The difference between a startup company and a small business
All entrepreneurs commonly start their new venture by forming an entity, opening a bank account, and hiring key advisors-but they may be starting different company types. Learn the significant difference between small business and startup company operations.
Determining your company type can help you pursue the right business advisors and infrastructure to support your goals. Answer these questions to see if you're starting a small business or a startup company:
Where’s your startup capital coming from?
“Outside investors and VC interests.”
In this case, your company's a startup. If you're seeking investors for seed funding or venture capital (VC), your company will likely require a startup's corporate structure and financial reporting. You'll need to maintain a capital table and reporting that both reflect your outside investors from the outset. You'll also need to use prospective financial reporting to successfully launch your company and find your necessary funding.
“Personal savings, Small Business Administration (SBA) or other small business loans, or loans from friends and family.”
In this case, your company's likely a small business. With these funding sources, your company will likely require a small business's financial reporting, which facilitates operational decision making. Although forecasts will be helpful, you'll need to use retrospective financial reporting to understand whether your approaches to business are effective or ineffective.
Are you making money right away?
“Probably not, because your business requires significant investment before you generate customers because your company needs financing to develop a tangible or intangible product.”
Your company's likely a startup. These companies are often in the software, subscription, or eCommerce space.
“Probably, because your company will offer goods and services right away or require only about six ramp-up months to operations.”
It's likely a small business. Small businesses often start with less capital, so they need to monetize their business model more quickly.
How fast is your company growing?
“Very quickly since once your product or service is ready to launch, you're planning to invest significantly in marketing and sales to ramp up quickly.”
Your company is likely a startup. The upside of rapid development is that you'll make up for the time you spent in development and pre-revenue; the downside is that you may experience difficulty scaling your infrastructure and backend operations to keep up with the growth. If this sounds like you, consider hiring operations or systems consultants to ensure you're building a solid foundation alongside your growth.
“More slowly because your capacity to handle business is finite.”
Your company is probably a small business. Small businesses often experience a slower growth trajectory, as heavy dependency on the owners can limit speedy scalability. Although you might not achieve extraordinary profitability very quickly, you'll probably be able to operationally keep pace with your growth.
What are your long-term business goals?
“To quickly sell or IPO the company.”
Your company is definitely a startup. Therefore, you'll need to immediately hire advisors who know how to quickly and effectively take companies from seed to sale. From the start, you'll want to focus on building enterprise value that can drive a sale, even if you need to significantly invest over the long term.
“To continue owning and operating your business over the long term.”
Your company is a small business. If you're focused on ramping up your operations for longevity, planning ways to prevent burnout, finding accountable, reliable staff to scale with, and spending thoughtfully to create cash flow for any unplanned dips in business, you'll want to hire an accounting team who can align your financials with your goals.
After determining if your company is a small business or a startup, you'll want to turn to business advisors, such as lawyers, tax accountants, operational accountants, and HR consultants, who specialize in the business type to determine your initial needs and priorities. If you're looking for guidance, reach out to Syzygy today!