There is a huge societal misconception and misrepresentation of the definition, characteristics, and difference between a startup and small business.
A lot of people will most times conflate the meaning of both concepts and as promised in my previous post on reasons why startups fail, here are the differences between a startup and a business.
Before then though, there will a general clarification of both terms.
Startups, oftentimes than not, focus on rapid growth and high-end profits.
They are characterized by their dependence on technology in carrying out their services and usually rely on investments from venture capitalists or crowdfunding platforms as a means of ensuring the continued growth of the project.
Businesses, on the other hand, are focused on consistent returns rather than growth as their primary goal. This doesn’t mean that owners of small businesses are content with being stagnant and making no progress, rather, it means the businesses are more concerned with putting their goods and services in the market and getting customers for their products than they are in making instant, rapid growth.
Businesses have a personal focus since the owner is more invested and determines the general output instead of an investor who has put money into the project as is obtainable in a startups. If you are wondering what the clear distinctions are, here are some of the differences between a startup and a business.
1. Growth Expectancy
One of the fundamental differences between a startup and a business as mentioned earlier lies in its growth expectations. Startups have a pertinent need for fast growth and are structured to reach bigger markets with what they have to offer. This is opposed to businesses where you don’t necessarily need a big market to flourish. All you need us a market and a demand for your product or service.
Unlike businesses who do not have the luxury of a regular infuse of cash and must, therefore, work within a respectable expense budget, profitability for startups isn’t really imperative, at least during the initial stages, as growth is since the investments gotten to run the project are not paid back in the same way as business loans or grants.
So, basically, startups are technology-oriented and have really large growth potential. To grow quickly, you need to develop a product you can sell to a large market and this is why most startups are grounded in tech – technology removes the constraints of time and space.
2. Source Of Funding
The presence of potential growth from a nascent concept to something enormous is a distinguishing characteristic of startups and is enough allure for wealthy investors otherwise known as venture capitalists or venture angels to take the risk of putting huge sums of money into the new project and this here is another difference between a startup and a business.
A small business depends on more easily accessible means of funding like loans and grants or personal savings. Because they are not as excessively interested in rapid growth as startups, there is no mandatory need to infuse additional rounds of capital.
Funding startups is way difficult because of the high number of startups competing for investment.
The entrepreneurs have to pitch their ideas to venture capitalists, showing predesigned growth models and must convince these investors – who are only interested in their return of investment (ROI) projection at the end of the day – on why their project is more feasible.
Additionally, since venture capitalists are responsible for startup funding, they tend to influence decisions largely and play an active role in every stage and process. This is understandable, after all, they are the ones taking the risks.
Although businesses who obtain loans will have to give occasional updates to the lending institution, these institutions do not interfere in the businesses and they as such have greater carte blanche in determining the growth and sustainability of the overall business operations.
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3. Presence Of Risks
Another difference between a startup and a business is in the level of risk obtainable. Startups are primarily formed because of a founder’s need to create something new, to introduce an innovation. That innovation could be a new product or a new service or a total restructuring of an already product or service, perhaps an entirely new way of marketing something.
What this implies is that the amount of work required to ensure the fruition of the innovation is significantly more than that of a business. This makes it a way riskier prospect.
It is not like businesses are entirely risk-free. The Nigerian market space is totally unstable and unpredictable and a particularly promising area today could be a real dud tomorrow.
The knowledge that business owners bear the risk of the business not reaching the expected height alone is enough risk on its own, however, this risk isn’t as accentuated as what is obtainable in a volatile startup traversing relatively new terrain.
Most small business owners aren’t creating something new. Rather, they are leveraging the opportunities present in an existing market with business models that are already relatively proven. Additionally, small businesses are not solely focused on growth, but on consistent profit generation, the length for success are often much longer.
And there you have them, the differences between a startup and a business.
The differences can be approached from three broad areas – funding, growth expectations, and risk. Startups rely on investors, who by the way are also focused on recouping the proceeds of their investments, for their funding.
They are also invested in fairly unthreaded paths and as such are at more risk of hitting roadblocks. Finally, they have the penchant to seek rapid growth and when this is not forthcoming, there is a huge likelihood the project will collapse.
The words of Steve Jobs summarizes this.
“The problem with the Internet startup craze isn’t that too many people are starting companies; it’s that too many people aren’t sticking with it…when these people sell out, even though they get fabulously rich, they’re gypping themselves out of one of the potentially most rewarding experiences of their unfolding lives.”
Businesses, on the other hand, are more stable as they are not pressurized by rapid growth prospects. Their owners, while investing in already existing markets and operating with proven business models, try to build lasting relationships with their customer base and have lesser risks of the business collapsing during its conception stage.
And as a final part of the differences between a startup and a business, they are funded primarily by grants and business loans.
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