This time we will try to understand what is the difference between SME and startup. Many times both terms are used interchangeably when in reality they are not the same. In Hispanic Entrepreneurs we will talk about the difference between these business models.
SMEs: a traditional model
Let's start by defining what an SME is, this is the abbreviation of "small and medium-sized company". The conception of companies that fit into this profile may vary from one country to another.
In the case of Chile, income from annual sales is considered, which must not exceed 100.000 development units (UF) per year; Likewise, the number of workers is considered, which must be between 1 and 199.
La Law 20416 sets the standards for smaller companies. In this three different categories are distinguished:
- Microenterprises: those with annual sales income of less than 2.400 UF. In addition, they have between 1 and 9 workers.
- Small companies: their annual income from sales and services and other business activities is higher than 2.400 UF and less than 25.000 UF. They have between 10 and 49 workers.
- Medium-sized companies: annual sales revenue exceeds 25.000 UF, but is less than 100.000 UF. Regarding the number of workers, they are between 50 and 199.
SMEs have a more formal organization than startups and, at least in principle, are aimed at a local market. This is not to say that they cannot scale and expand the market, but this process is usually slow.
They usually start out as a family business, like open a bakery, and can remain as such. Although it is also possible that at some point they exceed the parameters that define them as SMEs.
Startups seek innovation
We also explain this concept to better understand what is different between an SME and a startup.
For a company to be defined as a startup it must meet two basic characteristics. In the first place, it is based on technology and through this it seeks to impact a product or a sector. On the other hand, it seeks innovation, which can be a business model or a process.
Startups are defined by their scalability; that is, they have the ability to grow very fast. Furthermore, they target a global market. These types of companies are customer-oriented and have a great capacity for change, they can adapt the model until they find the most appropriate one.
Another characteristic of startups is that they are named this way only when they are in their initial stage. Once they pass this phase they are no longer considered as such.
What is the difference between SME and startup
Now that we know both concepts we can detail the differences between them. One of the main distinctions is in the market to which both are directed. While SMEs seek the local market, startups go further and aim towards the international or global.
With this, startups work to generate an impact from the beginning, they present more ambitious objectives than an SME and it may take time to find a business model that is profitable. The latter, instead, finds a business plan that is profitable and works around it.
As we saw before, the concept of a startup is closely related to time. In other words, a company that is in its first phase will be considered as such, but then ceases to be. SMEs will continue to be such as long as they comply with the established parameters, regardless of the time.
Small and medium-sized businesses often get their initial financing from the entrepreneur's savings or contributions from family and friends. In the same way, they opt for bank loans, among other types of financing.
But the main source of financing for startups are angel investors and venture capital.
In Chile there are financing options for both, but you should know if your venture fits into the model of SME or startup to go to the most suitable one.
Scalability and rapid growth are other characteristics that define startups. These are going big from the start, it is an ambitious project. On the other hand, SMEs are not born with that intention; they may be successful and grow over time, but in principle they settle for being profitable.
Here is the difference between SME and startup. The latter carry a much greater risk. Can you determine which of these models your business idea fits into?
