Start-Ups and SMEs – What is the Difference

Businesses have had to adapt to rapidly changing customer preferences, government regulations and disruptive change in order to survive. Since the 1990s, large corporations with bureaucratic style functioning have increasingly become a minority while small and medium businesses now employ more than 95% of the workforce worldwide.

With innovation as the watchword, businesses are cutting costs, adopting lean manufacturing practices and hiring more remote workers than ever before. The small business ecosystem has contributed to the growth of the national economy by contributing more than 24% of India’s GDP from service-related activities. It also employs more than 120 million people and generates significant export revenues.

While they may seem to be similar, there are major differences between small businesses and start-ups. From their philosophy of operations to their funding structure, they have very little in common. Let us examine the distinct characteristics of start-ups and small business.

1. Scope of operations

Start-ups are founded to serve the global market. From inception, start-ups focus on developing innovative products and services with a worldwide appeal. They position themselves as high-growth companies with the intent to scale rapidly, adding to their value proposition as well as employee headcount. Small businesses, on the other hand, serve a largely local market and are self-sustaining. They hire fewer people and have a more traditional approach to business.

2. Approach

Start-ups emphasise taking risks and challenging conventions with their products and services. They develop a viable product and scale rapidly to reach new audiences. While this approach gives them the first movers advantage, they lack strong fundamentals for long-term sustained growth.

Small and medium business owners are more pragmatic when it comes to their product offerings. Their aim to build long-term relationships with their customers and vendors. SMEs are more traditional and risk-averse in their approach to business.

3. Investment

Start-ups are aggressive in pitching for funding from institutional investors and venture capitalists. While most start-ups are incorporated as self-funded ventures, they leverage their networks to secure external financing for rapid expansion. Small and medium businesses, on the other hand, are self-financed and do not rely on investors. They often scale their operations solely based on the needs of the target audience that they serve.

SME loan eligibility norms have been relaxed due to the emphasis placed by the government of India’s Make in India initiative, which aims to boost the manufacturing sector in the country. This is in line with the long-term objective of generating employment opportunities for the nation’s youth and promoting equitable development.

A business loans are offered by NBFCs require minimal documentation and are disbursed quickly, to meet the working capital needs of small businesses.

4. Term of existence

Start-ups are usually launched to serve an emerging market need, scaled-up and sold to larger buyers at an appropriate time. They prioritise innovation over long-term stability. Start-ups operate on a time horizon of no more than 5-7 years, after which they are either closed or further scaled up using another round of investor funding.

Small businesses have a longer-term perspective. Their operations are designed to be sustainable and have greater predictability. Small businesses are traditionally family-owned and their owners generally do not aspire to expand operations.

5. Exit strategy

Start-up founders seek funding from angel investors to scale and eventually exit the company in return for a good price on their equity. Investors usually decline funding if a clear exit strategy is not included in the business plan. An exit strategy helps investors determine if their investment will bring in enough returns to make it worthwhile.

SME financing options include business loans which allow owners to still retain managerial control of the company. Unlike start-ups, SME owners do not part with equity but may need to provide periodic reviews to their lenders with regard to the financial health of their company.

While start-ups and small businesses are fundamentally different, they have proved to be catalysts for the business environment in the country.

I'm a certified financial expert,lives in Delhi and completed Mba in finance.I like to write finiancial blog.