So the question for today is what is the difference between a startup and a small business. I often hear people using the words startup and small business interchangeably, at the early stages of their business, as it’s pretty easy to refer to all new businesses as startups, but there are distinct differences, which will determine who you approach for funding.
“Moms and Pops” Shops
I am a second generation descendent of immigrants. My one grandfather, came to South Africa over a century ago, seeking a better life for his kids, grandkids and future generations. To make ends meet and provide for his family, he started a business as a shoemaker. My other grandfather was a jeweller. Both these men were entrepreneurs with small businesses by default. All their kids and many of their grandkids followed suit and went on to build very successful small businesses in various sectors, paying taxes, creating employment and solving problems.
To present day, whether it's a jeweller, bakery or clothing retailer, these small businesses remain the linchpin of commerce globally. Countries, like South Africa, define the company type by its size in terms of annual revenues generated and number of people employed. Another characteristic is that they are present in a specific region and mainly service customers within that region. While these businesses are interested in growth, they grow at their own pace, and their only pressure to scale is a personal one as they are, more often than not, self-funded or bootstrapped.
These businesses may employ tech solutions to manage the business, but they are not reliant on it to operate. The ability of these businesses to scale is largely limited to funding, manpower (employees), geography and potential to generate and increase revenues within those regions. Unless they introduce technology (e.g. an e-commerce website); franchise and/or open more physical branches, the probability of scaling to become billion dollar companies is unlikely.
Angels, VCs and PE investors often refer to these businesses as “lifestyle businesses”...which boggles my mind as I know many millionaires in this space! The best sources of funding for these businesses are banks, government grants, and development agencies.
Growth as a defining factor
A startup, on the other hand, is a business that starts out small, but is able to
rapidly scale beyond country borders. These businesses may or may not use tech to solve problems, irrespective of sector. A tech startup is a company that specialises in developing and
commercialising new technology, typically in the form of a new product or service. In addition to being innovative and cutting-edge, tech startups are also typically fast-paced, adaptive, and focused on achieving rapid growth.
In 2017, I officially founded Styld - a SaaS platform for retailers to understand their consumer needs and evolving purchasing behaviour, allowing retailers to produce and sell garments their customers would prefer - as it would feel customised based on data gathered on their style preferences, sizing and a plethora of other variables. This would have a knock on effect on sales - it would push it up, wastage - it would reduce waste in the manufacturing of clothing, and would encourage sustainable fashion - reducing the sectors carbon footprint. An all round winner. To build this I relied on the technical skills of designers, developers and data scientists to develop the AI and machine learning components that would eventually be the heart of the selection engine. I required cloud hosting services, management of big data, multiple system integrations, and key staff that were able to move, pivot and adapt quickly to a rapidly changing environment.
Sales of the software would be global, whilst the offshoot of the 2 retail stores, primarily focused on SA due to logistical barriers and high costs. Funding growth for such a business required access to Angels and VCs - those looking for a highly scalable company with the potential to be a billion dollar company. As can be proven by many founders, it’s easier said than done.
When it comes down to it, it’s about how rapidly the business can grow. Startups will experience exponential growth vs. small business being slow and steady.
If you are a tech startup, feel free to reach out to us to help you to build and scale your business. We are here to help.
Published for the first time on https://investable.business.