What are SMEs and How Do They Differ from Startups?

When you talk about small businesses, the first thought that comes to mind is small and medium-sized enterprises (SMEs), followed closely by start-ups. Though they look the same, SMEs and start-ups are two separate categories of business with different hierarchies, ambitions, and economic functions.

In this article, we’ll break them down—what they are, how they can get funds, and the challenges they each encounter—to see what makes each one unique.

SMEs vs. Startups

SME stands for Small and Medium-sized Enterprises, and according to the European Union, it has fewer than 50 employees and a turnover of less than €10 million annually. SMEs underpin most economies, generating employment, supporting local businesses, and creating stable growth. SME’s can range from small eateries and independent shops; their focus is on steady income and stability, with a steady customer base.

A startup is an early-stage company that can expand quickly and potentially disrupt existing industries. In a startup, an idea, product, or technology has a chance to scale fast.

Startups do not strive for stability like SMEs but rather rapid growth so they can dominate the market and perhaps take off around the world. They operate mostly in technology or e-commerce spaces, where disruption is the name of the game. A good example of a startup would be Airbnb, which started as a room rental company and expanded to be the hospitality giant in the world.

Key Characteristics of SMEs vs. Start-ups

Though both types of businesses may start small, their goals and growth paths differ.

Characteristics of SMEs

• Steady growth: SMEs aim for consistent, long-term growth rather than fast scaling.
• Regional focus: They usually cater to local or regional markets, providing reliable, essential services.
• Incremental innovation: SMEs tend to enhance their products and services over time rather than introducing revolutionary changes.
• Often family-owned: Many SMEs are passed down through generations or started by individuals seeking stability.

Characteristics of Startups

• High-growth potential: Startups are designed to grow quickly, often capturing market share in competitive industries.
• Global scalability: Startups are built to expand rapidly beyond their initial location.
• Innovation: Startups prioritize ground-breaking innovative products or services to differentiate themselves.
• Risk-oriented: Startups operate in a high-risk, high-reward environment with a focus on fast growth.

Size and Growth of SMEs vs. Startups

The size and growth rate of SMEs and startups are very different. This is because both businesses prioritize different aspects of their business.

Employee Count and Revenue

SMEs typically have 1-50 employees and capped revenue of 10 million euros, ensuring they qualify as small businesses and benefit from support programs. In contrast, startups may have few employees initially but are structured for fast growth and substantial market presence, potentially scaling from a few team members to hundreds within a short time frame.

Growth Focus

SMEs grow steadily, often focusing on retaining loyal customers. Startups, however, aim for rapid expansion, often pursuing national or international reach as quickly as possible. A bakery with 20 employees aiming for local customer satisfaction illustrates SME growth. A tech platform rapidly expanding across countries exemplifies start-up growth.

Development Stages

SMEs and start-ups differ in their development stages, which affects their business strategies. SMEs progress through familiar business stages: building a customer base, refining products or services, and sustaining growth. They focus on achieving reliable revenue and tend to plateau once they meet steady demand.

Startups undergo high-risk stages of ideation, market testing, and scaling. Their growth hinges on finding a successful product-market fit and scaling fast to capture significant market share. This stage can be volatile, with many start-ups failing to secure footing.

Funding Sources

Funding sources for SMEs and startups are often quite different due to their distinct growth ambitions.

SMEs usually rely on traditional funding, such as bank loans, family investments, or personal savings. Some may qualify for government grants or small business loans. SMEs’ steady growth models make them lower-risk investments.

Startups, on the other hand, typically require substantial funding to support their aggressive growth and development. They turn to venture capital, angel investors, and crowdfunding to secure capital, especially in fields like technology and biotech. These external investments support high burn rates until startups reach profitability or become acquisition targets.

Focus on Innovation

Innovation plays different roles in SMEs and start-ups. For SMEs, innovation is often about improving processes, customer service, or product quality to maintain their current customer base. They avoid the risks associated with market disruption, focusing instead on reliable offerings.

Innovation is central to startups, as they often try redefining or disrupting markets. Startups in areas like fintech or green energy strive to bring entirely new solutions that challenge existing industry norms, making innovation a core strategy.

Examples of SMEs and Start-ups

A local bakery with 20 employees focusing on excellent customer service and quality is a typical SME. It operates with a steady growth goal and doesn’t aim to expand beyond its regional market.

Airbnb started by offering a platform for people to rent out rooms and quickly scaled up, reshaping the hospitality industry. Its innovative approach, global scalability, and rapid growth make it a textbook example of a startup.

Benefits and Challenges of the Business Models

Conclusion

Small and medium-sized enterprises (SMEs) and startups are both very important economic engines but they have different histories. SMEs are focused on sustainability, local impact, and incremental expansion, while startups are focused on rapid scaling and innovation.

When entrepreneurs and investors are aware of these distinctions, they can match their objectives, resources, and risk tolerance to the right kind of business. SMEs and start-ups in different capacities – creating jobs, bolstering communities, developing industries.