As the country and policy makers focus on job creation and economic revitalization, they eventually look to small businesses. There are strong reasons to do so. Almost 99% of all US firms are small businesses (defined by the Small Business Administration as firms with fewer than 500 employees); they contribute 50% of the US GDP and are the source of most new job creation. Besides creating jobs, small businesses also help build the local tax-base, create and contribute to a sense of place, and provide an important source of wealth creation. Hence, if you want to address unemployment and improve economic vitality, strategies that support small businesses must be considered.
Finding ways to foster the success of small business is on the agenda for Living Cities’ Integration Initiative (TII) sites (Baltimore, Cleveland, Detroit, Newark, and Minneapolis/St Paul). However, the sites face the challenge of developing strategies that recognize the fact that small businesses are extremely diverse and take many forms: from the immigrant food cart to the small plumbing shop, from the 30-person advertising firm to a rapidly growing biomedical technology company. Although small businesses share a common set of needs: access to customers, capital, management skills, networks and supportive local governments, meeting these needs requires approaches that distinguish among the diversity of small business types. To help these Integration Initiative sites develop successful strategies for fostering small business success, we have created a short guide that will be presented at a conference on February 7th in Washington, DC. This paper provides a broad framework that outlines the different dimensions and characteristics of this sector to ensure that small business support strategies are targeted and customized to maximize success.
In the paper, we segmented small businesses along three key dimensions:
2) Growth Trajectory
3) Industry cluster
The vast majority of small businesses are sole proprietorships or very small firms (microenterprises) with fewer than five employees, while well-established small businesses may have up to 500 employees (a small minority of small businesses). For growth, we distinguished between high-growth firms (sometimes known as “gazelles”) that are significant job creators and may double in size within four years and “slower-growth” firms which may have vastly different needs for capital, marketing assistance and management support. Finally, we suggest segmenting firms by industry cluster, reflecting the fact that while common resources may be needed (such as incubator space), these resources will differ drastically if you are creating shared kitchens for food businesses vs. wet labs for fledgling bio-tech firms.
Potential Use in the Field
In the case of job creation, the segmentation around growth highlights key differences around the quantity and type of job created. A Kauffman Foundation study shows that just 1% of businesses generate roughly 40% of new jobs in a given year. If the objective is significant job creation, then an important focal point would be a highly targeted approach that supports high growth industry clusters and the ecosystem that nourishes them. If the objective is creating jobs for lower-income individuals, then stakeholders may consider focusing their attention on firms with fewer than 10 employees as these businesses typically have higher shares of employees who may be low-income.
Capital is another area where strategies need to be differentiated. To ensure access to capital for start-ups, different support strategies will need to be deployed depending on the segmentation. For example, a high-growth start-up will need access to angel and venture capital investors, while a slower-growth start-up will rely more on friends/family or microfinance providers such as Community Development Financial Institutions (CDFIs).
A robust small business sector is an important regional asset. Yet the range of small businesses is so wide that a “one size fits all” approach to addressing critical needs for capital, customers, management support and networks, cannot be effective in fostering small business success. By understanding the particular characteristics and needs of different small business segments, regions can most effectively target their resources in ways that increase the likelihood of meeting their objectives.