Startups versus small businesses

What is the difference between a startup and a small business?

Startups do start out as small businesses, but can every small business really be considered a “startup”?

Let’s examine what is usually meant by these terms and what the differences are.

Small businesses

A small business:

  • usually implements an existing basic business concept (e.g., a restaurant) with a tried-and-true business model
  • operates in a “mature” market (as opposed to a newly-created market) and competes against other existing businesses serving more or less the same general target customers
  • often serves a local geographic market, but could also be virtual (e.g., Internet-based, mail-order, etc.)
  • may have a physical presence like a storefront or an office, or could be home-based
  • could be a one-person operation or may employ any number of employees
  • is usually funded by bootstrapping, i.e., using the founders’ own capital; bank loans may also be used, and the company’s retained earnings will be used to grow the business
  • can have significant growth potential, for example, by expanding into multiple locations, by adding further product or service offerings, or by hiring more staff to perform service work; however, small businesses are generally not scalable structurally in the same way that a successful startup could be

Examples of small businesses that would not be considered startups include restaurants; accounting, medical, or law practices; corner stores; web design agencies; car repair shops; dog grooming services; personal assistant services; insurance brokerages; and hair salons.

Startups

A startup:

  • is, in contrast to a small business that is repeating an existing business concept and business model, usually doing something innovative or risky, by either solving a hard problem that has never been addressed before, creating an entirely new market, or by introducing a new business model, a new type of product, or a new technology to an existing market
  • has high growth potential and is scalable; the ability to service additional customers is not bound by constraints like labor capacity or capital equipment. For example, for an accounting practice to service more customer accounts, it must hire proportionally more accountants and assistants in order to handle the volume of work. A startup, on the other hand, should generally be able to sell its products or services to ten times as many customers without needing to increase the employee headcount or capital equipment by ten times. (An increase in staffing and equipment would likely be necessary but it would not be expected to be of the same magnitude.)
  • may offer products or services, but services that are offered are almost always “productized” and sold for a flat rate (rather than billing for hourly labor)
  • may attract a large amount of investment from venture capitalists or angel investors; in exchange, this means that founders must usually give up a significant share of ownership in the company
  • will typically not qualify for bank loans, as banks prefer to extend loans to lower-risk businesses with proven business models that they are familiar with
  • can be disruptive to existing competitors and industries if they are successful; they are more likely than traditional small businesses to change the world
  • is often (but need not necessarily be) a technology- or Internet-centric business

Steve Blank, author of The Four Steps to the Epiphany: Successful Strategies for Products that Win and co-author of The Startup Owner’s Manual: The Step-by-Step Guide for Building a Great Company, stresses that a startup isn’t just a small version of a big business. He argues that a startup is a “temporary organization” that is “in search of a repeatable and scalable business model”, and that this temporary organization will continue to change through pivoting, demand validation, and “customer development” until it finds a successful business model.

Small business owners are often interested in owning, managing, and growing their business over the long term. They may eventually decide to sell their business, but often the succession strategy is to pass down the business to the next generation of their family. Startup founders, on the other hand, are often interested in cashing out via some form of an “exit” — selling the company to a big corporate acquirer, or taking the company public in the hopes of an windfall through the IPO.

Know what to expect

When deciding on a business idea to pursue, it’s good to be honest about whether you see the business opportunity as a small business or as a startup. Small businesses can be less risky but also provide potentially less reward.

Generating ideas based on your personal inventory

One way to generate business ideas is to consider an inventory of yourself. Start by asking yourself the following questions:

  • What skills do I have?
  • What knowledge do I have?
  • What interests and passions and hobbies do I have?
  • What have I done and achieved in my past and current jobs?
  • What things could I learn and become competent at with a reasonable period of time?
  • What equipment and materials do I have or have access to?
  • What capital and credit do I have access to, and what could I do with this?

For example, if you have training and job experience as a nurse, you might be able to find a way to leverage your skills and knowledge into a healthcare-related business — perhaps home care services, nutritional counselling, or creating books and courses on health-related topics.

If you love cooking as a hobby, then why not consider starting a restaurant or a bakery or a catering business?  Or you could write cookbooks, or make cooking videos, or teach cooking classes, or open a shop selling kitchen gadgets!

If you own a woodworking shop and equipment such as a lathe, then perhaps you could start a business making furniture or crafts, or you could teach people woodworking.

If you have access to a computer and the Internet (and I’m guessing you do), could you teach yourself basic web design within a few months?  Of course you can!  Yes, it will take longer than a few months to become a really world-class web designer, but could you start making money with even an intermediate skill level, either getting paid to make websites for other people, or creating your own sites with money-making potential?  You bet!

How to differentiate your product or service offering

A great way of coming up with innovative business ideas is to take an existing product or service concept, and to change it or improve it in some way. You can then emphasize that special feature, aspect, or quality in your marketing campaigns.

The unique selling point differentiates your offering from the competition and makes your offering stand out and better appeal to your target customers.

