‘Startup’ is a glam word in tech. It connotes innovation, excitement, youth, and potential – usually huge potential.
At the same time, it is also a word that tends to be abused in the tech ecosystem. Anyone who comes up with an idea and is trying to sell it can be described as being in the ‘startup phase’ of their business.
But what is the difference between a startup and any other company that is small and new?
In this blog, we will go over both the key conceptual differences as well as some of the practical differences between those two business models, so that whenever you come across these terms in the future, you know exactly how to make the distinction.
Key Conceptual Differences
Like many other words in English, ‘startup’ has different connotations depending on the culture in which it is being used. In the UK, for example, the term’s meaning is less precise than in the USA, and may be employed more broadly when discussing new and/or innovative companies. Non-Anglophone countries also make use of the term, but with their own declinations. You should be aware of these cultural differences when discussing the topic with people from different countries, and avoid relying too rigidly on a single definition.
Allowing for cultural subtleties, then, a startup is typically defined as a business model characterized by two outstanding qualities. The first is transformation: a startup is not meant to keep operating the way it is doing, but to grow exponentially (or in business parlance, to ‘scale’) and eventually turn into something not just larger, but qualitatively different. The second is influence, or at least intended influence. A startup isn’t created to sell another version of an existing product, but to put out a product innovative enough that it will disrupt the market. It involves a paradigm shift of some sort, or at least an attempt at one. Any small or new company that does not share in both these qualities is not a startup.
The best way to understand the difference between the above and a small business is to think of how the chrysalis of a butterfly compares to a small animal. A small animal may be small, but it is already the finished product. It lives and thrives in the environment it was born for, and similarly, a small business like a hot dog stand or a barber will generate profit without necessarily changing its shape or methods over time. It was made to compete in a specific market, and that’s where it is comfortable in.
The chrysalis of a butterfly, on the other hand, is not an animal in and of itself. It does not ‘thrive’ in an environment, it only operates as the incubator of a future, potentially much larger creature, in a form it will shed once the transformation is complete. That’s exactly how a startup works.
As I mentioned, startups don’t intend simply to enter the market, but to affect it, and deeply. This means that a startup has to be innovative, be it in terms of its product, its strategy, or both. You can’t call your business a startup if you simply opened another regular Café – there has to be at least an element about what you do that is unique.
A small business usually does not require outrageous amounts of money to be set up. Family savings are sometimes sufficient, otherwise the venture is usually financed by loans. The owners have to pay interest on them, but they keep full control of their business.
Startups need enormous financing bouts to move to their next phase (seldom anything less than €1 million), but they also promise much greater returns. Thus, they usually – not infallibly, but usually – secure capital by giving away equity, i.e. a portion of the company’s ownership. The founders surrender some of their control over the company, and in exchange obtain large injections of cash with neither interest nor repayment deadlines.
Startups are so common to the tech industry because technology is so closely tied to innovation – and to explosive growth. There aren’t many other fields in which it is possible for a company to go from someone’s basement or garage to being worth over a billion euros in just a few years. Startups grow exponentially, all the time, even when they are losing money. The moment their growth curve flattens, that’s when the company has either failed, or it completed its transformation and thereby stops being a startup.
Success rates for startups versus small companies are not easy to assess, as most labor-market surveys do not distinguish between the two different business models and simply conflate them. But saying that startups fail more often than small companies is simple common sense, because of the way the two relate to the market. A small business will be entering a known market in which risk is easier to assess, while a startup has a far greater number of unknowns to contend with. All new business ventures come with fairly high risks, but startups are distinct for being by far the bigger gamble.
…and that’s a wrap! We hope this small guide has helped you see that startups and small businesses are most definitely not the same thing. You may not work for one, but the next time you hear someone in tech talk about their startup, you’ll know exactly where they’re coming from.