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Home » The Accelerated MBA – The Entrepreneurship Blog by Impactified » Entrepreneurship development » What is a startup company? Startup definition vs small business, explained
Hey, Impactified, what is a startup company? What is the difference between a startup company, a small business and an entrepreneur? Do the terms really mean something different? What’s the meaning of all this? Can you clarify what a startup is about these days? Thank you!
Startup company, small business, entrepreneur… the ways to describe how you do business are numerous but one question remains: do these terms mean the same thing, or are there any differences worth noting out there?
Long things short, each term describes a different reality, a different mindset, and a different context.
A startup company works around a team, it is capital-demanding and needs significant external funding to start-up its activities, while its main purpose is to grow fast. Its founders usually see themselves as entrepreneurs, but not as small business owners.
In contrast with this startup definition, a small business is usually based around one or two partners, with a very limited team, if any. Its purpose is to survive and to grow as much as possible, without however looking for external funding so to that extent it is not capital demanding.
The founders rarely see themselves as startuppers, in fact, and may not necessarily see themselves as entrepreneurs either. However, they will surely recognize themselves as small business owners who run their own business and aim to be their own boss for as long as possible.
An entrepreneur is someone with an entrepreneurial mindset, who wants to make a difference for themselves and for others by building a viable business model around a team.
Some will operate capital-intensive activities, but others won’t. Some will see themselves as startup owners or as small business owners, but most won’t give any importance whatsoever to the startup vs small business dichotomy.
The distinction between the three terms is certain, said differently, yet beyond the words, the interesting part is the impact that the terms usually have from an entrepreneurial perspective. So, in this article, we get into the details!
So let us start with a basic definition of what a startup is.
Generally speaking, a startup company is a company that operates at an infant stage, with a nascent economic activity, a limited (but growing) client base, and a highly motivated team.
The company is typically based on an innovative idea capable of making a major impact on a community, and it grows by building on the energy provided by a team of dynamic people willing to work hard to get results fast.
To obtain results, a startup company, therefore, needs to be funded by external investors, who will need to see a large market potential in the said idea.
From a business perspective, a startup company is promising because it tends to operate in unchartered territories. However, it largely depends on the goodwill of its funders because at the early stages the overhead costs typically exceed the sales-generated income.
Last but not least, a startup company is characterized by the relatively short or medium-term thinking of the founders and investors, who build a new business with a business plan and an exit strategy in mind, i.e. the intention of selling it within three to five years to larger investors.
By the way, should we say startup or start-up?
Well, the difference between startup and start-up is purely a semantical one. “Startup” is a noun and it relates to company structures aligned with what we just described, while “start-up” is the verb that describes the dynamics in which the company evolves.
No, this definition of what a startup does not mean that every small business is a startup, and it doesn’t turn every small business owner into a startupper either. In fact, in our experience, most small businesses will not describe themselves as startups, because their operations are run very differently from those of a startup.
Typically, a small business is built around one, two, or three partners who want to work together and team up to make the most of their skills and assets. They see an opportunity to become allies and join forces, and they do it on a durable, long-term basis because the business undertaking becomes a job, even a lifestyle dream that they want to stick with.
In contrast with the typical startup definition, small business owners rarely consider the possibility of bringing external funding into the equation, because they see the firm equity as theirs. Since they operate on a long-term basis, they don’t think in terms of exit either.
What this means, however, is that a small business will grow much slower than a startup because the absence of external funding won’t allow them to rocket a new business using content marketing and social media immediately. They will undeniably take time before getting to that stage.
Finally, while the typical startup definition suggests that startuppers will continuously seek more external financing to develop – and are willing to keep diluting their shares to keep growing – small business owners will rather develop proportionally to their own means of financing.
When we try to define startup, the term entrepreneur tends to stick around. This is because while the term startup describes a type of structure used to develop a business, the term entrepreneur rather describes the mindset required to build a startup in the first place.
Please see the related article “What is an Entrepreneur” for more information on the topic – but long things short, an entrepreneur is someone who sees challenges and insufficiencies around them, and decides to act in order to provide the affected public with a solution deemed desirable, technically feasible, and economically viable.
Accordingly, it takes being an entrepreneur to build a startup, but you can be an entrepreneur without being a startupper if you recognize yourself more in the definition of a small business that we just provided!
Startups typically have two goals. One is to come up with new products and solutions capable of changing the world while filling a market demand. The other is to scale and grow as fast as possible, to acquire more market shares, and create value for shareholders five years down the road.
From a financial perspective, this means that startups are not funded by the entrepreneurs’ credit cards and collateral engagements (like in small businesses) but by external private equity investors.
At the early stages, the first investors are the Family, Friends, and Fools (the FFFs) – their main goal is to help the founders because they believe in the project and in the founding team.
