The Difference Between a Startup and a Small Business

25 August, 2021

In the post-Soviet region, the focus on technology innovation has grown relatively recently. Innovation centers are being built, programs are being implemented, and funds are being allocated. Young people, inspired by stories about startups from the United States, which have brought billions of dollars to founders, seek to start their own business and call it a startup. Furthermore, they oftentimes ask the state for support their endeavor. However, in may cases, the business is not truly a technology startup, but rather a small business. For this reason, it will be helpful to clarify the main differences between a startup and a small business. For easier understanding, at the end of the general thesis, I will explain the differences using a metaphor of clay pots.

1) Innovation: Every startup idea should present a solution to a problem. This solution must be innovative. This means that the startup must offer something new to the audience. This is not necessarily a supernova product that has never existed. It can be an add-on feature to a regular product that makes the product easier to use. If you are creating something identical to an existing startup, and your startup is just as high-tech, it may also be a startup, but most likely it will not be successful. When starting a small business, you may not think about being innovative if you think your product will sell.

Example: People use pots to store grain. They buy the pots from Potter Max. But Alex the Potter appeared in the city, and rather than selling pots, he leases them by subscription. It turns out to be cheaper than buying gots from Max, since Alex spends less money on buying clay at the expense of returned pots.

2) Orientation: In the first paragraph, we already said that a startup must solve a certain problem faced by the audience. A small business does not always solve the problem of the audience, because the small business is primarily focused on the product and its sale. A startup looks for a problem first, and is human-centered.

Example: Max knows that people always need pots. They break frequently. Therefore, he tries to produce more pots in order to sell more and even launched a “2 + 1” promotion. Alex, on the other hand, found out from people that they wanted to change their standard pots. Now Alex is making sturdier pots and has even added handles to them. They are more expensive, but there is more demand for them.

3) Availability of resources: When starting a small business, you create a business plan. You calculate the initial capital, expenses, and estimated profit. The startup is different. For a startup, it is enough to have a computer with Internet access and the idea itself. A startup does not require a lot of investment in the initial stages of development. This is what attracts investors. If the small business goes out of business, it will be a financial loss. If a startup goes out of business, the founder may have less liability.

Example: Max and Alex want to open their own store, which will sell not only their pots, but also pots from other cities. Max leases a room, buys shelves, buys out-of-town pots and opens a store. Alex agreed with potters from other cities that they would send their pots when they were ordered. Then he opened an online store, where everyone can choose the pot they like and they will bring the pot to his house. Both businesses were unsuccessful, but Max spent a lot of money, and Alex simply explained the failure to other potters.

4) Risk: While a startup does not require as many resources to launch, the venture is still risky. It is very difficult to predict how the audience will perceive the innovation and whether they will use it. A small business, on the other hand, offers the audience a familiar product that will always be in demand.

Example: After a failure, Max returned to the workshop and continued to sell his pots. Conversely, Alex became interested in a merchant who sells pots, delivering them to different cities. He does not know how to create an online store, but he is ready to help advertise an online store in large cities. The merchant and Alex have nothing to lose, but are ready to take the time to test the idea.

5) Scaling: Although a startup is a risky venture, a successful startup allows an idea to expand quite quickly. Since a startup is most often associated with a new technological solution, the idea of ​​a startup can spread throughout the world through the Internet. A small business, on the other hand, takes a lot longer and does not always go beyond its location–the goal is not by definition to scale.

Example: Merchant and Alex’s idea worked. In the big city, everyone began to buy a variety of pots through the online store. The fame of the online store quickly spread to other large cities. Max took advantage of Alex’s absence and began to earn more in his small town. But Max’s sales were still less than Alex’s sales.

6) Loans and investments: A startup needs investment to grow. Startups may not be given a bank loan due to the inherent risk and uncertainty. Small businesses have less risk, but the expectations of the investor is different.

Example: Max decided to increase the size of his workshop in order to produce more pots. Therefore, he borrowed money from a local feudal lord. Max promised to return the money by selling more pots. Alex also needed money. He wanted to buy more horses to get the pots to other cities faster. But instead of money, he promised to provide the horse breeder with free pots for life.

7) Exit strategy: A startup should always work out its “exit strategy” – a plan for the return on investment in the event of a successful expansion. This can be a share in a startup, a part of a profit, or other conditions. The small business, on the other hand, returns the loan according to the terms that the bank provides.

Example: Max produced a lot of pots that no one needed anymore. He could not sell them, and the feudal lord did not want to accept debt in pots, since he buys pots on the Internet. Max had to close the workshop and work elsewhere to recover the debt. Alex began to earn even more. But in order not to be indebted to the horse breeder for life, he gave him 100 pots. The horse breeder was satisfied and had no pretensions to Alex.