There is no right or wrong answer here. It is simply a question that you should ask yourself before you embark on a new venture.
A startup, also referred to as a high-growth company, is a company with a business model that is designed to be repeatable and scalable.
In contrast, a small business, is typically more of a lifestyle business. In a lifestyle business, the Founders are not as concerned with scalability. Instead the goal is to sustain a specific level of income to enjoy a particular lifestyle.
Scalability is a system, model, or function that describes its capability to cope and perform under an increased or expanding workload. A system that scales well should be able to maintain or even increase its level of performance or efficiency when tested by larger operational demands.
A startup may be a costly endeavor to launch, as Founders create a minimal viable product intellectual property (IP), and secure funding for development and distribution. Once these items are in place Founders can quickly and easily grow without very many obstacles, other than operating capital. As the company continues to scale the operation is streamlined with economies of scale, such as the cost per unit reducing as the unit production size increases.
A small business can only reach a certain capacity of workflow given the size of the location and the number of employees. Think of a hair salon, or a car shop. In order to continue growing, the company will need to expand to a second location, purchase duplicate equipment, hire new staff and new managers, and market the business. While this growth is achievable, it is not an operation that is easily scaled.
Another key difference between small businesses and startups is how the Founders will approach funding. Typically, Founders will have different access to sources of capital available to them.
High-growth startups typically rely on several sources of capital at different stages. Early on, Founders bootstrap, rely on friends and family funding (if they have the privilege of having generational wealth or F&F with means, not everyone does, followed by angel investors and venture capital firms. This type of venture financing requires Founders to have an exit strategy in line so they can return capital and returns to investors.
Small businesses rely on non-dilutive capital from friends and family, bank loans, and grants. They typically avoid going after venture financing. Small business founders often have ambitions to pass on the company to their kids at some point. Rather than focusing on selling the company, they retain equity and control.
Investors don’t normally get involved with small businesses due to two reasons: lack of scalability and potential of returns. Most small business owners are not necessarily planning to scale the business and sell in the short to medium future. Investors require a plan to exit in the near future and a clear defined strategy as to how they can create liquidity, so they can get their capital plus a return.
One thing to clarify is that there are plenty of examples of high-growth companies that have achieved billion dollar revenues without taking venture capital. Building a company that achieves billion dollar revenues is not exclusive to having to be venture backed.
So, are you a Small Business or a High-Growth Startup?
How else would you define the difference between a lifestyle business and a startup? Share your thoughts with us by commenting below.