What is the difference between a startup and a small business?

Alexia Ruscone and Sophie Toohey, co-founders of Good Day Girl, say they've moved past the startup phase.

Alexia Ruscone and Sophie Toohey, co-founders of Good Day Girl, say they’ve moved past the startup phase.Photo: Supplied

The 2015 budget became known as the small business budget thanks to the small business instant asset write off and tax cuts but this year the government’s focus is firmly on startups.

Malcolm Turnbull has been lauded as our “first startup prime minister” and stressed his dedication to the startup cause with the launch of his $1.1 billion innovation plan. The hype around startups means Atlassian is regularly described as a startup despite having been in operation for 12 years and listing on the NASDAQ last year.

In our hearts we are a startup but on paper we are probably a small business.

Sophie Toohey, Good Day Girl co-founder.

Despite the startup love in it’s still not clear what exactly makes a business a startup rather than a less glamorous but equally as crucial small to medium enterprise.

Freelancer founder Matt Barrie says his business is no longer a startup.

Freelancer founder Matt Barrie says his business is no longer a startup. Photo: Louie Douvis

Growth expectations and financing

David Jackson is on the board of investor group Sydney Angels and has founded, mentored and invested in startups. He says startups and small businesses often begin with very different growth expectations.

“Operationally speaking, early startup activities often centre around pitching to investors to raise enough capital for rapid adoption of their product, which is usually tech-based and scalable in nature,” he says. “The startup itself is typically the brainchild of two co-founders, one who is a tech expert, and the other with skills in sales and marketing, and its success usually relies on their ability to successfully attain large-scale funding early on.”

Guy Pearson, founder of Practice Ignition, says startups are defined by being high growth and scalable.

Guy Pearson, founder of Practice Ignition, says startups are defined by being high growth and scalable. Photo: Daniel Munoz

On the other hand Jackson says small businesses often provide more traditional products and services, although he concedes this is not always the case when you look at businesses like Boost Juice and Gloria Jeans which he classifies as startups.

“[Small businesses] may have been operational for around two to 10 years, with two to 20 steady employees, and no huge expectations for growth,” he says. “They are often also far less scalable than startups – usually because their lower tech focus makes automation a challenge.”

Jackson says finance is another key difference between startups and small businesses.

“Startups often seek large-scale funding from venture capitalists or angel investors that is then used to finance rapid growth,” he says. “Small businesses, on the other hand, are often self-funded or financed from family, friends or a bank loan.”

An early stage SME

However Koos Kruger, founder of Business Exit Planner, defines a startup as essentially an early stage SME.

“A startup is typically in its first few years of operation, or may only exist as a concept or idea ready to be implemented,” he says. “At this point it’s often considered an unproven concept, so business owners may struggle to demonstrate its value to investors – will this be the next Facebook or Gloria Jeans, or just another app or coffee shop that goes out of business within a few months?”

In contrast Kruger says SMEs have generally passed the “all-important” three-year milestone, before which time more than 60 per cent of small businesses fail according to the Australian Bureau of Statistics.

SMEs have a proven history of success, steady cash flow, and a credit history which can be used to access more finance if necessary.

“In my experience working with hundreds of business owners, another key difference between startups that ‘graduate’ to become SMEs and those that don’t often depends on the degree of priority given to financial and operational matters,” he says.

“Startups often fail as a result of a disproportionate focus on the product or idea, such as the technology powering the app, or the artisanship of the coffee served. This often results in neglecting the operational and financial management of the business itself.”

Is your business a startup?

Matt Barrie, founder of Freelancer

“It’s not a startup anymore, it’s a growth stage company. But we certainly still have a startup culture. We organise into product groups and the product manager is the startup chief executive of that product.”

Sophie Toohey, co-founder of Good Day Girl

“In our hearts we are a startup but on paper we are probably a small business. Good Day Girl is a relatively new concept that we created to find a better way to manufacture clothing and offer our clients a modern traditional service that addressed her issues when it came to shopping. There are not many made-to-order women’s fashion businesses around so we kind of sit by ourselves. Which gives us this continual feel of starting something new – a fabulous entrepreneurial startup vibe. We are entering our third year as Good Day Girl and from that we are aware of what works, and what doesn’t. We have systems in place for our seasonal design, marketing, selling, manufacture and delivery – these systems are based on our Good Day Girl experience, which we wouldn’t have if we were just ‘starting-up’.”

Guy Pearson, founder of Practice Ignition

“I’d deem Practice Ignition to be a startup. Like most startups we are not profitable, are high growth, have external funding to fund losses but speed up our growth of our customers. [Practice Ignition is] building something scalable – we are software as a service, low requirement on human hours to service clients, but, high spend on research and development to build a better structural platform.”

Annabelle Smith, founder of Social Playground

“I would consider Social Playground as a startup. The definition of a startup, in my opinion, is a temporary business model that is disrupting an industry and looking to develop a scaleable business model to grow quickly.
By contrast, an SME is a small business looking to create consistent and stable profit and for someone to be their own boss.

“When we launched Social Playground, we knew our Live Instagram Printer was going to be a disruption to the Photobooth market and the way that marketing agencies thought about engaging consumers at events. We continue to approach the business with a startup mindset because we are constantly looking for new innovations to launch in our market as well as opportunities for high growth. My ambition is to continue to grow the business and be a groundbreaking leader in the space, not just to turn a profit. I think it’s this mentality that cements us in the startup space.”