As the US, or any nation, seeks to accelerate the pace of economic growth it would be very helpful to understand what makes the small business a big contributor to growth. 

If there is one thing that can be counted upon from a politician at any level it is that at some point the importance of small business will be noted.  It is almost reverential as paeans of praise are heaped on the noble entrepreneur.  They create all the jobs and they meet all the consumer’s needs. They are the very backbone of the community and underpin not necessarily only the American dream.  It would seem from the speeches that the US and other nation could do away with the Fortune 500 and thrive.

The reality is far different from what the myth would imply. In fact the vast majority of small businesses stay small, hire very few people, are quick to fire when times are tough and the majority of them play very limited roles in their community.  This is not to say that the contributions of small and medium sized business are not important – only that the majority of that influence is coming from a small number of these small businesses.

Analysis:  A number of studies have been done in the last few years trying to determine what the role of the small business really is.  In some cases there is not much more than anecdotal evidence of influence – too unique to the company and their environment to be all that instructive.  In other cases it is evident that there are some themes that distinguish one set of small businesses from the others.

At the top of the list is the intent of the entrepreneur. The vast majority of those who start or run a small business are essentially interested in creating a job for themselves and are content at that. They don’t want to create an empire or franchise the concept or grow all that much. This is not where their talent lies and they don’t want the headaches. Operating a restaurant or a dry cleaning store is plenty for them. The small business owner that dreams big is rare but these are the ones who will take steps to drive the economy and boost employment. These are the companies like Starbucks that start with a single shop in Seattle and now have outlets in every single structure in the US. The point is that 90% of entrepreneurs do not intend to get big and actively resist this level of complication.

The second factor of note is that most of the impact from small business comes from the start-up and not from the businesses that have been around for a while. The older the business the more stable it is likely to be – in terms of its profits, revenues and staffing (and credibility).  Its contributions are what they are and will not be getting any larger. The start-up is another story. To begin with there are many expenses involved in the starting of a business – regardless of how small. The fact is that most of these new companies will not survive their first year, but in that year they will be renting space, buying equipment, paying for marketing and business services and they will be hiring. Even as they struggle to survive they will be helping other businesses thrive. The older business is also spending some money but on average it is only a quarter of what the startup spends.

A third factor important to the role of small business in economic growth is the desire to innovate. The majority of small companies are not innovators as they have either taken a path that has already been well laid out or they just don’t have the risk tolerance to try something really new. Innovation is not a guarantee of success and there is nothing to suggest that innovative solutions or plans are even good ones.  They are simply different and it is entirely possible that the differences are bad.  The company that innovates successfully has the potential to drive a whole new segment of the economy or they may be able to create breakthroughs in productivity and efficiency. The point is wanting to innovate is rare enough and doing so successfully is rarer still.

If one puts all these together one gets a situation in which small business contributes significantly to the economy only if the entrepreneur really wants to grow, is founding something new and desires to be innovative. This should help inform the system designed to support the growth of small business but a quick look at what is generally offered in the way of help demonstrates there is not all that much focus on the businesses that meet the above criteria.  The ambitious entrepreneur often struggles to find people willing to back their vision.  They are generally urged to set their sights lower – just build a small success and see what happens.  The problem is that planning for small makes getting bigger that much harder.  Starbucks founder Howard Schulz started with the assumption there would be millions of outlets. The start-up is often at a disadvantage when competing with an established company when it comes to getting capital.  The vast majority of SBA loans go to companies that have been around for at least five years and most banks and investors would rather get engaged once there is some kind of proof of concept (SMEs generally fail to produce an adequate business plan and consistent follow up reporting for their bank).

Perhaps the hardest hurdle to clear is innovation. The nature of innovation is experimentation and the essence of experimentation is repeated failure from which new lessons are learned.  The innovation that works right away is usually not all that innovative. The game changing actions did not emerge fully-formed. Most are the result of many trials and errors.  The problem is that few are patient with failure and most new companies lack the time and resources to make the necessary mistakes.   The point is that small and medium sized business can indeed carry an economy forward but only under the right circumstances.  It can be argued that the challenges of the start-up have never been more profound and this has to alter if there is to be the small business growth that everyone seems to want and need.

Dr-Chris-KuehlCourtesy of Dr. Chris Kuehl, Armada Corporate Intelligence. Dr. Kuehl is an ex officio Director of BIIA and regular contributor to the BIIA Newsletter