Misconceptions about startup:differences between a startup and a small business
Atualizado: 30 de mai. de 2019
Let’s talk startups! When you start your own business, there is a number of factors that should be considered. If you work in a technology sector or live a large metropolitan area, it is very likely that you or someone you know well is in the process of developing or conceptualizing a startup idea. What is a startup? The purpose of this article to help align the understanding and minimize the misconceptions that surround the concept of a startup and a small business. Understand the fundamental differences between high-potential startup and a regular small business.
What is a Startup?
The term startup has been around for many years already and many professionals and investors have been treating startup companies as a smaller type of a larger organization, often attributing innovation as the key differential of such small business. One of the interesting definitions of startup that I came across over the past years was given by Niel Blumental, who, in his interview to Forbes, said that:
A startup is a company working to solve a problem where the solution is not obvious, and success is not guaranteed (Co-founder and co-CEO of Warby Parker).
I view startup as the structured social system created to give body to the founder´s dream under the conditions of controlled uncertainty, when such dream can provide solutions to existing problems. With that in mind, some time ago I shifted my focus from a profitable small business with solid and time-tested proposition on the market to become part of the technology startup, entering the international market. I did so, because I felt tremendous difference between a small business and a startup and wanted to derive personal meanings about the differences between the two concepts. Here is what I found.
1. Mindset of “scalability”
Startup mindset has focus on the benefits that the solution can bring and on building up the scale of those who will benefit from it rather than on the dollar amounts – on the contrary to the small business mindset.
Startup mentality is excessively helicopter-viewed. The founders and the team tend to think about the greatness and potential of the product and service, as opposed to the immediate financial return. Startup companies cannot build on disruptive innovation, limited by the short-term return required by the owners or investors. The CEO of the company that I work with constantly tells that you have to keep the startup mindset, when going abroad.
2. Rare, but attractive for imitation
Coffee shops, small electronic boutiques, snack bar, post office franchise, ice cream kiosk are some of the examples of a typical small business. These ventures are created with the primary focus on profit generation through market penetration. Small business is born, when there is a demand and can generally be classified as early majority or late majority on the Moore’s Chasm Diagram. Startup, on the other hand, is the ambition to create a demand through offering a solution to existing problem or to a problem that can be introduced to the market by a startup itself. Some of the latest startups that made it to the top rankings are Brandless, cosmetics store with focus on eliminating brand loyalty, WeWork coworking offices, Rappi delivery service. One thing in common between the three is the disruptive innovation that helped the creators to identify the opportunity and offer unique solution, which can be replicated and scaled up. With that in mind,
Small businesses are not rare and are generally easy to imitate, while startups have rare resources and capabilities, which are attractive for imitation by highly difficult to replicate.
3. Startup is temporary
I have met a number of entrepreneurs that argue that startup is a mindset and that the point at which people stop feeling like a startup, is the point of organizational sunset. Indeed, startup as a culture cannot be placed inside specific KPIs and delineated by market metrics, as it affects the way people think and work.
Despite that startup is a temporary stage of organizational development at which it has the highest growth spurt and continuously increases the potential impact, growing into a large corporation.
The relationship between the ambition and the real operation determines the stage of startup development. It is possible to argue that the main functions of startup founders include the definition and validation of the business model; formulation of the vision and mission of the company and ensuring the alignment between the internal resources and capabilities and the external environment. Small business, on the other hand, is risk-averse, financially-focused venture with focus on incremental innovation or effective laggard strategy.
4. Different financing
The differences, discussed before, lead to the differentiation of the financial and funding strategies between startups and small businesses. This can be explained by the fundamentally different objectives of the companies. Small companies are most likely to start with internal financing by the founders, friends, bank loan or other source that is accessible to the creators. While small businesses will likely to develop within the limitations of the own capital, scalable startups will look for external financing, such as Angel Investors, Initial Public Offering (IPO) or venture capitalists. Additionally, small businesses avoid internal uncertainty concentrate financial decisions with the owners. Startups tend to focus on the composition of the team that can concentrate the set of skills and expertise, required to scale up the business. This leads to internal complexity and objective uncertainty, which most of the startups throughout post-launch and active growth stages.
Both, small businesses and startups are founded by entrepreneurs and have a number of common characteristics. The intent, primary focus, culture and funding, however, are fundamentally different. Startups are built upon an ambition to grow a small business into a large multinational corporation. This ambition is the first major distinction between a small business and a scalable startup. The function of a small businesses is generally to create comfort and bring visible financial benefits to the owners