How To Define a Small Business Vs. a High-Growth Startup
- Difference between a Small Business and a High-Growth Startup
A startup business differs from a small business in one primary aspect: Growth.
A startup company, also referred to as a high-growth startup, is a company with a business model that is designed to be repeatable and scalable. This is directly opposed to a small business which is typically more of a lifestyle business that is not primarily concerned with scalability, but aims to sustain a particular level of income to enjoy a particular lifestyle.
What is Scalability
To better illustrate the difference between a small business and a high growth startup let’s define the term scalability.
According to Investopedia.com, scalability is defined as, “A characteristic of a system, model, or function that describes its capability to cope and perform under an increased or expanding workload. A system that scales well will be able to maintain or even increase its level of performance or efficiency when tested by larger operational demands.”
Examples of Scalability
An example of a small business – i.e. a business that does not easily reach scale – is an auto repair shop.
Any particular auto repair shop can only reach a certain capacity of workflow given the size of the location and the number of employees. 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.
An example of a high-growth company – i.e. a business with high scalability – is a consumer electronics company. It may be a costly endeavor to create a prototype for a consumer electronic device, obtain intellectual property, and secure manufacturing and distribution.
However, once these obstacles are in
place, the company can quickly and easily grow without very many obstacles other than operating capital. In fact, 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.
- What About
Another key difference between small businesses and high-growth startups is how the two think about funding, as they typically have different sources of capital available to them.
High-growth startups typically rely on several sources of capital at different stages of the startup process. Early on, the
startup relies on friends and family funding followed by angel investors and venture capital firms.
However, small businesses typically don’t have access to the angels and VCs and therefore rely on friends and family money, bank loans, and grants.
The primary reason that angels and VCs don’t get involved with small businesses has to do with the issues of scalability, outlined above, as well as a lack of
a potential return on their investment.
- Return on Investment
For the most part, small businesses do not make good investment opportunities for angels and VCs for two reasons:
1) their lack of scalability limit the potential for a significant return, and
2) most owners of small businesses are seeking a lifestyle business and not necessarily one that they plan to sell in the
short to medium future. In order for angels or VCs to partner with a company, the business must have an exit strategy that creates a liquefiable event in which the investor gets their capital returned to them along with a return on that investment.
- Should I Launch a Small Business or a High-Growth Startup
Some questions to ask yourself when determining if a small business or a high-growth startup is right for you include:
1) Why are you starting this business? Are you looking to work hard, grow a business, and sell it? Or do you want to start a business that supports a certain lifestyle?
2) Does your product or service have a huge market?
3) Will the success of your business require outside expertise or guidance, or do you have the knowledge and experience to make this business a success?
4) Is your product thoroughly differentiated from other products on the market?
5) How much money do I need to get started?
6) Is this business scalable?
Overall, there’s no right or wrong answer. Sure, high-growth technology companies are certainly the trend now, but starting a small business will always hold it’s appeal.
The Startup Garage applauds the Entrepreneurial spirit in all of you!