Soon, the FFFs are replaced by Business Angels or Angel Investors who perceive a development and growth potential. These external funders tend to invest between 50k and 500k in startup companies and hope to sell their shares to a bigger fish at a later stage.
When that happens, venture capital firms take over, but at that stage, the structure has evolved considerably and the power to control the business has shifted from the startup founders into the hands of the venture capitalists who now have the largest stakes in the business venture.
So, startup vs small business vs entrepreneur – where do you stand? In the end, there is no pre-made answer to that question, it really depends on you, on your mindset, and on your expectations.
If your purpose is to solve a problem through a viable solution and business model, then it sounds like you match the definition of an entrepreneur – congratulations and welcome into the club!
As to the way you operate, well, if you see your business as a job, or as a long-term occupation that allows you to live the life you want to live, at your own pace, whilst building up your growth with the means available to you then you would seem to fall under the definition of a small business!
If you are more interested in starting up the fast way, for the love of entrepreneurship, with a view to scale as soon as possible in line with lean startup methodologies and acquire market shares rapidly with a fast-growing team and the money provided by external funders, then a startup is probably what describes the environment in which you will strive as a startup entrepreneur!
Either way, you will find successful entrepreneurs in each model – it really is up to you to make things work the way you want them to work!
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A startup company is a newly formed business with particular momentum behind it based on perceived demand for its product or service. The intention of a startup is to grow rapidly as a result of offering something that addresses a particular market gap.
There are no fixed parameters on what type of company can be considered a startup, but the term most frequently applies to high-tech companies creating products that leverage technology to offer something new or to perform an existing task in a novel way.
Many startup companies don’t have products for sale, and many do not have a revenue stream.
Similarly, there are no firm rules on when a startup ceases to be considered a startup. Some suggest a startup stops being one when it hits a certain size, completes its path to profitability, receives a high level of investment funds, becomes a public company or is acquired by a larger corporation.
The genesis for startups is often the founder’s concept for a product; some originate once the founder has hit the subsequent step, at the proof of concept stage.
The startup’s founder often leads the development of the product and serves as the organization’s business leader. He or she often focuses on scaling the company ahead of making a profit. Facebook did not make a profit until 2009, five years after Mark Zuckerberg founded the company while he was a student at Harvard University.
As a result, the value assigned to a startup does not necessarily correspond with the actual revenue it generates during those early years. Instead, company leaders and investors might consider the company’s potential value based on the profits it’s projected to generate. Startups that have a value of $1 billion or more are called unicorns.
Some founders bootstrap their young companies using their own financial assets — whether owned or borrowed — to fund the company’s day-to-day operations. Others turn to angel investors when starting out, and later to venture capitalists.
Many work in incubators — workspaces and offices that are financially supported by nonprofit or government organizations, as well as other institutions committed to growing these kinds of businesses. As such, these supporting entities frequently provide seasoned business leaders and successful entrepreneurs to mentor startup leaders.
Startup investors, along with the founders and other leaders within startups, often recoup their investments when they sell their startups to larger, more established companies; that’s one exit strategy. Another strategy entails taking startups public. Startups can also opt to stay private, using their accumulated profits to reinvest in the enterprise and to provide pay to the founders and employees.
The term startup rose in popularity during the 1990s, as the number of technology and internet-related companies rapidly increased. Excitement over their potential led to the dot-com bubble, with investors that were eager to capitalize on the growing popularity of the internet overvaluing startups. This was the dot-com boom.
When too many of these companies failed because they lacked solid business fundamentals, including viable products, it left investors unable to recoup their investments — a comedown that’s sometimes called the dot-com bust.
Most startups today spend more time analyzing their financial statements to guard against that situation.
Not all new companies are considered startups. Companies that have limited growth potential in terms of their customer base, revenue and product aren’t seen as startups. For instance, a new restaurant, dry cleaner or professional services firm aren’t likely to be called startups.
Although there’s no single standard for what defines a startup company, the business community recognizes there is a special class of young companies and a particular work culture that exists within startups.
This startup culture, or startup mindset, features several key characteristics, including a commitment to innovation and a willingness to take risks and make decisions quickly. This atmosphere attracts potential workers who seek out that environment.
The startup culture can also be considered egalitarian, with workers at all levels pulling together. Their workspace frequently reinforces that view, with open areas where leaders and staffers work side by side. However, founders and their chosen executives do remain in charge, and often serve as ambassadors for the product and company they’re building.
Startups are often heralded for their potential to disrupt industries and introduce new processes and products to the market, as well as for their innovative spirit. They can have an almost mythical hold on the American imagination, as they embody the notion that anyone can start with an idea, work hard and become rich, while shaking up the status quo.
But startup companies are just as prone to negative qualities, including hyper-competitiveness, impulsivity and exclusionary behaviors that shut out workers, partners and other potential stakeholders who don’t meet certain narrow standards set by core members of the startup.
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