Founding a startup is an increasingly attractive business venture for Australian entrepreneurs. But what actually is the difference between a startup and a small business? We set out below three differences: the rate of growth, finance and the nature of the idea.
1. Expectation and Rate of Growth
First of all, startups focus on fast growth, focusing on scaling the business and growing it quickly. Startups often scale quickly due to business processes being tech driven (to be more efficient or automated). A traditional small business’ growth is comparatively more limited. Firstly, by the product or service itself (for example, a hardware store is only going to reach a particular target market) and perhaps by its geographic location (a small business does not usually prioritise tech, making growth via automation a challenge).
2. How Are They Financed?
Startups often seek external funding to accelerate its growth. This means that startups can choose to be funded until they generate their own revenue and become profitable. Therefore, the initial stages often involve pitching to investors. The most common avenues of funding, pursued by startups, include, raising capital from ‘angels’ (an affluent individual who provides capital in exchange for convertible debt or ownership equity), investors, and venture capitalists. When seeking equity funding (giving away options or shares in the business), startup founders may have to consider how investor money will impact on their ownership of the business. Don’t forget the risk involved – it may take startups years to generate a profit.
Small businesses, on the other hand, often exist without raising funds from investors. They can be self-funded or financed from family, friends, or a bank loan. Unlike startups, the priority of a small business is to generate regular income with less risk.
3. Nature of the Idea
Finally, the very character of a startup is different to a small business. If you’ve heard the word ‘disruption’, there’s a high chance that the word ‘startup’ was in that sentence as well. Startups are often disruptive – it is almost a prerequisite. Startups tend to produce or operate on products or services that do not yet exist, or are drastically changing the delivery of a particular good or service in an industry. A small business, on the other hand, provides more traditional goods and services (but this is not always the case), for example, grocery stores, travel agents and hairdressers.
Startups vs. Small Business
There are significant distinctions between launching a startup or a small business. For this reason, it is necessary to figure out what your intention is from the start. Knowing whether your company is a small business or a startup is often required for developing your business strategy.
For example, a startup may need to get advice on the law in areas such as copyright, privacy, the Australian Consumer Law, intellectual property, or other more niche legal areas. A small business will need to choose an appropriate business structure (the most common being a sole trader, company, partnership or trust), and purchase or lease business premises – among many other things. Other legal requirements that will be relevant to both structures include: registering the company name, securing adequate business insurance, obtaining an Australian Business Number (ABN) and any requisite licenses or permits, and registration for taxation purposes.
What Should You Take From This?
For all the reasons above, startups are much riskier compared to small businesses, which are quite risk averse.Take some time to think about what you want from your business – both in the short term and long term – and consider seeking legal advice if you have uncertainties. Contact LegalVision’s business lawyers to assist with answering questions regarding an appropriate business model for you.