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Startups vs. Small Businesses: What Should You Build?

Jared Atchison
Jared Atchison

Understanding the differences between startups and small businesses will impact your success. Find out what the best type of business is for you.

Should you create a startup or a small business? 

That's one of the questions you might ask when building a new business venture. There are many routes one can take to start a business. Many industries, such as the real estate arena and private medical practice, have clear-cut options. But for many other areas, it's not clear what the best organizational structure is.

In this post, we're exploring startups and small businesses. They seem alike at first glance, but an in-depth understanding of these organizational types shows that's not really the case. 

By demystifying startups and small businesses, you'll know which to pick and why. This will allow you to adopt the right leadership style, to appropriately plan, and to make the best marketing strategies. 

To do this, we'll begin with understanding some of the differences between startups and small businesses and how these differences will impact your business creation decision. 

The key differences between startups and small businesses

Possibly, the only common thing between these two organizational types is that they are small. Apart from that, the way startups and small businesses operate is quite different. As we cover these major differences, you'll understand how your business type will impact your future decisions and even your role as a leader. 

Timeframe

Small businesses come into existence with the expectation that they'll last virtually forever, save some unexpected factor bringing the business to a close. This means that small business leaders undertake long-term planning and investments.

For startups, the lifecycle can be considerably shorter. At some point, a young startup grows into a big organization, losing its initial size and flexibility. And of course, many startups are acquired or bought out by larger businesses. Here, the possibility of an end date for its existence is very real, and leaders account for that or even actively look for liquidation opportunities.

Growth rate

A startup begins small but expects to scale up and grow rapidly in the near future. They do this by using growth marketing strategies to expand and scale. 

When you start a small business, quick growth is desirable. But small businesses don't have the same motivation or strategies in place to scale up rapidly. They don't just look at the next few years; they might even take decades into consideration. Such ventures often stay small, catering to the same market over time.  

Experimental vs. tried-and-tested approaches

The goal of a startup is to test new business models and product ideas. They focus on new technology with the aim of creating something new and getting it to the market fast. There's a mindset of thinking outside the box and encouraging industry-disruptive practices.

Not so much with a small business. When starting a small business, people look for the best practices and proven means of working. While innovation and fast market penetration are preferable, a careful and measured way of taking on new processes is important. For small businesses, you're looking at slower growth and less risky recommendations. 

An important implication here is that small businesses and startups use data differently. A startup that uses growth marketing strategies will rely heavily on data to understand what's working. It will then focus on those strategies that show exceptional results and then leverage them to grow the business fast. 

Small businesses can be slower to adopt data analytics. For example, even though content marketing is considered an essential practice for online visibility, some 26% of marketers do not set metrics to gauge the success of their efforts. Such businesses likely do not use analytics and other tools to monitor their activities, or they use their existing data ineffectively. 

Funding

One of the major ways that startups differ from small businesses is how they get funded.

Startups often depend on investments from venture capital groups and individual investors. They need several rounds of funding and typically require large sums of money with the expectation that they'll see significant revenue in a short period of time. 

Small businesses get business grants and loans from banks and other formal organizations. They don't need rounds of funding, nor are they expected to produce steep revenue projections in the near future. 

The struggle for startups to get investments is well known and often compounded with a great deal of control going over to the investors. Small businesses do not deal with such issues, as their steady growth is considered a clear indicator of success. 

Choosing to create a startup or a small business

In many cases, whether you have a startup or a small business organization will be decided by the nature of your product and the industry you're in. It's typical for businesses in the IT field to opt for the startup model because of the rapid pace at which technology changes, for instance. 

Looking at the differences between startups and small businesses, it's evident that the organizational form you choose will impact everything from your product planning to the possible liquidation of your business. So, when choosing the type of organization to set up, consider these additional factors.

Leadership styles

From the differences we've looked at, it's evident that your leadership style will also impact the kind of business you want to create. Looking at research on leadership styles in startups, we can see it's important for an entrepreneur to have a charismatic approach. A transformational leadership style, where you motivate others to reach for their goals, is also associated with startup success. Such qualities are important in small business leaders too, but the pressure to have a visionary mindset is not as great.

Risk aversion

Startups are generally considered riskier, since there often isn't a precedent for what you're trying to do. By creating a startup, you're assuming more risk, and the likelihood of failure is high. Starting any kind of business is inherently risky, but small businesses do not carry as much risk as a startup does. 

Ideas

Another important aspect to consider is the ideas you have for your business. If you're looking for ways to make creative and disruptive ideas come alive, then it makes little sense to build a small business. Risky and challenging as a startup may be, it's the best way to bring innovation to life. There are startup ecosystems dedicated to helping entrepreneurs reach their goals, and you should access these benefits to give your business its best chance. 

In many ways, the decision to create a startup or a small business is determined by external factors, like the industry or the market. But your own preferences certainly come into play as well. 

Bottom line on startup vs. small business

The decision to start a new business is not one that should be taken lightly. When you register a new company or start building a product, it's not easy to start over and make changes. You also need to understand the arena you're working in and the kind of strategies that are likely to help you succeed. 

By understanding the differences between startups and small businesses, you'll be able to make the appropriate decisions for your product, business and audience. You'll also choose the structure that makes the most sense for your talent and personal goals. With the information we've looked at in this article, you're in a better position to choose the right type of venture to build. So, go ahead and get started!

Jared Atchison
Jared Atchison,
business.com Writer
See Jared Atchison's Profile
Co-Founder of WPForms, one of the largest WordPress contact form plugins in the market. I have been programming for over a decade and enjoy creating plugins that help people create powerful web designs without touching code.