4 Differences Between Building a Startup and a Small Business

Entrepreneurship is a big word that covers a lot of territory. There are many different industries, niches, and strategies that you can use when paving your way as an entrepreneur.

But, there are some fundamental differences that I’ve noticed between building a startup vs. a small business.

I’ve done both (though my tech startups have been unsuccessful) and right now I’m running a successful small business. Here are some of the differences that I’ve observed between the tech startup and small business route.

1. Funding

A startup company can rarely exist if it doesn’t raise funds.

Even if you have an established business or lots of personal savings, you’re going to have to master the art of the pitch and figure out what VCs and angels are looking for.

Likely, you won’t be talking to VCs until you’ve gotten some traction, seed investment, and have a scaling path or at least have compelling growth metrics.

You’re going to be spending a lot of time raising funds for your venture, particularly if you’re learning along the way. It’s going to take away from running the actual business.

work laptop brainstormTo get started, I’d recommend reading some of the notable VC blogs out there like
Tomasz Tunguz, Chris Dixon’s blog, Bothsides of the Table, AVCMarc Andreessen’s blogSam Altman, Paul Graham’s blogFred Destin’s blog, and more.

In contrast, most small businesses exist without raising funds from a VC firm. Founders raise money from friends and family, take out a bank loan, or use their own savings to get the business started.

There is less emphasis on raising additional rounds of funding to service more users, but rather to establish cash flows that can support key employees, bring more profits into the founder’s pocket, and make systems work more efficiently.

In general, small businesses are less scalable than a tech startup, but that doesn’t mean they don’t have scale. Finding ways to create systems that operate on their own and ways to replicate your existing resources or assets so that you can service more customers is the hallmark of a great business.

Sometimes the founder just decides to keep the company small. Maybe they’d rather pocket the profits than pay more employees to work at the company.

Here are a few ways to get funding for your small business.

2. Risk

I think that startups are far riskier than small businesses.

Why? 

Because the role of a startup is to find a product, business model, and pain point that will eventually lead to success.

You risk losing your investor’s money, wasting your time, losing your own money, and damaging relationships.

A little talked about side effect of running a startup is that you’re going to be sacrificing a bit of your sanity, health, and it’s going to be emotionally up and down.

Although some small businesses do have leap of faith assumptions, most operate a standard business model and have numerous examples to study in order to identify what the business should look like in X years.

It’s true that you’re going to be risking your time and money, but I think that there is a higher correlation between success and hard work in the small business realm, whereas in startup land, you can work hard and it’s no guarantee that you’re in the right industry and at the right time for a home run success.

I know that some people will say that hard work will make it easier to find product-market fit, and therefore be successful, but I think that many times entrepreneurs are lucky enough to find themselves in the right marketplace at the right time and with the skills needed to capitalize on the huge growth going on in that industry.

3. Attracting Talent

In my experience, there’s a bias in the startup realm towards hiring the best people possible.

There’s a huge emphasis on creating positive values and fostering a company culture that makes people want to work there.

Why is that? 

Because the marketplace for programmers and skilled technology talent is competitive. Don’t forget that startups are strapped for cash!

They need to find compelling reasons to attract that great full stack developer who could either get a comfortable job at google or decide to hustle and live less grandly at a new startup.

The second reason is that ultimately, a startups’ value will come from what it can build in the world. Employees make the choice of trading their intellectual property for a salary. Your startup is only going to be as good as the intellectual property that your employees create for you and your users.

Oddly, I haven’t found this same mentality to exist in the small business realm. Of course, all small businesses want good employees, but many successful small business owners are very comfortable having average employees as long as they perform their job and keep the cash flowing in.

There is less of a talent war and less of a need to satisfy the pressing concerns of venture capitalists who want your business built fast.

But, this varies from industry to industry.

If you want to find out where the real assets are in an industry, look at a company’s payroll or list of recurring expenses.

I would also look at the revenue per employee ratio. Google has a revenue per employee of $1 million. No wonder they are happy to pay programmers six figure salaries. For them, an employee’s value lies in what they can build.

At the same time, you have sales driven companies that pay out ridiculous salaries to the top marketing, advertising, and sales employees who bring the most revenue to the company and IT is an after thought.

Although the talent marketplace will be different for each industry, it’s almost always competitive in the startup realm.

4. The Focus

When you’re building a tech startup, your entire focus and energy is devoted to:

  1. Obtaining product-market fit with a minimum viable product.
  2. Raising funds to begin to grow the company as quickly as possible.

In order to build the minimum viable product, you’re either going to need a technical skill set, a cofounder with that skill set, or to hire someone to create the product and continually iterate to your needs.

As a byproduct of raising funds, you’re giving up control of the company and allowing external influences to dictate the vision of the company, but you’re also committing your startup to a defined takeoff runway.

Your goal now is satisfy your users, monetize your product, and deliver a good return to your investors.

When you’re building a small business, you’re focused on:

  1. A traditional business model and strong cash flows.
  2. Keeping expenses low.

What would you rather focus on?

I chose differently at different points in time. I plan to do another startup at some point in time, but for the moment I’m running my small biz. 

  • Such important distinctions for an emerging entrepreneur to understand. And also for an entrepreneur to understand as they set goals and prep the marketing outreach for their crowdfunding campaigns. Thanks, Sal, for sharing the benefit of your firsthand experience here.

    • Salvador Briggman

      Definitely. Thanks for the comment. 🙂

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