The terms startup and small business are often used interchangeably, but they represent two fundamentally different types of businesses with distinct goals, structures, and strategies. Understanding the differences between a startup and a small business is essential for entrepreneurs deciding which path to pursue, as it will influence funding options, growth strategies, risk levels, and long-term goals.
While both involve starting a new venture, a startup typically focuses on rapid growth and market disruption, whereas a small business is more focused on stability, profitability, and long-term sustainability. Let’s explore these differences in detail to clarify what sets them apart.
What is a Startup?
A startup is a business designed for high growth and scalability. Startups aim to introduce new products or services, often using innovative technology to disrupt existing markets or create entirely new ones. The primary goal of a startup is to achieve rapid market penetration, acquire users quickly, and scale operations at an accelerated pace.
Startups are often backed by venture capital (VC) firms, angel investors, and crowdfunding platforms. Since profitability is not always the immediate goal, startups tend to burn through cash in the early stages as they focus on expanding their market presence.
Key Characteristics of a Startup:
- High Growth Focus – Startups aim for rapid growth rather than immediate profitability.
- Innovative Business Model – Startups often seek to solve new problems or provide better solutions to existing ones.
- External Funding Dependency – Venture capital, angel investors, and crowdfunding play a significant role in providing capital.
- Technology-Driven – Most startups rely heavily on technology to develop and deliver their products or services.
- Scalability – Startups aim to increase market share and user base at an exponential rate
Types of Startups:
But there is more to startups than this. The entrepreneur magazine Lioness sees startups coming in six different forms:
- Lifestyle Startups – Where entrepreneurs live the lifestyle they love. For example, a surfer opening a surf shop so they can fund their own surfing.
- Small Business Startups – Essentially these are just small businesses, but as they are often treading new ground for their owners and because they are new, they are still startups.
- Scalable Startups – The most typical vision of what we like to think a startup is. These are companies that like to think big. Like Google or Facebook, scaleable doesn’t just mean getting bigger, it means world domination.
- Buyable Startups – These are companies that are founded to be bought out. This type of startup has become recognisable to everyone, mostly on the web or mobile app market. It is the pipe-dream of every tech entrepreneur.
- Large Company Startups – Offers new products based on their core products, like sportswear or electronics companies. These startups sustain growth by continuous innovation.
- Social Startups – Instead of wanting to scale-up their enterprises, social entrepreneurs prefer to share wealth or at least create a better world.
What is a Small Business?
A small business is more focused on stability and long-term profitability rather than rapid growth. Small businesses typically serve a local or niche market and operate using a traditional business model. Unlike startups, which often operate at a loss in the early stages, small businesses aim to become profitable as quickly as possible.
Small businesses are often funded through personal savings, small business loans, or grants. They are less focused on scaling rapidly and more on establishing a stable customer base and consistent revenue stream.
Key Characteristics of a Small Business:
- Profitability Over Growth – Small businesses prioritize steady income and long-term financial health over rapid expansion.
- Limited Market Scope – They often focus on a local or niche market.
- Owner-Managed – Small businesses are typically run by the founder or a small management team.
- Personal Customer Relationships – Small businesses benefit from direct customer interaction and relationship building.
- Traditional Funding – Most funding comes from small business loans, grants, or personal savings.
Types of Small Businesses:
Small businesses can take various forms, depending on their size and structure:
- Micro Business – A business that operates on a very small scale. They usually have just one or two employees.
- Small-Scale Enterprise – Often mistaken for a small business this is a business, corporation or partnership that employs a very small number of workers and a low volume of sales.
- Small to Medium Business – Referred to as an SME, it has less than 250 employees and a turnover of less than £40m.
- Large Enterprise – Has at least 5000 employees and/or an annual turnover greater than 1.5 billion euros.
There are benefits to being a small business that larger scale enterprises and many startups do not enjoy.
- Small Businesses have a personal edge – Many small businesses are personally invested in the products they sell or the service they offer. There are real people with real jobs working in them. Many customers and clients actually like this. They like to know that their business isn’t being supplied by a faceless organisation; they like to know that their suppliers care about what they produce.
- Small businesses have a story – Most small businesses were created by hard work and graft and somewhere along the way where problems have been overcome. Success is often hard fought. Customers, clients and lenders can become invested in that story, which in turn generates business.
- Small business can build strong relationships – Generally, people do business with people they like. A small business is run by people and if you can develop relationships with clients and be liked, this can go a long way in providing security for it.
Before we take a look at the key differences between a startup and a small business, perhaps the biggest consideration for those looking to start a small business is the differences between being a sole trader or a limited company.
A sole trader is the person in sole charge of their business. They are self-employed and operate in one of the simplest business structures available.
A limited company is a business structure with its own legal identity, separate from its owners, shareholders and those running it.
There are benefits and disadvantages of both. Choosing the right one for you has a lot to do with your business type, how many employees you have and the kind of funding you are likely to require.
The advantages of having a limited company comes with the legal distinction of the business. Not only does it have a protection for its business name, personal assets are not at risk and there are tax benefits to consider.
There are disadvantages to being a limited company too, like the financial responsibilities of directors and filing company accounts every year – although most businesses will pay an accountant to do this for them. Also, all company and director information is also on the public record too – and this won’t appeal to everyone.
Sole Traders, on the other hand, have no such protection for their trading name. But the benefits come with being able to set up their business with little or no administration hassle and being able to file self-assessment tax online. For contractors, this method of setting up a business is one of the most straightforward ways in which to go self-employed.
There are a few disadvantages here as well as financial repayments and responsibilities lie with the owner themselves. However, most sole traders don’t need to risk borrowing significant amounts for their business.
