Many people often mistake a business for a start-up, leading to confusion about their investment decisions. Establishing an F-commerce or a small business is often referred to as a start-up. However, start-ups are not just small businesses, they can also turn into unicorns like BYJU’s, Snapchat, Uber, Airbnb, and Slack.
Although start-up models are commonly associated with new business ideas, it is essential to note that the same idea can also be executed using the SME (Small and Medium Enterprises) model. Investors are generally more interested in investing in start-ups due to their higher return potential, but Forbes reports that 90 percent of start-ups fail. Furthermore, an average of 2 out of 3 start-ups never achieve positive returns, while only 1 percent of start-ups make it to Unicorn status.
On the other hand, SMEs have a relatively higher survival rate, with about 80 percent surviving the first year. The survival rate for SMEs after five years is 50 percent, which is comparatively safer than investing in start-ups.
Therefore, it is crucial to understand the difference between a business and a start-up before making any investment decisions. While start-ups can offer significant returns, they also come with high risks. Investing in SMEs may not offer the same high returns, but it is a relatively safer option. It is always wise to seek professional advice before making any investment decisions.
What is a Startup?
The term “Startup” was originally coined in a 1976 Forbes article. It gained tremendous popularity after the dot-com boom in the late nineties. Silicon Valley legend Steve Blank defines a startup as a temporary organization whose main objective is to find a repeatable and scalable business model. The ultimate goal is to quickly establish a viable business model that can significantly impact or disrupt the current market. AOL co-founder Steve Case believes that the term applies to companies that can scale rapidly and disrupt existing markets. Neil Blumenthal, Co-CEO of Warby Parker, suggests that the primary focus of a startup is to solve a problem whose solution is not immediately apparent. Success in this case may or may not come.
Another definition suggests that startups are usually new to the market and aim to explore a new idea or product by leveraging technology. From these definitions, it can be inferred that a startup is a new or young organization that primarily uses technology to solve problems and create a scalable business model. The ultimate goal is to create a new market or industry or disrupt the existing market.
While startups cannot be classified as such, they can generally be categorized based on various parameters such as Buyable Startups, Large Company Startups, Lifestyle Startups, Scalable Startups, Small Business Startups, and Social Startups. Startups always have high growth potential and high risk. If successful, they can grow into giant organizations such as Facebook and Zomato. However, if they fail, they will cease to exist.
What is an SME?
On the other hand, SMEs are defined by the U.S. Small Business Administration (SBA) and Steve Blank as independently owned and operated businesses with the primary objective of making a profit. They do not aim to dominate their industry and usually serve their local market with existing products. According to the OECD, SMEs must be non-subsidiary, independent, and have a certain number of employees, which varies by country. For example, the EU has a limit of 250 employees, while the U.S. has a limit of 500, and some countries limit it to 200. Stoner, Freeman, and Gilbert add that SMEs are typically locally owned, have a small number of employees, and operate in a single location. Additionally, SMEs typically use a proven business model resulting in low growth potential and low risk.
Therefore, SMEs are small and independent firms with the main goal of ensuring consistent profit, using a proven business model without being too concerned about growth. SMEs are categorized as Micro, Small, Medium, and Large Enterprises based on the number of employees and annual revenue.
In summary, the definitions of Startup and SME show that SMEs prioritize profit over growth, while Startups prioritize revenue and growth over profit.
SMEs Vs Startup
An F-commerce company that sells grocery items through Facebook on a small scale cannot be considered a startup. This is because the business serves an existing product in an existing market, making it an SME. Additionally, there is no innovation in the business model or idea, and the technology used is a common social media platform, lacking innovation. Such a business cannot disrupt the market.
In contrast, Chaldal.com is an example of a proper startup that received follow-on investment from Startup Bangladesh in 2022. Despite selling grocery items, they have integrated new sales channels through technology, mobile applications, and websites. According to Techcrunch’s September 2021 report, Chaldal completed 2.5 million orders and generated $40 million in revenue in the previous 12 months, indicating its scalability.
