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Startup Vs SMBs - understand the differences as we bust these jargons

Updated: May 3, 2023

Small and medium-sized businesses (SMEs) and startups might have very similar exteriors.

Both are modest businesses that an entrepreneur started from scratch in order to satisfy a market niche. Both are concerned with growth, success, and survival.

So far, so similar, yet there are a few minor but significant distinguishing characteristics.

1. Innovation:

The definition of a startup itself says that it is a business which aims to meet the needs of the people in a unique way. Innovations are very important for a startup. This might include product innovation, business model innovation or service innovation.

On the other hand, the definition of an SME is based on the investment and revenue bracket they fall into. Investment of up to Rs 10 crore and an annual turnover of up to Rs 50 crore is a Small enterprise and investment of up to Rs 30 crore and an annual turnover of up to Rs 100 crore is called a Medium enterprise. Small & medium business aims to solve an existing problem with existing solutions in a small way – it does not make any claims to uniqueness in terms of products or services.

2. Scalability:

Typically, a small business brings in a relatively small number of sales, enters a local or regional market, and has a small number of employees. This is typically keeping in mind the sustainability of the business.

A startup can start small but scaled very quickly to larger markets, with larger teams and sales growth, sometimes expanding into international markets.

3. Growth:

A small business is confined by the limitations set up by a single businessperson and this slows down the rate of growth. In some cases, the focus is entirely on helping the growth of a certain set of customers that limits the business itself.

A startup, as a rule, does not limit it’s own growth based on a single business person. In fact, startups are focused on high growth rates with the goal to become an industry leader and gain substantial market share.

4. Profit:

SME is an entity that focuses on making money and if possible, profit from day one. A closing gain of the company depends on the owner’s appetite and less on the plans for business expansion.

It might take months or even years for a startup to make money or even find their first customer, given that the product or service is entirely new. Hence the focus is to gain market share by creating products that the customer will like, rather than profitability at the beginning.

5. Business Model:

A small business seeks a business plan that is successful right away rather than one that will succeed in the future. Hence, they prefer to follow a verified business model rather than innovating it.

Startup founders set out to search for the right business model that scales to heights in a massive market—as fast as possible. So there is a need to innovate the business model which works for their set of products/services.

6. Financing:

In order to start one’s own small business, as a rule, private savings, investments on the part of one`s family, friends, banking credits and/or investor funds, government schemes will do. For example, NBFCs or small business investors like CSL Finance help these small businesses through the right funding. However, mostly the financing type is debt since the goal is to be self-sufficient and the investors need money back guarantee. they need to be careful on the contracting terms.

Startups need a larger amount of funding so even though they start with personal savings or friends and family, they quickly move onto angel investors and venture capitalists to raise funds through different rounds of funding. The funding type is equity since the startup owners initially don’t focus on profit and rather growth.

7. Technology:

Small businesses need only basic technology for day to day ops and no specialized technology. Of late, there are many companies supplying SaaS options with some customizations to these small businesses to help their ops.

Technology is frequently the primary offering of startups. Even if this were not the case, startups are compelled to use new technology in order to scale up quickly and smoothen out their ops.

8. Lifecycle:

Overall life cycles of small businesses are longer than startups.

Small Business: 32% of enterprises are shut down in the first three years, which is not bad compared to startups…

Startup: 92% of enterprises are shut down during the first three years.

The differences between SME and startup are well pronounced when you look closely and understand that the ways of doing business vary largely in these two types of enterprises.

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