What Is a Startup?

Contrary to popular belief, startup companies are not a permanent phase for any business or tech company. Startups are the initial phase of a high-growth business model. A few common startup traits are few employees and fast growth potential that deliver a high return on investment for their funding sources.

Startups generally provide products or services that appeal to a large demographic or solve a widespread problem better than the options currently available.

Learn how to start a startup.

What Is a Small Business?

On the other hand, a small business is a less scalable business that isn’t necessarily focused on growth potential. Small businesses are generally centered around providing a product or service to a target market and longevity resulting in stable, consistent growth.

Two defining characteristics of a small business are a small target market and a focus on long-term sustainability rather than top-end revenue.

Learn how to start a small business.

Startup vs. Small Business: Differences

Growth

Startups are typically built for scalability. One of the cornerstones of this business phase is rapid growth, which means it is supplying a product or service that appeals to a large market. This is required for the kind of growth that characterizes startups.

In contrast, while small businesses generally welcome healthy growth, the focus is centered more on a sustainable business model that appeals to a more focused market.

Funding

Startups can have a hard time securing funding, and most startups are funded by a method called “bootstrapping,” which means entrepreneurs fund their business initially out of their own personal savings. Otherwise, startups are more likely to be funded by angel investors or venture capitalists rather than by grants or loans. Investors typically choose startups based on the highest possible return on investment and the lowest risk possible, making funding a unique challenge for startups.

Alternatively, small businesses tend to source funding through small business loans and grants because they tend to generate less profit and therefore deliver a lower return on investment for venture capitalists or angel investors.

Goals

By the nature of this business type, startups are built with top-end revenue goals and an exit strategy in mind. The goal is to achieve high, rapid growth — not necessarily to build a sustainable or long-lasting business. For startups that want to keep their business in operation after its initial growth, an exit strategy to pay off investors through revenue, loans, or another funding source is needed. 

Small business owners, on the other hand, don’t need an exit strategy when they are seeking funding or starting their own business since the burden of responsibility is entirely on their shoulders. This also means that these entrepreneurs are typically less focused on high revenue goals; instead, a small business’s goals are centered around financial stability.

Startup vs. Small Business: Which Should I Choose?

Choosing between a startup and a small business for your business idea typically comes down to the business idea, the market that’s available for it, and how you plan to source funding. Let’s take a look at a few of the characteristics that can dictate whether a startup or small business is right for you:

A Startup May Be Right for You If:

  • Your business idea has large market potential. One of the hallmarks of startups is an expansive market, something that a small business model won’t always be able to support.
  • Your business idea has the potential for a high return on investment for investors. Angel investors and venture capitalists fund startups that they think can earn a high return on investment. For this reason, your startup has to have high ROI potential.
  • You are comfortable with a high-risk business model. Startups tend to hold higher financial risk than small businesses. You should be sure that you are able to and comfortable with taking on the risk.
  • You are an innovator. Innovation is the name of the game in the startup world. To be a successful startup entrepreneur you need to be able to think outside the box.

Recommended: Read our full guide on how to start a startup.

You can also choose your state from the list below to read our state-specific startup guides:

A Small Business May Be Right for You If:

  • You want to focus on your target market. Small businesses tend to focus their energy on their target market in order to maintain consistent profit and stable growth.
  • You are looking for a less risky business model. Starting a small business still holds inherent risks; however, the percentage of small businesses that fail is far below the percentage of startups.
  • Your business idea isn’t likely to experience rapid growth. Small businesses are geared toward consistent business growth rather than expeditious.
  • Your goal isn’t to become an industry leader. You can still impact your industry, but if your goal isn’t to dominate the industry around you, a small business is most likely a better fit.

Recommended: Read our full guide on how to start a business.

You can also learn how to start a business in your state by reading our state-specific business guides: