When a Startup Becomes a Small Business?

When Is Your Business No Longer a “Startup”?
BY: M. Sebastian | Updated on June 9, 2022

When Is a Startup no Longer a Startup?

You're starting a business. Is that what you call it? Startups are often termed such when they're just getting off the ground, but your definition as a start may change at different stages of your company's life.

No matter what stage of life a business is in, it can never be classified as anything else but a startup. The answer to when a startup ceases to exist will vary depending on the person asking.

A ‘startup' isn't a strict definition, as it can be interpreted in a number of ways. A popular definition is “a newly-founded (and typically young) business entity which seeks to solve an important social need or produce an innovative product or service.”

Defining what constitutes a small business is not an easy task. For example the U.S Small Business Administration defines small businesses for federal contracting purposes, however it can vary depending on a number of factors.

But startups, a subset of small businesses, are even harder to define. There isn't one single definition that everyone agrees on and they usually fall into one of two categories:

  • Time in business
  • Approach to business

Time in Business

Many business owners wonder if they should put a lot of time into their business’s startup, even if they don’t have a truly unique service, product, or idea.

They are taking a chance that their idea might not be as successful as they hope and that makes them feel like there's a lot of risk. They have to put in the time and effort upfront but some people might view this as just another small business.

One consideration with this approach is that it isn't always clear when moving from startup to small business. Is it when you reach profitability? Or will success be determined by the company's survival rate at around the one or two year milestone?

“Startup” is a term with no universal definition. Both of these definitions have one thing in common: an business owner considers their business to be early-stage, and it still has a long way to go.

Approach to Business

A “startup” is often a new business that aims to disrupt an industry or provide a unique product. The term is also often associated with risky businesses that are known to have high growth potential.

Companies from all different areas of business can view themselves as startups in their early days. High tech companies are not the only ones to identify themselves as such.

Eric Ries, the creator of the Lean Startup methodology defines it this way: “It is a step-by-step process that allows entrepreneurs to test their vision continuously, measure progress effectively and adapts what's being done based on what's working and what isn't.”

“To open up a new business that is an exact clone of an existing business, all the way down to the business model, pricing, target customer, and specific product may, under many circumstances, be an attractive economic investment. But it is not a startup, because its success depends only on decent execution—so much so that this success can be modeled with high accuracy.”

He goes on to add, “A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.” 

While many people have different opinions about uniqueness, one of the benefits, which we haven’t discussed yet, is that small businesses are more risky than larger corporations. This can be seen in the early years of a business since they are more difficult to predict.

The Congressional Research Service has found that “business startups create many new jobs, but have a more limited effect on net job creation over time because fewer than half of all startups remain in business after five years.”

How to Finance a Startup Business?

Entrepreneurs often want to know how they go about getting financing and funding for their business.

If you’re defining your business as a startup, make sure to go to traditional lenders like banks or credit unions. They might be more likely to work with businesses that have been in business for less than two years. These younger businesses may be hesitant to get loans and as a result face more difficulty with the financing process.

Businesses that are young and don't have a good credit history will often find themselves looking for financing. Online lenders or microloans might be suited to their needs depending on what they can provide as collateral, but personal loans can also work if they have a strong enough credit score.

However, business owners who don't have any money saved to start their business as a startup may find it more challenging to fund their idea. Alternative sources of funding might be better for these entrepreneurs, such as crowdfunding, angel investors or venture capital.

These types of funding are not as dependent on a user's credit score or revenue and are instead focused on providing major financial opportunity for investors. The business owner is expected to make a good impression and persuade investors that they will likely succeed even with the lack of warranty.

When are You no Longer a Startup?

How can you tell when your small business no longer qualifies as a startup? As your business grows, you may be able to move beyond the startup label. Here are a few signs:

  • It is profitable. The majority of firms without any outside employees are either unprofitable or breaking even.

  • It has survived its first year. According to the Small Business Administration (SBA), about 78.6% of businesses don't even make it a year. This shouldn't come as a surprise, because the SBA defines startups as businesses that are less than one year old.

  • It is hiring employees. ( 80%) of small businesses in US only have one employee-the owner.

There are many factors that can be used to determine whether or not a business is still considered a startup. However, if a business manages to achieve more than one of these milestones, it's likely that it is in fact successful.

Want to Learn More?

  1. Congressional Research Service. "SBA Assistance to Small Business Startups: Client Experiences and Program Impact, https://sgp.fas.org/crs/misc/R43083.pdf".
  2. Eric Ries. "Startup Lessons Learned, http://www.startuplessonslearned.com/2010/06/what-is-startup.html" .
  3. U.S. Small Business Administration Office of Advocacy. "What's New With Small Business?" "https://advocacy.sba.gov/2019/09/24/whats-new-infographic-lets-you-see-the-answers-to-top-small-business-faqs/".

  4. Federal Reserve. "Small Business Credit Survey 2019: Non-Employer Firms" "https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/sbcs-nonemployer-firms-report-19.pdf".
  5. Federal Reserve. "Small Business Credit Survey 2019 Employer Firms, https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/sbcs-employer-firms-report.pdf".

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