm rooms or garages are legendary. A startup founder's goal, however, is to grow the company rapidly and have it become a major, if not the dominant player in its market.

Examples of world-changing startups include Google, Facebook, Apple, and Amazon. Of course, not every startup will become that successful. But generally startup founders hope to provide a product or service that will make a significant difference and will eventually enrich its founders. Startups are often, but not always, in the tech industry.

Small business: A small business doesn't usually seek to dominate the market. Instead, its goal is usually to serve its community and a stable cash flow for its owners. The Small Business Administration defines a small business as a manufacturing company that has fewer than 501 employees, or a nonmanufacturing company that has less than $7.5 million in average annual receipts. However, most small businesses are considerably smaller: 89% of all businesses in the U.S. have fewer than 20 employees, and 78.5% have fewer than 10. Many small businesses are partnerships or sole proprietorships.

Growth expectations

Startup: Rapid growth is a top priority for startups. They may sacrifice initial profitability for faster growth. Having external investors gives startups the freedom to delay profitability, something they might not be able to do if they had to pay back loans from banks.

Small business: Small businesses usually prioritize stability over growth. Their owners may focus more on generating long-term income. They may focus less on quick returns that would attract investors, so they tend to grow organically and more slowly.

Market share

Startup: Founders of startups may want to create a new market and quickly gain market share.

Small business: Small businesses may not set a goal of dominating the market, though they might want to build market share. Success means generating a long-term stable income while serving their local communities by providing goods or services.

Funding methods and venture capital

Startup: Startups usually seek money from outside investors. Many startups turn to venture capital as one means of funding, which is funding from investors who are willing to assume risk to gain equity in new or growing companies that have substantial growth potential. The investments are made in multiple rounds. The first round is seed funding, which is followed by Series A, B, and C.

Small business: Small businesses typically rely on more traditional types of funding, such as loans from banks or credit unions, business credit, personal savings, or loans from family and friends.

Long-term strategy and profit potential

Startup: Startup founders hope to create substantial profits. One exit strategy is creating buyable startups. Founders develop companies with the goal of attracting other companies to buy them. Mergers with other companies can also be a goal. Other startups hope to go public and sell shares via an initial public offering (IPO). All of these strategies, if successful, can greatly enrich the founders and investors.

Small business: Small business owners want their businesses to be at least profitable enough to stay in business and generate income. These owners often want to keep control of their businesses, so they are not interested in going public or in making a quick sale to a larger company. They may, however, eventually sell the company.

Startup founders vs. small business owners

Given these differences between startups and small businesses, the roles of startup founders and business owners can be different.

The startup entrepreneur: A risk taker

To be a startup founder, you will probably need to have a high tolerance for risk. You should have a strong desire to change your industry and become a leader. You also must be motivated by a strong growth intent—aiming to turn your startup into a major company.

Startup entrepreneurs have to identify a genuine need and come up with a business idea for a product or service that may not already exist that will solve the targeted problem. You must focus on goals, build a team, raise funds, and steer the company to success.

The small business owner: A stability seeker

To be a small business owner, you will probably be more focused on meeting the needs of your local community. You probably won't be seeking growth just for the sake of growth or trying to create products or services that no one else has ever offered before. Instead, you may want to build a stable company that provides a good, steady income for you and your employees.

You'll need to create a business plan and strategy, and manage all aspects of your business to help ensure that it stays on a steady course.

Am I starting a small business or a startup?

If you are an entrepreneur starting a business, you should think at the outset about whether your new business is a startup or a traditional small business. Your choice may fundamentally change the way you need to plan for marketing, financing, growth, and business structure.

Startups and small businesses do face some common challenges. No matter which type of business you have, as soon as you start hiring employees, you will need to manage human resources functions. Both startups and small businesses can benefit by outsourcing their payroll administration and other HR tasks to an outside provider like TriNet.

Trying to handle HR administrative tasks in-house and also keep up with the constantly changing regulatory landscape takes time, money, and energy. TriNet can help with that HR administrative burden so that startups and small businesses can focus on their core missions. Our HR solutions options allow you to outsource selected HR tasks or have us support most of your HR functions with our professional employer organization (PEO) services. We invite you to connect with us and find out more about how we can help.

This communication is for informational purposes only, is not legal, tax or accounting advice, and is not an offer to sell, buy or procure insurance.

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