A small-scale traditional rent-a-car business is an SME, but Uber would be a startup due to its innovative technology, app, website, and business model that have disrupted the market. This is evident from the scalability graph.
Suppose this graph represents a conventional, small-scale car rental enterprise, where the X-axis denotes Scale and the Y-axis represents Capital. In order to expand the company, consistent investments of capital are necessary. The greater the amount of capital invested, the more the business will prosper. Additionally, it is worth noting that every investment made in the business leads to growth through improved efficiency and profitability.
Considering this graph to represent Uber’s growth, it shows that while there was some initial investment, it did not result in significant growth. However, over time, the investment decreased while growth rapidly accelerated. Reuters reported that Uber achieved an operating profit for the first time in 2021, but prior to this milestone, the company had been continuously investing through fundraising since its inception in 2009.
For a start-up to succeed, it must adopt a growth mindset and strive to capture a significant market share. This can be achieved through innovative technology or by utilizing existing advanced technology to drive rapid growth. However, a start-up need not have innovative technology as its core product. Instead, it must have a unique and novel business model. In the beginning, the company may not generate profits as it searches for the perfect product-market fit. However, over time, the scalability graph will continue to shift to the right, and there will be no limit to growth. Additionally, a start-up’s success is often determined by its ability to disrupt and dominate the market, which are two critical criteria for success.
For SMEs to be successful, they must prioritize earning profits from the outset. These types of businesses should focus on targeting a specific niche market rather than attempting to capture a larger share of the market or filling gaps in existing markets. While technology is not necessarily required for SMEs, if utilized, it should be common and widely accessible, such as websites, social media, and messaging platforms. It is crucial for the business model or idea to be established or proven to reassure potential investors of the profitability of the business from the start. These types of organizations are typically risk-averse and not growth-oriented. Instead, their focus is on generating profits from established markets at a small margin, rather than dominating or creating new markets. The primary objective of such an organization is to achieve sustainable profitability and long-term survival in the market.
Startups and SMEs are often confused as both types of businesses are relatively small in size. Both require investment for growth and expansion and usually have an open workspace to facilitate open communication between different departments and a collaborative work environment. Flexibility is also a significant characteristic that identifies a startup or SME. Dudran’s business, for example, has a focus on survival, resulting in marketing campaigns, PR activities, and messages being very precise.
Startups aim to capture a significant portion of the market, while SMEs focus on capturing a smaller market share. Startups typically have a new and innovative business model or idea, whereas SMEs operate with a proven business model that involves less experimentation or uncertainty. SMEs typically achieve profitability from the first day, whereas startups may take a longer time to become profitable. SMEs do not typically use innovative technologies and, if any technology is used, it is commonly accessible and average in quality. Startups, on the other hand, often utilize innovative or advanced technology, although their core product may or may not be technology-based. Startups seek equity funds from venture capitalists and angel investors who expect a high rate of return, which can be more than 10X.
In contrast, SMEs typically approach traditional banks, friends and family members, and lenders for debt finance, with investors providing a small amount of funds in return for interest. The objective of a startup is to dominate or disrupt the market, with a market that is not only local but global. Startups aim to be the most innovative, creative, and disruptive force in their industry. In contrast, SMEs do not aim to dominate the market, but rather to survive by maintaining consistent profitability over a long period. Startups want to bring about revolutionary change with high risk, while SMEs want to maintain profitability with low risk. The growth strategy of SMEs is slow and cautious, focusing on profit-building before expanding. Startups, on the other hand, prioritize enhancing their top line and ensuring rapid growth.
For startups, two exit strategies are available: Initial Public Offering (IPO) and strategic buyout (Acquisition). In contrast, one of the exit strategies for SMEs is through dividends, liquidation, or permanently ceasing operations.
To start a business, it is essential to determine the type of business and identify the appropriate financing sources. Additionally, strategic planning should align with the business type. As an investor, it is crucial to understand the nature of the business being invested in. If the goal is to obtain a multifold return over a long-term period, investing in a startup may be the best option, but it is important to consider the high level of risk associated with this type of investment. Conversely, if expecting immediate dividends from a short-term investment, choosing to invest in an SME may be more appropriate.
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