What’s The Difference Between A Small Business And A Startup?


What’s the difference between a small business and a startup? Structurally – a lot. Operationally – not much. And I’ll explore that throughout this series.

To me, startups are a subset of small businesses. They are both initially owned by a few people, they need the same inputs (labor + capital), and they have the same problems. As they grow, startups usually start to take a different path (focusing on growth, not revenue), but the vast majority of the steps and processes are the same.

All small businesses (including startups), have the same initial steps:

  1. An Idea
  2. A Plan (this is waaaaaaaaaaay different than an idea, and where most people give up)
  3. A Legal Framework
  4. Labor
  5. Capital
  6. Repeat Steps 4 and 5 over, and over, and over

Merriam Webster defines “start-up” as “a fledgling business enterprise.” Sounds kinda harsh. But I think we can highlight three categories where startups diverge from small businesses.

  • Growth – a startup is seeking exponential, not linear growth. People often refer to this as the “hockey-stick.”
  • Funding – a startup usually needs multiple rounds of funding, and that funding initially comes from friends and family, then angel investors, and then venture capital funds or other institutional investors.
  • Exit – a startup is looking to sell the business or file an initial public offering – the “exit.” Many small businesses just want to be operating businesses for an undetermined period of time.

In closing, I want to share an excerpt I found in a Business Insider post from 2014.

“A startup is an emotional roller coaster that can either result in massive failure or success, after which one’s bank account total may either drastically increase or decrease. The person behind a startup is a founder, an often very bright, somewhat crazy person who finds a normal 9-5 job dull and is deluded into believing he or she can change the world by working tirelessly in front of a computer screen. The relentless work has been known to shave a few years off a founder’s life while adding premature gray hairs, but it can be very rewarding both emotionally and financially for those who pursue it.”

In my experience, you can replace “startup” with “small business” and the paragraph still fits.

About the Author
Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of M&A, venture financing, fund representation, and gaming law.

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