Plenty of people will think that a startup and a small business are the same thing. Doesn’t the word startup imply a business that is just starting? Aren’t those businesses usually small?
Others will think that in order to found a startup you need to be a tech geek and move to Silicon Valley.
Neither of these definitions of a startup are necessarily true. Startups don’t have to be tech related and a small business is not the same as a startup.
If startups and small businesses aren’t the same thing, what umbrella does YOUR company fall under?
Investopedia states, “A startup is a young company that is just beginning to develop…. These companies offer a product or service that is not currently being offered elsewhere in the market, or that the founders believe is being offered in an inferior manner.”
What really distinguishes a startup from a typical small business are the goals of the founders.
Think about it like this… there are two new kids at an elementary school. The first one works hard to find a place and make friends within the existing friend group. That kid might learn what the others like to do for fun or how they dress and try to follow suit. He or she soon has found new friends at his or her new school.
The second kid doesn’t try to fit into the group. Instead, they hope to take over the group or start a new one. Maybe he or she dresses differently or starts playing different games at recess. At first, he or she may not have many friends, but eventually they may be the leader of the pack.
In this scenario, the first kid is the small business, while the second kid is a start up. Neither approach to the new school is better than the other; each kid just had different goals.
Innovation vs. Steady Profit
Startups are risky endeavors. 90% of startups fail. This isn’t a statistic that is very appealing to many. Founders of startups aren’t focused, especially in the beginning, on making a profit. They are focused on the product or service they are selling. They hope to introduce something completely new to the market, or offer consumers a product that is even better than what already exists. Creative Bloq offers the following advice, “Don’t necessarily worry about where an income will come from – a good product/service will always find a way to make money.”
In some ways, think of startups as being more “it’s about the journey, not the destination.”
Due to the nature of startups, they are typically in need of financing from investors and lenders at the beginning. Startup owners will often be spending more money than what is coming in during the early stages in order to enable their company to become a powerhouse in the future. “…many startup founders willingly forgo profits or premature scaling to build a sustainable, scalable company.” This, as we mentioned above, does not always pay off, but when it does-it usually pays off big.
Unlike a start up, a small business will be more concerned with profit early on in the venture.
Think about your business and your goals for it. Do you hope to work on a steady profit right from the beginning? Or, are you willing to forfeit profits at the start?
Staying Small vs. Taking Over the World
Most typical small businesses– clothing boutiques, markets, accounting firms, medical practices, law firms– are not trying to do anything radically different. The market exists, and an owner is just trying to find a competitive place in it. Often small business owners aren’t trying to become large business owners.
On the other hand, startup founders have an idea. A new idea. And, they are trying to take over the market or create an entirely new one with their new idea. Staying small isn’t usually in the game plan.
What are you hoping for with your company?
Does It Matter?
In the end does it really matter whether your business is classified as a ‘small business’ or a ‘startup?’ Not really. Both kinds of businesses should still file as some type of entity: LLC, S Corporation, C Corporation etc… depending upon the structure of the business. Both kinds of businesses are still hoping to eventually make a profit. Startups may be riskier, but both types of businesses take courage and hard work to start.
What DOES matter is that you take a look at your business, your hopes, your goals, and your values. Deciding if you have a start up or not can help you to do this.
Would you like entity type advice or help with finding investors for your start up or your small business? Contact Lucid Accounting and Finance!