Between 2012 and 2021, funding to U.S. tech startups jumped to $344 billion. gorodenkoff/iStock via Getty Images
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What’s the difference between a startup and a business, and is one better than the other? – Aditya, age 16, Ranchi, Jharkhand, India
All startups are businesses, but not every business is a startup.
Nearly 100,000 new businesses were formed each week in the United States in 2022. But what sets a startup apart?
As a professor of marketing and innovation who has worked at several startups, including Netflix in its early days, I can share some of the differences between a startup and a more traditional business.
Startups are inventing something new
A traditional business generally has an established solution to a known problem and has not developed anything particularly new.
For example, a new sushi restaurant in your neighborhood may be a new business, but it is by no means a startup. However, if a new local company had developed a device that automated sushi-making and tried to get sushi restaurants to try it, that would be a startup. The restaurant is simply trying to satisfy the neighborhood’s needs for sushi, whereas the device company is trying to change all sushi restaurants with its new method.
A startup is centered on an innovation that has never been brought to market before. This could be a product or service, a technology, a process, a brand, or even a new business model. Generally, they have big industry-changing goals about disrupting the market leader or current customer behavior.
Think Uber, an inventive startup that originally operated in San Francisco. It built off the time-tested taxi model – a business – and created a unique ride-sharing app that had never existed previously.
The goals of startups
Regardless of their product and location, the main focus of a startup is to figure out if there is a need for their product.
Startups are trying to find and optimize a target market for their new solution. Who would value and buy what they have developed? Startups often think they have a good picture of who would like what they are building, but they’re not always right.
For example, I headed marketing nearly a decade ago at relationship-focused tech startup Contactually. When Contactually began to promote its services, it aimed for small businesses in several industries, thinking that the product met needs equally across all of them. But subsequently we found out that our offering worked particularly well for real estate agents and brokers, and we started to put all efforts into meeting this group’s needs exclusively.
Part of identifying a target market is establishing a product/market fit – the degree to which the innovation satisfies a market need. Startups know they may be on to something when customers from the target market purchase the new solution and are willing to share their positive experiences with others.
Once a startup has passed those stages, it will try to scale. This means successfully growing the startup so that it’s not limited by funding or staff. For example, once Netflix launched its streaming platform in 2010, it was able to scale around the globe in an easier and faster manner than if it had stayed with its original DVD-by-mail business model.
Finally, to accomplish the things that would enable it to scale, startups are generally focused on spending time with and learning from their customers. Once they reach a specific size, most businesses focus less on customer learning and more on making the company more efficient.
Research shows around 90% of startups will fail, while thousands begin each week.
Kelvin Murray/Stone via Getty Images
Transitioning into an established business
Amazon, Netflix, Uber and Airbnb are global powerhouses that began as startups. Successfully growing a startup into a prosperous company is extremely hard. Industry data suggests that 90% of startups will fail.
Once established within their market, traditional businesses find themselves with a different challenge: running more efficiently.
Startups may be able to rely on funding from different kinds of outside investors while they gain their footing. But an established business needs to run smoothly to make a profit from what it’s selling.
Non-startup companies need to figure out how to manage workers better and run the business in a way that solves the customers’ problems while enabling the company to meet all of its goals.
For a non-startup business, specific goals could be how much money or profit the firm makes, how and where to expand to grow more or faster, how much time it takes to create a product, or how to make more products with the same or fewer resources.
While the focus of a startup is to determine if there is a demand for a new and innovative product, the primary goal of a traditional business is to create an efficient operation that can last far into the future.
With luck, a successful startup, like Uber or Netflix, will scale and grow, eventually evolving into a traditional business – one that some future startup may try to disrupt with a brand-new idea.
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Daughter works for Maven Clinic after working for CNBC and Morning Brew
