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

I've had a conversation with some friends recently on the differences between a startup and a small business. One of my friends said that a startup in a brand new company, which aims to scale fast and become a large company, while a small business stays small and doesn't plan to scale. Examples for this definition of a startup may be Google, Facebook, Microsoft and Apple in their early days.

From what I read online, no one makes this distinction. What do you think - do you make a difference between a startup and a small business?

Variations of this have been asked before -- but as far as I can tell, not exactly the same, not what the difference between "startup" and "small business" is.

But AFAIK the answer is pretty much the same. There is no stringent, formal definition of what constitutes a "startup" or a "small business". These words are use slightly different by different people.

That said, I personally agree with your friend that "startup" implies higher growth ambitions. "Small business" is a more general phrase, used by fx marketeers or statisticians, and depending on the context it can mean anything from <5 man companies to <1000 employee companies.

http://en.wikipedia.org/wiki/Startup_company A startup company or startup is a company with a limited operating history. These companies, generally newly created, are in a phase of development and research for markets.

http://en.wikipedia.org/wiki/Small_business A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships.

from: http://www.businessinsider.com/small-business-entrepreneur-startup-which-do-you-identify-with-2011-3 or to summarize (my own words and experiences): startup :

• limited operating history (0-3 years usually) or newly created
• in development or market research phase
• small number of employees, expanding rapidly
• owned by founders (AND investors)
• market share can be huge
• profit can be huge
• likely to accept acquisition
• higher risk of operation failure

• any age (15+ and still a small business is possible)
• doing business 'as usual'
• small number of employees (usually under 10-15)
• owned by ONE or (rarely) a few founders (and then usually friends, family)
• market share is never huge
• profit is VERY UNLIKELY to be huge (usually enough to sustain a (large) family)
• unlikely to accept acquisition (or even be target for one, unless a huge competitor is consolidating the market)
• low risk of operation failure

some of the differences may transfer or overlap, but rarely (such as a small business can have high profits in rare cases, etc...).

In my opinion:

Startup refers to the state of a business in it's life cycle. In other words, it's been recently formed, and it's a relatively new business. Whether or not they intend to grow or stay small, a new company is still a startup.

Small business refers to the size of the business, and may refer to the number of employees, revenue, or net worth. A small business can be a startup that is still growing or an established company that is maintaining the status quo.

People frequently use the terms interchangeably, but that's because most startups start small. It doesn't help that the terms themselves are ambiguous with no firm definition or hard cutoffs.

Steve Blank definitely has a great insight on this.

The terminology he uses is "Scalable Startup". This is analogous to what this community refers to as the funded, go-big or go-home type of company. The only difference between a Scalable Startup and a Small Business (or lifestyle business as it's also referred to) is merely one of vision, risk, and personality.

Read this:http://steveblank.com/2010/01/04/make-no-little-plans-%E2%80%93-defining-the-scalable-startup/

And watch this: http://www.justin.tv/startuplessonslearned/b/262670582 In summary, Scalable Startups generally:

• Need risk capital (aka Venture or Angel funding)
• "They wanted to build an industry not just a product or a company"
• "They believed their vision and work was going to be worth a lot more – or zero"
• Vision for a $100 million/year company by creating an entirely new market
• "They used Customer and Agile development to search for a scalable and repeatable business model to become a large company"
• "They hired a world-class team with co-founders and early employees who shared their vision"
• "They fervently believed that only they were the ones who could and would make this happen."

Small Businesses (the other 5 million in the US) generally:

• "...may want to grower larger, but they aren’t focused on replacing an incumbent in an existing market or creating a new market"
• "The size of their opportunity and company doesn’t lend itself to attracting venture capital"
• "Grow their business via profits or traditional bank financing"
• "...have a predictable revenue stream for the owner, with reasonable risk and reasonable effort and without the need to bring in world-class engineers and managers"

It should be noted that there is nothing wrong with either type of business, and there is no bias towards a particular industry. Some people want to run a single bakery, others want to supply bread to every fast-food restaurant in the nation.

Just adding to @Jespers remarks.

• 80% fail in the first year
• of those that survive 80% fail in the first 5 years
• in 10 years you will have a small portion left.

So when is a startup not a startup? When its intended sunset is reached

• You get bought out
• you publically list
• you grow beyond the original dream you set out to achieve.

Maybe when you revise your business plan and work out what you actually intend to do (the majority of businesses do this several times over).

... maybe just when you don't feel like its a startup business anymore.

My general view on where a company is a startup or small business is that this depends of the level of Risk/Return.

So, if a small bussiness is working in area of high level of returns (and level of risks) it is called a startup. In some point when the company establishes the returns and risk can decrease and the company becomes ordinary one. Calling some company Startup is somehow arbitrary and for investors (VC) more important are risk/return numbers.