Startups vs SME’s
By: Sanju Peramuna Arachchi
Tags: Startups Vs Sme, Startup Life, Startup Sri Lanka, Startup, Startup Lessons

In today’s world, everyone gets excited when talking about startups. The arrival and growth of businesses like Airbnb, Uber, Snapchat have influenced most young entrepreneurs to strive towards launching their own startup and culture rather than an everyday idea SME.

According to Daily FT, Sri Lanka’s startup ecosystem has more than quadrupled just in the last two years. The best recent example of a successful startup is the launch of PickMe in Sri Lanka. It is hands down one of the best startup concepts in Sri Lanka.

However, most people seem to misuse the word startups with SMEs. In this article, we’ll be trying to understand what differentiates a startup from the rest of the business.

What is a Startup?

Investopedia defines a startup as:

“A young company founded by one or more entrepreneurs to develop a unique product or service and bring it to market. By its nature, the typical startup tends to be a shoestring operation, with initial funding from the founders or their friends and families.”

Below are a few characteristics that differentiate a startup from an SME.

Problem-solving

The primary characteristic that differentiates a startup from a traditional business is that it attempts to solve a problem or a customer’s pain point through an inventive or innovative product/service. This often means operating without a clear path or guidance for success. Most of the time it would be a tech-based product/service.

R isk

Whenever we launch a company there is always a certain amount of risk involved. However, comparatively, startups involve high risk. Therefore, when launching a startup, the company and its team will need to experience so many emotions and persevere with hard work and guts. Hence, an unsuccessful startup may cause quite the damage, financially and emotionally. But one should also keep in mind that the higher the risk, the higher the return.

Rapid Growth

Another unique trait that makes startups stand out is its exponential growth. Startup founders always target a bigger market for impact and disrupt the current market with their scalable, fast-growing, and competitive business models.

E.g., PickMe doubled its growth every month for the first year of operations and in a short span of five years became a company worth 3 billion LKR.

Funding

Apart from the above characteristic, startups have an interesting method of collecting funds compared to traditional businesses. On most occasions startups attempt to obtain their funds through venture capitalists and angel investors while other businesses usually resort to obtaining a financial loan. However, the only downside is that these VCs and Angel Investors will have certain control over the startups they are betting on while the traditional businesses will have full control over themselves.

Despite that, these startups find the opportunity to seek the right advice and guidance from established and experienced individuals or teams to reach their potential and beyond.

Exit Strategy

Most of the time when you’re launching an SME you are planning to run that business for sometime-until you eventually pass it on to a family member or sell it after you retire. Therefore your goal is to stay in the business.

But when it comes to startups the circumstances could be different. Most of the time they change the business model multiple times to find the most suitable scalable and repeatable model and execute it. Once they’ve reached the desired level of their business they’re usually bought by another larger company or they will just sell their shares and move onto another business.

Innovation

Most of the time an SME business is not unique, it could be one of many similar businesses and when you are launching a business you can easily follow readymade solutions but when it comes to startups innovation is the key and they require you to create something new or improve on existing ones. The success could depend on that.

As you now understand, startups and small businesses are actually much more distinct than most people would initially think. So, why does the difference matter?

At the end of the day, the difference between a startup vs. a small business goes beyond our everyday usage of these words. Instead, it’s much more significant for future entrepreneurs. When you’re starting your own company, you can ask yourself — Am I launching a startup or a small business?