funding4business – difference between a start-up and small business

The difference between a Start-up and Small Business

This article is a precis of an original article published by Emily Pope on General Assembly.

What is a Start-up?

If you work in the technology industry, you’ve probably heard the term “start-up” thrown around. If you live in a tech hub such as Silicon Valley, Hong Kong, Sydney or New York and work in technology—it’s likely that you or someone you know is in the process of conceptualising or even launching their own start-up.

Although the start-up founder and small business owner are both entrepreneurs; the intent, primary function, and funding of their respective business model’s are radically different.

Many people think that start-up is just another term for a small business, when the definitions of the two are very different. To differentiate these two organisational entities, let’s take a deeper dive into the definition of a start-up.

For years, investors treated start-ups as smaller versions of larger companies; this was problematic because there is a vast ideological (and organisational) difference between a start-up and a small business and or a larger business, which necessitates different funding strategies and KPIs.

According to serial entrepreneur and Silicon Valley legend Steve Blank, a start-up is searching to not only prove their business model, but to do so quickly, in a way that will have a significant impact on the current market. Which brings us to our first major difference between the start-up and the small business.

A start-up has the intent to become a larger business

As Blank describes it, in a scalable start-up, Founder(s) don’t just want to be their own boss; they wants to take over the world or part thereof. From day one the intent is to grow the start-up into a larger, disruptive company. The Founder(s) believe that they have come across the next “big idea,” one that will truly shake up the industry, take customers from existing companies, or even create a new market.

This stance is in stark contrast with the definition of a small business, which the U.S. Small Business Administration (SBA) describes as “independently owned and operated, organised for profit, and not dominant in its field.”

Therefore, the driving force behind the two business models is different: The intent of the start-up founder is to disrupt the market with a scalable business model; whereas the intent of the small business owner is to be their own boss and secure a place in the local market.

To be sure, the latter is the prevailing model of entrepreneurship in the United States: grocery stores, delis, hair salons, plumbers, electricians, etc. and their contribution to the local economy cannot be overstated. However, for better or for worse, the ultimate motivation behind a small business is fundamentally different from that of scalable start-ups.

A start-up is temporary

The organisational function of the start-up is to search for a repeatable and scalable business model. According to Blank, this means that a start-up founder(s) have three main functions:
1. To provide a vision of a product with a set of features.
2. To create a series of hypotheses about all the pieces of the business model: Who are the customers? What are the distributions channels? How do we build and finance the company, etc.
3. To quickly validate whether the model is correct by seeing if customers behave as your model predicts (which he admits they rarely do).

Given this definition, it stands that once a business model has been proven, the function of the organisation must shift to produce outcomes and execute the business model; in many cases removing the agility and innovation that once existed in the early days of the business.

A start-up is funded differently

While both a start-up and small business will likely start with funding from the founder’s savings, friends and family, or a bank loan; if a start-up is successful, it will seek additional funding from angel investors or venture capitalist. With each round of funding, the start-up founder(s) give up a piece of the company–this is called equity, and everyone who has it becomes a co-owner of the company. Eventually, a start-up may cease to exist as an independent entity via a merger or acquisition.

To a small business owner, relinquishing control would defeat the purpose of running their own business; however, for the start-up it may be necessary to sustain seemingly infinite growth.

funding4business has recognised the difference between the funding needs of both entities and is the first and only peer-to-peer (P2P) marketplace in Australia, specifically established to facilitate funding for Start-ups and P2P loans for established businesses.

We connect Aussie start-ups and business borrowers with Aussie investors such as SMSFs, and HNWIs for their mutual benefit.

The funding4business marketplace is open and transparent, offers a broad range of investment options, provides flexibility, offers potentially better investment returns, faster and simple settlement, online registration and algorithmic loan matching to your investment criteria.

funding4business is not a bank, finance company or lender, and we are not owned or backed by a bank or finance company.

We are an Aussie company, with an Aussie team, applying Aussie developed technology and know-how, to an emerging P2P marketplace for Aussie business borrowers and Aussie investors.

funding4business was launched in Australia on 1st August 2014.