What’s the Difference Between a Start-up and an SME?
When the word ‘start-up’ comes to mind, most people visualise a small business with 10-15 employees working in a corner office with a vision of changing the world. This image, though not wrong, does not adequately convey what a start-up is in the truest sense. It also leaves a lot of scope for confusing a small business with that of a start-up.
There are a lot of reasons as well – entrepreneurs start both these business types, and both have low employee count and low revenue. So, what makes them different. We begin explaining by stating their definition.
A start-up is defined as a ‘temporary organisation that is searching for a repeatable and scalable business model’. According to the Ministry of Commerce and Industry, Government of India, it is:
- A registered entity not more than 7 years old
- Has never crossed an annual turnover of Rs. 25 crore in any preceding financial year
- A company working towards innovation and development of products or services that have high potential of wealth creation or employment generation
An SME (Small and Medium Enterprises) is an ‘independently owned and operated enterprise, designed for profit and sells known products to known customers in local markets’. In India, the SMEs are further sub-divided into a manufacturing and service enterprise. For manufacturing, the investment ranges from Rs. 25 lakh to Rs. 10 crore, and in the service enterprise, the investment varies from Rs. 10 lakh to Rs. 5 crore.
A start-up starts small but has a very big vision. It has come into existence to prove that the business model can have a huge impact on the current market. From the onset, start-up founders have a vision to grow their firm into a large, disruptive company that will rearrange an existing industry or create a new one altogether.
SMEs or small businesses follow a tried and tested path and don’t travel off it. They are structured organisations that follow a known and established business model. Founders of small business are focused on gaining profits by delivering value to their customers. The best way to achieve this is by following a stable and successful business model and by securing a financially viable position in the market for a long period of time.
Funding and Control
Start-ups are in a hurry to prove that their business model is viable, and for this, they require funding. Start-ups have humble origins and are founded to prove a point. The founder’s vision does not feature thoughts like retaining control of the company.
As the start-up begins to grow, it will receive funding from angel investors and venture capitalists who will buy out a stake in the company with their investments. Over a period of time, the founder’s control over the company will diminish and s/he will move on to the next idea/challenge.
Funding for small business is the same as that of a start-up in the initial stages. But, in contrast to the latter, the founder’s interest is in retaining control over the company. He will seek funding from various financial institutions, such as banks, to grow his company without relinquishing control.
This is one of the major difference in these two business types. Start-ups promise enormous potential, high return on investment and claims to bring revolutionary changes in the industry they operate in. Any company claiming to upend an entire industry with a novel idea is treading a path fraught with high risks.
Small businesses are not risk takers. They follow a path that has already been treaded a million times before with proven returns. Hence, they are much more stable than start-ups and offer consistent returns with a significantly lower risk profile.
Start-ups are trailblazers in their own right. They are pursuing ideas that have never been explored before. Therefore, to reach their goals, the equipment that they utilise also must be more advanced than what is already available to the industry.
SMEs don’t require cutting-edge equipment to manufacture the products or give the service that is already present in the market. Hence, they can make do with conventional technology and only upgrade their equipment, if they want better efficiency in pursuit of higher financial gains.
Both these company types are founded by entrepreneurs and might appear the same at first. However, they are as different as chalk and cheese with radically different ideas that separate them from the onset. Their stated objectives and method of working as well as of acquiring finance, further differentiates them from each other.