If you’re an aspiring entrepreneur or just anyone who follows the news now and then, you would surely have come across the term ‘’start-up’’ and ‘’small to medium enterprise’’ (SME). Essentially, start-ups and SMEs are both approaches and arguably models which you can use for your business, with different defining characteristics. The approach can determine the long term trajectory of your business, as well as your daily immediate operational procedures, and priorities.
The two approaches can be defined according to its intent. Start-ups exist with innovation as its core element, aiming to disrupt the market with a highly scalable and impactful, innovate business, but with a high risk proposition – meaning the business will either be highly successful, or fail dismally. On the other hand, an SME intends to establish stability through a niche market thereby providing employment, economic stability and sustainable growth. If you are trying to maintain guaranteed ownership of your business within a local market that has stability and gradual growth, you would look to establish a SME. But, if you are looking to develop a larger business that will disrupt markets and sell shares to help you scale faster to broader and global markets, then you would go the route of a start-up. The approach you take should be informed by your long term vision and goals, because they also impact alternative revenue (income) streams as well as potential for scalability.
Below are the main differences between start-ups and SMEs:
- One of the aims of a start-up is to disrupt markets with innovative products or services in order to grow and influence a global market. They are typically founded in, but not limited to, the tech industry in terms of innovation. SMEs are considered mainstream businesses and even though a product or service of an SME may be innovative, they do not exist to disrupt markets. They are cornerstones of local economies and employment.
- A start-up builds on experience as it grows and adapts and changes with the way the market moves with a ‘’learn as you go’’ approach. Therefore, failure is not seen as a hurdle but rather a lesson on what works and what doesn’t. Learning through experience is a helpful teacher but can also be costly (on both time and money); and as an entrepreneur you need to take calculated risks. In contrast, an SME is far more structured and designed to be sustainable from the get go. The approach is to analyse a market, find a gap, find consumers and cultivate that as your niche local market. This requires a good amount of market research and planning.
- A start-up is often a temporary organization in the sense of existing until failure or adaptation. It is designed to search for a repeatable and scalable business model. The start-up will change business models multiple times to find the right one. A SME business is self-sustaining and should generate revenue from the first day of opening, meaning the business model is pretty much set beforehand. SMEs typically exist for some time until they are passed on or sold, whereas start-ups are not always invested in longevity until a scalable model is found.
- A start-up typically requires a significant amount of external funding and investments. They are therefore more likely to raise capital by registering as a company which can sell shares (equity financing) to push financing. Start-ups thus do not prioritise controlling the business, but instead growing the business for greater international market capital. SMEs on the other hand, don’t require major investments and time, as the business model aims to generate sustainable profits from the on-set.
- Unpredictability is a defining feature of a start-up, as there is an openness to trial and error learning, whereas SMEs work with a known formula that is reliable, however, is paced at a much slower rate
Financial technology (fin-tech) is one of the fastest growing industries in the South African start-up landscape. As mentioned previously, a big part of start-up culture is funding. In 2020, the funding capacity grew by 80%, demonstrating the need for fin-tech solutions in the future of work. Some examples of start-ups that are growing well is Smile Identity, which is an Identity Verification tech solution. Another example is Flutterwave, which is a payment solutions technology, and Chipper, which is a borderless money transfer solution for Africa.
Chipper has grown, not only increasing its funding from USD 6 million in 2019 to USD 13.8 Million in 2020, but also increasing their user pool from 600 000 in 2018 to 3 million over the course of the Covid-19 pandemic. This growth trajectory was fast and meant that as the business grew, the business model had to be adapted as well in order to be agile for large scalability.
SMEs in South Africa account for about 60% of employment in South Africa, across sectors. They cover various industries from retail, to finance, to property, as well as beauty and hospitality. They are seen as the backbone of our economy, providing 22% turnover in 2019 compared to medium sized business at 10% in the formal business sector. The growth rate of small businesses from 2013 to 2019 has grown at an annual rate of 12.3% each year. Examples of SME businesses are hairdressers, tutors, grocery delivery services, project and events management, social media agencies and consultancies, and more. Many of the entrepreneurs featured on the redHUB site have SME business models. Businesses like Portia M, Switch Beauty in the health and beauty sector to Pimp My Book and Drip SA footwear in the retail sector are all examples of SMEs.
Start-ups now make it possible for ideas to thrive, and if you have an idea which you think is a game-changer, but requires capital which you don’t have, the start-up approach allows you to explore that. There is a plethora of support that now exists for those wanting to pursue start-ups as well as funding pools and sources which invite start-ups to pitch their ideas and win funding or investments. Alternatively, if stability and sustainability is what you seek, and you want to add to economic growth and employment, as well as have minimal risk of profit and capital loss, then an SME is the approach you should look at. Business model canvas is a good tool that one can use to map out your business plan and model to get a better understanding of your market, various business segments (alternative revenue ideas), and to understand your customer needs on an evolving basis, which may also inform which approach makes sense to you. Ultimately, it’s up to you how you want to structure your business in line with your long term vision and goals.