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Startup vs. small business: what’s the difference, why it matters

If you’re considering launching a new business, you need to think how big you want it to grow and how quickly. Answering these questions can help you decide

Summary

Do you want to scale up your new business venture and eventually sell it? Or do you want to grow it little by little while keeping control of it? These are the main differences between launching a startup or a small business.

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When Eric Lubert started his residential home building firm, Dacoda Homes, in Seattle in 2016, his dream was to make a living outside of the world of corporate cubicles.

Although he hit the ground running by tapping his past experience as a project manager for a large homebuilder, he envisioned Dacoda Homes as more of a boutique small business than a startup.

“I wanted to be a local builder – a smaller builder who did big things,” says Lubert. “I was looking to scale but not to the point where I wanted to be a national builder.”

Although Lubert’s business took off, he’s taken a measured pace to hiring, bringing on his first-full-time employee, a project manager, very recently.

One of the most important decisions many entrepreneurs make when they first get started is about how big they want to grow the business and how quickly they want to do that.

Read the business headlines and it’s easy to get the impression that every new business is an IPO-bound startup with the potential to “scale up” in to the next big brand, thanks to the eye-popping amounts of venture capital it’s raised.

In reality, most businesses aren’t going to become the next SpaceX – and don’t want to be. Many founders, like Lubert, prefer to create a small business that allows them to have a great life outside of work while still offering the potential to grow in the future.

The numbers tell the story: Among small businesses in the U.S., more than three-quarters have no paid employees, according to the U.S. Census Bureau. They’re solo operations, partnerships or family businesses, where the owners are the only staff.

So which type of business should you chose? It all depends on what you want from it. The beauty of being your own boss is you get to decide. Here are some questions to consider.

See related: Should you fund your startup business with a credit card?

1. Do you need to make money from it soon?

Small businesses offer more potential for immediate and ongoing income, because the initial investment tends to be lower than for scalable startups and they tend to address an existing gap in the marketplace the owner can solve quickly – whether it’s a scarcity of legal service for local small businesses or a sandwich shop in an office park where the lunchtime pickings are slim.

Often, the owners begin taking in money with each sale or within a short payment cycle, such as 30 days from when an invoice is sent. As long as the owner is not saddled with debt, it’s often possible to start taking pay from the business within a few months.

“In a small business, it’s all about profit, rather than growth,” says Alejandro Cremades, author of “The Art of Startup Fundraising” and co-founder of Panthera Advisors, a fundraising advisory firm in New York City. “It’s about building a long-term business that’s sustainable.”

Startups have a lot more risk than small businesses, and it may take a lot longer to reach the point where you can take a paycheck from them.

“With a startup, everything about the business is untested – the team, the customers, the pricing,” says attorney Andrew Sherman, a partner in Seyfarth Shaw LLP in Washington, D.C.

2. How much control of the business do you want?

Many small business owners want to set the vision for their business – including how fast it grows and how long they will run it. They would rather finance it themselves to maintain this control than bring in outside investors who may want to dictate how they run it.

There’s a cost to staying in control. You’ll have to find the money you need to grow the business, perhaps by tapping your savings, taking out a business loan, using your own credit cards or reinvesting the money you make from sales into the business.

Self-financing can put pressure on an owner’s personal finances. Small business owners typically have to provide a personal guarantee for any bank loans and credit cards they take out for the business, meaning that even if the business fails, they’ll be on the hook to pay the loans back. Alternative financing, which may not require a personal guarantee, generally costs a lot more.

In contrast, if you found a traditional startup, you’ll likely need so much money to scale – sometimes in the millions of dollars – that you will eventually need to bring on outside investors.

“As a startup, it’s all about growth,” says Cremades. “It’s about growth above everything else. You need to get more employees and market share.”

In the early stages, startup founders often raise funds from their immediate circle – as some joke, “friends, family and fools” – but if they need more cash, many move on to private investors called “angels” and eventually venture capital firms.

Deals with these outside investors can be structured many different ways, but commonly, the entrepreneur sells shares of the company to the investors. The investors hope the shares will become valuable if the company ever goes public, which is why they are willing to take the risk.

Once entrepreneurs bring in investors, they will own a lower share of the company than they did originally. Those who go this route need an expert legal and financial team, so they don’t end up selling so much equity they lose control of the company.

Sometimes, investors have been known to force out the original founder if they don’t agree with how the company is being run. Or the business goes public and the founders hardly make any money, because investors own so much of the company they are the ones who profit.

Of course, nothing is set in stone in the world of entrepreneurship. For instance, both small business owners and startup founders are turning to crowdfunding sites such as Kickstarter or Indiegogo, where they share prototypes and information about a product they’ve invented with the public so they can attract paid pre-orders to pay for the actual development and manufacture of the product.

Although the entrepreneurs are obligated to let these customers know how they are progressing, the customers don’t own equity in the company – leaving the owners in control.

3. What do you want your daily life to look like?

Running a small business often takes more time than a traditional job, but you can set your own hours. In a startup, investors who want to see a quick return on their investment will set the pace, with an eye on an “exit” through a transaction like a public offering or acquisition by another company, so they can cash out their shares.

“When people say ‘startup,’ they mean a fast-growing business that disrupts,” says Cremades.

Working around the clock on a startup may be exciting for those who don’t yet have many family responsibilities, but if you already have an active life outside of work, startup life can be stressful.

A lot comes down to personal preference. “I think they both can be tools for achieving the lifestyle you want,” says Julia Spangler, who founded her one-woman business, Sustainable Events Consultants, in 2015 to help event organizers create environmentally sustainable gatherings and is now looking to hire her first employee. “The goal with a startup is a lot of work for a short time with the goal of selling. With a small business, it’s about ‘how do I build my life and business together so both are satisfying?’”

4. What is the market telling you?

It’ll be easier to make decisions about how much you scale once you have put your product or service out there in the marketplace and can see what the demand actually is. What you thought was boutique business might show the potential to scale into a startup – or what you envisioned as a startup might not have the traction you expected.

“Once you’re an established business, you’ll be in a position to do business planning and make decisions about the pace of growth, the rate of growth and whether you want to stay small or get big because of the nature of the business,” says Sherman.

Chris Denny, based in Houston, intended to scale his first business, Lead Optimize, when he founded it in 2008 to provide marketing automation and search engine optimization services. He grew it to four employees but found it was hard to push it past that point. “I wasn’t having any fun,” he says.

He scaled that business back and, in 2017, started a second one-man business called Attention to Detail Solutions, focused on training employees to do better quality work, after getting positive feedback on a workshop he ran on the subject.  He wrote a book called “Improve Attention to Detail” and developed an online course.

With the business thriving, he’s now giving careful thought to how much he wants to grow it. “I want to make sure it’s sustainable and supports both the brand and the way I want to live,” he says. “This one is more fun.”

The nice part of running his own business is he gets to decide what to do next – when he’s ready. “I’m deliberate about every single decision I make about it,” he says. “I want everything to fit.”

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