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What Is the Difference Between a Startup and an SME?

Published on Dec 27, 2024Updated on Feb 7, 2025

What Is the Difference Between a Startup and an SME?

Have you ever wondered why some businesses aspire to scale globally while others focus on serving their local communities? The difference between startups and SMEs (Small and Medium-sized Enterprises) in India extends beyond size or revenue. It also includes their purpose, growth, strategies, and the impact they aim to create.

Both startups and SMEs play a pivotal role in shaping India’s economy, but they follow different paths. In this article, we’ll explore the key differences between them and delve into what makes each unique.

SME Definition and Examples in India

SMEs are considered the backbone of the Indian economy. They account for nearly 30 % of the GDP and employ millions across various sectors. SMEs are typically defined based on investment and turnover, as outlined under the Micro, Small, and Medium Enterprises (MSME) Development Act of 2006.

Examples of Indian SMEs

SMEs are businesses that focus on steady growth, community impact, and profitability. Unlike startups, their goal is not to disrupt an industry but to serve a specific market efficiently. Some examples of SMEs in India include:

  • A local bakery in Mumbai that has been serving the community for generations.
  • A family-owned textile unit in Surat that supplies sarees to regional markets.

How Are Startups Different?

Startups in India are often synonymous with innovation. Companies like Flipkart, Byju's, and Ola started as small ventures but quickly scaled to dominate their respective industries. Startups typically operate in uncharted territories and introduce unique solutions to existing problems.

For instance, Zomato revolutionised the food delivery space, while Paytm has promoted financial inclusion by enabling millions to access digital payments. One major element that sets startups apart from SMEs is their high-risk, high-reward nature.

Startup Business and SME Classification in India

Startups and SMEs can be classified based on their size, investment, and operational goals. Let’s understand the startup and SME classification below:

Types of Startups

  • Scalable: These are high-growth businesses designed to scale quickly, often in industries like technology.
  • Small Business Startups: These startups are typically local or small-scale businesses that provide services or products within a community or specific industry.
  • Buyable Startups: These startups are created with the intention of being acquired by larger companies or conglomerates.

Other common types of startups include lifestyle startups, social startups, small business startups, and so on.

Types of SME Business

  • Micro Enterprises: Small-scale operations with an investment of up to INR 1 crore and turnover of up to INR 5 crores.
  • Small Enterprises: Slightly larger businesses with an investment of up to INR 10 crores and turnover of up to INR 50 crores.
  • Medium Enterprises: Larger units with an investment of up to INR 50 crores and a turnover of up to INR 250 crores.

Characteristics of Startups and SMEs

Startups and SMEs differ significantly in their operations and growth strategies. Their characteristics include:

Startup Business Characteristics:

  • Innovation: Startups explore new ideas and unique solutions, whether it is using AI for customer service or developing applications that connect farmers directly to buyers.
  • Scalability: They aim for rapid expansion and often aim to target the global market.
  • High-Risk Tolerance: The ability to tolerate higher risks translates into the potential for higher rewards and exponential growth for successful startups.
  • Tech-Driven: Most startups use technology to scale quickly and efficiently.

SME Business Characteristics:

  • Stability: SMEs typically focus on consistent growth within established industries such as textiles, manufacturing, and food processing.
  • Local Impact: SMEs cater to specific regional markets and often play a crucial role in their communities.
  • Low-Risk Tolerance: SMEs tend to grow slowly and steadily. Their focus is primarily on profitability rather than rapid scaling.
  • Traditional Approach: Many SMEs combine traditional practices with modern methods, such as mixing manual labour with basic machinery.

Funding for Startups vs SMEs in India

Startups typically rely on external funding sources, including venture capital, angel investors, and government schemes like Startup India. They often go through multiple funding rounds, ranging from seed funding to Series A, B, and beyond.

In contrast, SMEs usually rely on more traditional funding avenues, such as business loans. Reputable lending institutions offer collateral-free loans with competitive rates and terms to eligible businesses, helping them scale without taking on excessive financial strain.

Final Thoughts

Startups aim to change an industry with their solutions, innovation, and risk-taking abilities. On the other hand, SMEs keep the economy running by offering stability and employment. Whether you're aspiring to launch the next unicorn or planning to build a community-focused business, understanding these differences will help you make the right choice for your entrepreneurial journey.

SMFG India Credit offers unsecured business loans of up to INR 75 lakhs* for businesses with at least 3 years of business operations and 2 years of steady profits. Apply online today to take advantage of competitive interest rates, flexible repayment tenures, and transparent fees and charges.

* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us

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