The following list offers a number of ideas and suggestions that you might find useful when brainstorming ways to differentiate your product or service:

  • Pricing
    • Lowest cost
    • Affordable
    • Best value for the money
    • High-price, premium, luxury
    • Attractive long-term cost of ownership
  • Quality
    • High quality
    • Craftsmanship
    • Design
    • Purity, best ingredients, etc.
    • Pedigree
    • No-frills or good-enough quality (to save costs)
  • Features
    • Special features that bring benefits that other competitors don’t offer
  • Specialization to satisfy the needs a particular niche market
  • Customization
    • Made-to-order (sandwiches, tailored suits, etc.)
    • “Have it your way”
  • Speed
    • Delivered in 30 minutes or less, “glasses in about an hour”, etc.
    • Fast food
    • While-you-wait
    • Drive it off the lot (rather than waiting weeks for delivery from the factory)
  • Service
    • “Service with a smile”: happier or more attentive staff (better than the competition)
    • Guaranteed response times for customer support inquiries
  • Ease of use
    • Easy to learn; don’t need training
    • “Set it and forget it”
  • Reliability
    • Durability; reputation for a long product life
    • “Unbreakable”
    • Uptime guarantees
    • Assurance that your business is stable and solvent and will remain in business for a long time
  • Guarantee
    • Warranty
    • Lifetime warranty
    • Replacement guarantee
    • Satisfaction guarantee, money-back refund
  • Brand name
    • Trusted name for quality, reliability, etc.
    • As a means of looking cool or showing off socially (e.g., look, I’m wearing Prada)
    • Prestige
  • Technology
    • Cutting-edge technology is usually only useful if it brings some benefit that wasn’t possible before, but some tech geeks may want something just because it uses a new technology, for the “coolness factor”
  • Design
    • Attractive, aesthetic design
    • Ergonomics
    • Current style or fashion
  • Risk-free / risk-transfer
    • Money-back guarantee
    • Generous return policy
    • Provider assumes the risk (e.g., provider pays the fees if a compliance issue is violated for a regulatory filing)
  • Green / environmentally-friendly
  • Social responsibility, ethics
    • Cruelty-free, not tested on animals
    • Fair trade
    • Not manufactured in a sweatshop
  • Details of manufacture
    • Hand-crafted
    • Precision manufacturing
    • Made in the USA, made in Germany, union-made, etc.
  • Healthy
    • Organic
    • Low-fat, low-carb, etc.
    • Added vitamins
    • Pure ingredients
  • Safety, security
  • Convenience
    • Open late or 24 hours
    • Web-based so you don’t have to go somewhere in person or wait on hold on the phone
    • Cloud-hosted, access from anywhere
    • Convenient location
    • No need to make an appointment, just drop in
    • Toll-free hotline
    • “We do all the work so you don’t have to worry”
    • Low-maintenance or easy maintenance
  • Pricing model or purchasing options
    • Financing; monthly instalments plan
    • Subscription plan (versus paying once up-front)
    • One-time purchase for lifetime ownership/access (versus recurring payments)
    • Access to subsidies, grants, etc.
    • Renting
    • Leasing
    • Rent-to-own
  • Location
    • Close to the customer
    • Made with local ingredients
    • Location-independent (e.g., service by web, phone, mail-order)
  • Size, quantity, form factor
    • The biggest…
    • The smallest…
    • The most comfortable…
    • Travel-size
    • Available in multiple sizes or custom sizes (versus one-size-fits-all)
    • Generous portions
    • Healthy-sized portions
    • All you can eat
  • Relationship
    • Non-commission salespeople
    • “Advice you can trust”
    • Buying the product lets the customer become a member of a formal or informal community (e.g., buying a Harley-Davidson motorcycle)
    • Likeable celebrity founder/CEO or spokesperson/representative
  • Choice, variety
    • Offering a wide range of styles, models, colors, etc.
    • Optional add-ons, plug-ins, after-market enhancements
  • Future-proofing
    • Expandability, upgradability
    • Guarantee that a software package will run on future operating system versions

What is the definition of a successful business?

Naturally, if we are going to start a business, we want the business to be successful!

It’s a fact of life that most new businesses ultimately fail, and a failed business is obviously costly and embarrassing, whereas a successful business could easily make you very rich and happy.

While there are many reasons why businesses fail, the most fundamental factor is simply the choice of the business idea or business concept itself. Some ideas and concepts are just more likely to be successful than others. So when generating and evaluating business ideas, we want to eventually choose the idea that has the highest probablility of becoming a successful operation.

What is a successful business? It’s subjective, but:

  • At the minimum, a successful business is a “going concern”: it has sufficient resources and is earning sufficient revenues to be able to sustain its operations indefinitely without having to declare bankruptcy.
  • A business should earn an operating profit for its shareholders over the long term. The business should generally be collecting more in revenues than it is paying out in expenses. However, new businesses may take several years to achieve this state. Capital investments (such as acquiring manufacturing plants or machinery, expanding into new locations, R&D for a new product line, etc.) can impact profitability in the short term, although such investments are undertaken for the purpose of increasing long-term future profitability.
  • Successful businesses are also be expected to grow over time in one or more ways: increased revenues, profitability, market share, employee headcount, market capitalization, number of stores, etc.
  • And while a business must not necessarily be well-loved to be financially successful, in the eyes of the public, a successful consumer-focused business would be one with strong goodwill: a well-known brand name, enthusiastic customers who love the product or service, and a positive reputation.