In Serbia, due to the nature of the language, the terms startup, (small) business and entrepreneurship are often mixed. For starters, we will go through the key differences between these terms, and then explain what it means to build a startup, and what it means to build a small business – where there are similarities and where there are differences.
Startups, Small Businesses, Entrepreneurship – What is What?
Startup is a company or project started by an entrepreneur or a group of entrepreneurs (founders) who are looking for a way to effectively develop and validate a business model. They modify this business model according to their customer’s needs (pivot) until they find one that has the potential to be scalable (to grow rapidly). Startups are new businesses that intend to grow, develop quickly, have employees and quickly expand the team that helps them reach ambitious goals.
Entrepreneurship and startups have similarities, but they do not imply the same things. Entrepreneurship is a term that refers to all new businesses, including self-employment, as well as small businesses that do not intend to grow to the same extent as startups.
Small businesses are new businesses that have much smaller targeted audience and market than startups. They become profitable and sustainable faster than startups, but their growth is quite limited.
Startups often encounter great uncertainty and have a high failure rate, but some of them have the potential to become very influential in the world. Small businesses, on the other hand, usually target clients and customers in their country or local community.
Sources of financing for startups and small businesses
The most important difference between these two types of businesses is in the sources of financing. Both can be financed from their own pocket, but in the case of startups, this is quite a rare case. Startups need fast development and constant acquisition of new users, which is why the cost is much higher than the cost of starting a small business.
Small businesses can be financed out of their own pockets, but also by applying for various state funds (grants), and most commonly through bank loans.
Startups are funded out of their own pockets, through state funds (grants), and most commonly through investment funds and business angels.
If a small business does not receive a grant or loan for which it applies, it does not necessarily mean that the firm will be shut down, but that its development and growth will be slower and more difficult. On the other hand, startups that fail to raise the investment they are looking for, often have to shut down their business.
Small businesses make a profit based on the sales they make and thus quickly become sustainable. So the success of a small business is measured through its profitability.
We spoke with Tiana Rackov on this topic in the fourth episode of our StartUP Path of Success podcast. Tijana believes that one of the key differences between startups and small businesses is how their performance is evaluated.
“When we say startup success, people often think of profitability. Profitability is important, but it is much more important for businesses than for startups. Startups, in the very beginning and a good number of years after the start, do not focus or evaluate in terms of profitability but in terms of top line growth, ie. revenue growth through the years. It is very common that some startups are not profitable but have incredible top line growth and therefore are considered successful because they show great potential for growth. ”– shared Tijana.
Exponential growth mostly follows startups. This means that that startup has a constant need to invest in the acquisition of new users and customers and to expand rapidly. In order for a startup from Serbia to grow, it is necessary for it to quickly emerge from Serbia and the region, in order to be able to achieve the desired growth in some larger markets. Startups need money all the time because they are constantly paying the price of acquiring new users. That money usually comes from the investment because the company’s revenues are not enough to cover the costs.
The Serbian market is still in its early stages of development, so it is very difficult to scale startup business, especially when it comes to physical products. The production of a physical product alone costs a lot and takes longer. Software solutions, on the other hand, have much greater potential for faster growth.
What is the difference between loans and investment funds?
A big problem in mixing the terms startups and small businesses in Serbia arises when banks advertise loans for startups, which are actually for small businesses. Startups do not have regular income and cannot repay loans, while small businesses are quicker to reach profitability and more stable in terms of repaying loans. This creates additional confusion among founders who are unsure of which category they fall into.
The bank loans have to be repaid and the money received from the investment funds does not (unless you break the contract with the fund). Banks do not invest in startups because they carry a high rate of uncertainty and failure. Small businesses are growing slowly and to a certain extent, but they are growing faster and more stable than startups, and they can repay the money they receive through loans faster.
Startups grow slower and harder, but if they grow, ROI for investor is much higher.
ROI = return on investment
At the very beginning, founders need to be aware of what category their business falls into so they can know what kind of funding and mentoring they are looking for and what steps to follow.
Difference in required knowledge
In case of starting a small business, the founders need mentoring in sales and advertising, creating the profile of the ideal user, as well as in selecting channels through which they reach customers. In the early stages of growth, it is essential to establish good processes and operations, as well as to establish good sales.
In case of starting a startup, the founders need mentoring in designing a business model and pivoting, developing a business and seeking investment. In the early stages of development, the focus is on creating MVPs and getting to the market as quickly as possible.
Differences in leadership
The aforementioned stages of development imply major changes in the field of idea, team and growth strategy. Such a change can successfully pass a team that is open and develops its ability to learn in parallel with the development of the product / service / system itself. We spoke with Nataša Kažić, an international marketing professional, in the first episode of the podcast, and she shared with us what challenges she had to overcome at her beginning of work with startup:
“This was a big pain point for me personally when I left the corporation and started my startup experience. I had to completely change my way of working and adjust my leadership style. At the corporation, I got used to having an entire army of people that answer to me and was focused on working with people and sophisticated leadership skills, such as mentoring and strategy. However, in a startup you have to do all that at once – to be a leader, and a mentor and colleague with other co-founders and other team members. There is no one else to complete the operation for you, you have to do it without ever losing sight of strategy and that ultimate goal. And besides all that, you have to solve the problems of your users as well as the problems that you have until you find a solution for the end product. It was shocking to me, but I have adapted over time.” – Natasha shared.
In our program Startup – on the road to success, we go through individual monitoring and growth planning with teams, and provide support along the way, through individual mentoring sessions, workshops and lectures. In this way, we help teams realize their goals and make the path to that achievement successful. One of the important things we deal with on the program is the ability of a team to learn and develop, both as a team and as individuals. This flexibility and ability to adapt quickly to change and leadership are important for two reasons. The first reason takes into account previous professional experiences of startup-ers. The second reason is that the ability of the team to learn is one of the key indicators of leadership on which investors decide whether to invest in the development of your idea.
The startup scene in Serbia is slowly but surely growing. The stories of those who have succeeded are increasing, and for this reason more and more people are encouraged to take such a risky venture, so we are looking forward to new stories that are about to emerge. Are you developing an innovative solution as well?
Sign up for Demo Day on September 14th! We want to hear more about your idea. By participating in the Demo Day, you are entering in the selection for the Startup path of Success, a program designed for startups looking to get into the big numbers market. SIGN UP!
Translated by: Jana Jovanović