The Key Differences Between a Startup and a Small Business
Startups and small businesses are often mistaken for one another, but they represent two fundamentally different business models with distinct funding approaches, growth expectations, and risk levels. While both involve starting a new venture, their goals and strategies are shaped by the business environment, market demands, and financial resources. For entrepreneurs in the UK, understanding these differences is crucial for securing the right type of funding and developing a sustainable growth strategy.
1. Funding Differences
Funding is one of the most significant differences between startups and small businesses. The type of funding available, the terms attached to it, and the expectations from investors or lenders vary significantly between the two.
Startup Funding
Startups typically seek external funding from venture capital (VC) firms, angel investors, and crowdfunding platforms. The goal is to secure enough capital to fund rapid growth, product development, and market expansion.
- According to the British Business Bank, total venture capital investment in UK startups reached £22.7 billion — one of the highest figures recorded.
- The UK is one of the leading markets for VC funding in Europe, with London attracting over 60% of the total VC funding in the UK.
- Startups often go through multiple funding rounds, including:
- Seed Funding – Initial capital to develop the business model and create a minimum viable product (MVP).
- Series A – Expanding the business model and customer base.
- Series B and Beyond – Scaling the business internationally or expanding into new markets.
- Startups are expected to deliver high returns to investors — often in the range of 10x to 100x within a few years.
Example: The UK-based fintech startup Revolut raised over £580 million in a single funding round in 2021, valuing the company at £4.2 billion. This type of funding is almost unheard of for small businesses.
Small Business Funding
Small businesses, on the other hand, rely on more traditional forms of funding such as bank loans, government grants, and personal savings.
- According to the Federation of Small Businesses (FSB), UK small businesses secured over £8.8 billion in small business loans.
- The UK government provides additional support for small businesses through:
- Start Up Loans – Government-backed loans of up to £25,000 at a fixed interest rate.
- Business Growth Grants – Targeted financial support for equipment, innovation, and expansion.
- Tax Relief Schemes – Such as the Enterprise Investment Scheme (EIS), which provides tax benefits to investors who fund small businesses.
- The approval rate for small business loans in the UK stands at around 65% — higher than the approval rate for venture capital funding.
- Small businesses rarely go through multiple funding rounds; they aim to reach profitability as quickly as possible to cover operational costs.
2. Growth Expectations
Startups and small businesses have different approaches to growth. Startups are focused on rapid market expansion and user acquisition, while small businesses seek sustainable, long-term growth.
Startup Growth
Startups are built to scale quickly. Their success is measured by growth in user base, market share, and valuation rather than short-term profitability.
- UK startups aim for annual growth rates of 50% to 200% in their early stages.
- Growth is often fuelled by reinvesting capital from venture funding into product development and customer acquisition.
- Profitability is secondary to market domination — many startups operate at a loss for years to capture market share.
- UK tech companies like Monzo and Deliveroo operated at a loss for years while focusing on user acquisition and market penetration.
Example: Deliveroo reported losses exceeding £223 million in 2022 while continuing to expand its services across the UK and Europe.
Small Business Growth
Small businesses prioritise consistent, incremental growth over rapid expansion. They focus on building a loyal customer base and generating steady cash flow.
- UK small businesses typically grow at a rate of 5% to 15% per year.
- Profitability is a key focus early on since there are fewer opportunities for additional funding rounds.
- Expanding a small business is often done gradually, such as opening a second location or increasing product lines.
- Managing operational costs and improving customer retention are more important than scaling rapidly.
3. Risk Factors
Both startups and small businesses face significant risks, but the nature of those risks differs due to their business models and funding structures.
Startup Risks
Startups face high levels of uncertainty and competitive pressure due to their dependence on external funding and aggressive growth strategies.
- According to CB Insights, 70% of startups fail within the first 5 years.
- Key reasons for startup failure include:
- Lack of market demand – 42% of startups fail because they misjudge market needs.
- Running out of cash – 29% of startups fail due to poor financial management.
- Product-market fit issues – 18% of startups fail because they misjudge customer needs.
- Competitive pressure – 17% of startups fail due to better-positioned competitors.
- If a startup runs out of funding, it often has no fallback position, leading to sudden closure.
Small Business Risks
Small businesses face lower risk of total failure but are more vulnerable to operational challenges.
- Around 50% of UK small businesses fail within the first five years — a better survival rate than startups.
- The main reasons for small business failure include:
- Poor cash flow management – 82% of small business failures stem from cash flow issues.
- Lack of market demand – 42% of failures are due to poor product-market fit.
- Operational costs – Rising supply chain costs and inflation put pressure on margins.
- Customer retention – Losing key customers or clients can disrupt profitability.
- Small businesses often have the ability to downsize or restructure to survive market downturns.
The Perception and Reality of Startups and Small Businesses
Risk is actually one of the real points of difference between startups and small businesses. It is demonstrated in the perception we have of them and how their customers and clients view them.
A startup is often seen as fund-hungry, often appearing fleetingly on our collective consciousness, driven by rapid growth strategies and profits before being consumed or becoming irrelevant due to newer technology.
A small business eschews this for a more reliable business model. Defining their real human story to generate high levels of trust from their customers and become a permanent fixture on the business landscape.
Importantly though, both small businesses and startups both need to prove their ability to excel at their relative business models in order for them to become candidates for funding regardless of their growth aspiration, risk or funding sources.
Conclusion
Startups and small businesses operate with fundamentally different business models, funding approaches, and growth strategies. Startups in the UK are typically tech-driven, highly scalable, and dependent on venture capital, while small businesses focus on building steady revenue and customer loyalty through more traditional business models. Understanding these differences is critical for securing the right type of funding, developing a sustainable business strategy, and managing risk effectively.
