Skip links

Buy a Small Business or Invest in a Startup? What’s the Difference?

They aren’t too similar, but to some, being an investor and being an entrepreneur often seems one and the same. After all, both start a business with some capital invested, right?

Some might even equate this to when you buy a small business because it shouldn’t be too different from a startup, right?

Defining Roles in the Business Chain

There are plenty of misconceptions floating around, but let’s put them to rest and give you an idea of the various roles that businesspeople acquire.

The Investor

The investor is typically at the backend of a business, being there well before it starts, depending on the type of investor you are. Most of the time, when we refer to someone as the investor who poured money into the business first, we are talking about Angel Investors, who were the first to provide funding for the business.

Investors typically take in the most risk in the business chain, as they provide capital with the promise of a higher return later. At this time, the business is not formed or at least is in a particularly nascent stage where any returns are at least a year or two away.

Sometimes, new investors come in through buyouts, acquisitions, mergers, and IPOs. We can all buy stocks in various tech companies like Apple, Tesla, AMD, and more, but that doesn’t make us investors. Yes, when you buy a stock, you are betting that it will increase in value in the future, but this speculative investment is minimal and relatively irrelevant in the grand scheme of things. Even if you buy thousands of shares, you have a fraction of a fraction of the capital invested into the company.

A regular person buying stocks won’t have the risk tolerance of providing millions or even hundreds of thousands of dollars into a startup. You put in money in the stock market because you are betting for a future return, but the risk is significantly less due to it being an already established company.

The Entrepreneur

Typically, a business is formed to solve a problem, but where entrepreneurs differ is they actively seek out potential problems and look for their solutions.

Someone looking to build a small business isn’t an entrepreneur but someone who provides that small businessperson to start their journey. They can provide the guidance, the organization, the systems, the funding, etc.

Entrepreneurship is a catch-all term that has become more of an industry trend than a legitimate profession. An investor can call themselves an entrepreneur, but there is a fundamental difference between them.

The primary separation is that an entrepreneur establishes a business, but more often than not, they sell it off for someone else to manage and start a new venture. Someone who is a true entrepreneur in their profession is interested in getting businesses off the ground. They will not buy a small business already established in its respective market. They want innovation, new bespoke solutions, and business owners to have the guidance and processes to reach their potential–and more.

A small business owner whose business is already set up may hire a startup business consultant to help streamline their operations and improve their financial well-being. These consultants still help with processes but do not provide the ‘organization’ an aspiring business owner might need.

The Startup

Most businesses are doomed to fail. However, that doesn’t mean that the business wasn’t operating correctly or that it didn’t make any more. A business failure should be seen as inevitable, as trends change and people become used to new things.

Take Nokia’s phones as an example. They were–and still are–renowned, but with smartphones and the refusal to innovate, Nokia died out and now controls less than 5% of the global smartphone market share, where its previous phones had about 40% or more. This is more of an example of stubbornness and bad business practices, but it shows how even market juggernauts can be ‘out-trended’ by another brand.

That is one of the first warnings that most startup founders get from investors, and that is the risk. Startups aren’t small businesses but are money-hungry giants that gobble up cash like it’s nothing. While founders have a fiduciary duty to their investors, most founders, early in their years, may not have the experience necessary to manage their business effectively.

Whether you’re an angel investor or not, investing in a startup is already incredibly risky. Even if industry experts and experienced business owners are starting the business, there is still an inherent risk of failure. A startup business consultant can be hired, but ultimately, the decisions are up to the founder and owner.

The Small Business Owner

That takes us to the small business. Even if a business has been around for decades, it can still be small. There are various definitions of businesses based on growth, revenue, and employee numbers, but overall, a small business can last for years. That means the considerations for buying a small business or investing in a new one are completely different.

A small business could be well managed or have miraculously survived after years–it doesn’t matter. The risk is not less or more, it is simply different. An established business might still need some capital, so it’s not that they cannot benefit from investments, either.

Small businesses also operate in specific niches and can be built around a very specific market. Some people might set up a general store or a pharmacy and live off that small store for decades, but others with more boutique stores might only last ten years at most. Different businesses bring different values, and in the digital age, even businesses with a few employees can bring in millions of dollars in revenue. This makes buying a small business even more complicated as they may have no high-value assets.

Buyouts and the Small Business Factor

Most of the time, an entrepreneur will launch a small business and sell it off to someone else to manage so they can start a new one. Typically, this is done when the business has started earning its own revenue, but there are plenty of reasons why buyouts happen.

For example, if you are an investor in a corporation, you can buy a small business to streamline operations, which might not always require a stable revenue stream. At times, some companies buy a business to sell off its assets, which can happen when the business loses plenty of capital every quarter. Sometimes, the buyout is to simply eliminate competition.

Moreover, even a small business buyout can be a process that takes months of hard work from both sides. You aren’t just throwing money at a business based on its valuation. There is research, audits, documents to examine, and much more unglamorous work that is rarely ever mentioned in any buyout news you might hear.

Investing and Breaking into New Markets

If you invest in a startup, it is largely up to you to know the market you are investing in, research the competition, your investment, the business model, revenue plans, and more. The one running the business will be doing their own, but full-time investors don’t just have the money.

Typically, a full-time angel investor will invest in tens or even hundreds of businesses, knowing full well that they all could fail. However, as an investor, you must look after your business and ensure it runs well. Investing in a startup typically grants you a seat on the board, where you can influence the decisions made. You aren’t running the day-to-day operations as an investor, but all those tens or hundreds of businesses an angel investor will have will be well-researched, well-understood endeavors.

For example, an angel investor pouring money into this new business called Uber must understand the business model they intend to base it on. While Uber had not made any profits for the 10+ years of operation, it only just recorded its first profitable year as of August 2023, which means investors are just now getting a return on their investment.

However, that has also been the Uber business model and even someone with the funds to buy a business will not be able to withstand millions invested each year with no return.

The Risk Tolerance Factor of Investing

Whether investing to buy a small business or for a startup, the difference can be simplified to risk tolerance–more specifically, your risk tolerance. An investor can help manage a company, and an entrepreneur can focus on more day-to-day operations, but both are taking on different levels of risk.

Yes, some entrepreneurs and even investors go all in with no additional funds for a rainy day, but that is an incredibly risky move that no serious investor would ever recommend. This approach is not just dangerous but is also impossible for most regular people. It is a high-risk, high-reward game that may or may not even have a payout.

Leave a comment