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In this article, I will be talking about the major differences between start-up and small businesses we will also see how the variation of start-up and small businesses can be calculated and why this time investors are more interested to invest in a start-up.
In the initial stages, both small businesses and startups start at a very small scale like a small business of car washing or furniture shop start with a small shop and big IT giants of today like Twitter Facebook and Google also were started from a garage or dorm room.
Now, lets look out for the differences on different measures:
When we compare small business and startup on the basis of risk, the risk involving the small business is very less.
When you start a small business you can start with revenue within a few days but that’s not the case with the startup, startup can be considered as an experiment which may work or not work.
So risk involved in the startup is very huge but the return can also be very high.
Now when we compare a small business and startup on the basis of pivoting of idea small business generally you start with some idea and they continue with the same idea throughout their life and that’s not the case with the startup, startup pivot the idea a lot.
Some startup even started with a sharing of photos application but later on strictly to some social e-commerce application.
While comparing the impact of a small resident startup we can see small businesses have a small impact on the small population in the nearby places but startup as a huge impact on the huge community of the people.
While comparing on the basis of global scalability,
One can see that small businesses revenue growth is based on the workforce they’re having and the increase of workforce increase the revenue but with this margins got decreased.
But that’s not the case with the startup, startup growth is based on the product that a number of users you are using, and as we know the replicating of ways of the product are almost close to zero.
When we compare the calculation of valuation of startup and small business,
we can see in this case of small businesses the valuation is calculated based on the revenue.
Let say a small shop which makes a revenue of about ten thousand dollars per month so in a year they will make about $120,000 per year.
So based on the profits they’re having the valuation that will be around 1x or 2x the revenue. So it will be around 120K to 240 thousand dollars.
While talking about the valuation of startup its valuation is not calculated based on the assets they have at that time but on the upside potential which they can have in upcoming years.
Why investors want to invest in start-up?
So now the question comes why investor want to invest in start-up although the risk is very huge.
Now let’s take example of a company A,
A was started with about three million dollar valuation in year one and at that time investor invested about $300,000 in this exchange of 10%.
So after about five years, you can see that the company valuation is grown from three million dollars to 30 million dollars.
Now the investment that time investor has made of three hundred thousand dollars will have about ten times return on that when the company got acquired or make an IPO.
So although the risk is high but investor want to make get back.
So this is all for this article.
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