What Type Of Business Is Entrepreneurship – America loves small business. A 2010 survey by the Pew Research Center found that the public has a more favorable opinion of them than any other institution in the country—beating churches and universities, for example, and even tech companies. As Janet Yellen pointed out in a speech last year, “the opportunity to build a business has long been an important part of the American dream.”
Governors, mayors and presidential candidates are therefore eager to proclaim their support for small businesses, but what do we mean by “small” and why do they matter? This is the part where we are usually told that it is the startups that matter, not small businesses, because they are the ones creating all the new jobs. There is truth in this, but it is also misleading. A sweeping policy that seeks to create just another Silicon Valley could be a disaster.
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Certainly, the local cleaner will not employ many more people next year than this year. But these Main Street businesses employ many Americans—more than 57 million—and the policies they require are not the same as those required by startups. If policymakers really want to help small businesses—and they should—they need to understand that not everyone is the same. Each type has a way that it contributes to employment and the vitality of the American economy.
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There are 28 million “small businesses” in the US, defined as companies with fewer than 500 employees, and they fall into four distinct segments:
(Note that these segments are not mutually exclusive. They are intended to represent different types of companies of interest to policy makers.)
Most of these small businesses actually have no employees. About 23 million are sole proprietorships, covering a wide range of fields, from consultants and IT experts to paints and roofs. While nearly 15 million self-employed earn more than $10,000, recent research shows that sole proprietorships are achieving record profits—and many indicators predict that the number of these businesses will continue to grow as technology becomes more geographically flexible and baby boomers grow. The boomers are taking the step to open their own companies. They provide income to their employers, but do not create jobs by definition.
The next largest segment of small businesses consists of what I call Main Street Entrepreneurs. These include dry cleaners, restaurants, auto repair operations and local retailers that are part of the fabric of our daily lives. There are about 4 million of them, and they employ a significant part of the workforce. Many of these businesses exist primarily to support a family and are not primarily focused on expansion. Although these businesses have high churn rates—opening and closing frequently—they are important to America’s middle class.
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An important but less documented type includes the estimated one million small businesses that are part of commercial and government supply chains (known as suppliers). These businesses are often focused on growth, either domestically or through exports, and operate at a higher level of managerial sophistication than high street companies. Companies like Hooven-Dayton in Miamisburg, Ohio, provide the labels for Tide and Mr. Clean. A strong network of small suppliers to the greater US is important to the long-term competitiveness of corporations and companies considering moving manufacturing back to the US from abroad. For example, a research and supplier park established in Prince George, Virginia in 2010 was part of bringing manufacturing Rolls-Royce to the region. As Michael Porter and Jan Rivkin of Harvard Business School point out, strong supply chains lead to “lower logistics costs, faster problem solving, and easier co-innovation.”
Of the other small businesses, about 200,000 are eligible for start-ups and high-growth companies. These are companies that punch above their weight when it comes to job creation. A 2008 study by economist Zoltan Ax found that only three percent of all businesses could be classified as high-growth or “deer” businesses, but they accounted for 20 percent of all job creation. A recent breakthrough by Scott Stern and Jorge Guzman of MIT showed that the 5% of listed companies in Massachusetts that provided 77% of the growth results can be identified by growth factors evident at the time of actual business registration. This is the disproportionate impact of high growth companies on the US economy.
Treating all small businesses the same can lead to misleading messages and poor policies. For example, a high street mom and pop shop has different financial needs than a high-tech start-up. One may need a bank loan while another may need a patient capital investor like an angel or venture capitalist. Establishing an innovative ecosystem around a university or emerging technology helps potential high-growth entrepreneurs, while revitalizing a city center can help local high street businesses. (In an upcoming article, we’ll look at how in several policy areas—access to capital, skills, and creating an innovation environment—the right policy depends on the type of small business you’re trying to help.)
Once policymakers understand the different types of small businesses and hear that startups account for the lion’s share of new job creation, they are sometimes tempted to focus only on those growth companies. It’s a mistake. Since it is important to distinguish between small businesses it is important to understand why each is important.
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Suppliers are an important, and underappreciated, part of this equation because they create high-paying jobs in both the small manufacturing and service sectors. And the success of large companies and growing startups often depends on a strong group of suppliers.
Sole proprietorships and high street businesses, for their part, can provide an important path to economic mobility. And while the high street may not do much networking
Jobs, it employs a large number of people. These businesses are also restaurants, shops and storefronts that design and reflect the identity and values of the community.
Each type of small business is important for different reasons. It is important to remember that what helps one group will not necessarily have the same effect or will not affect another. Valuing small businesses is justified for their role in driving an innovative and competitive economy and promoting social mobility, but not treating them equally when it comes to helping them succeed. Survival is essential.
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A few years ago, if you had an idea for a really good game, app, or other program, the only way to bring it to life was to know code (and pray you knew the right programming language). or prepare for it. Learn on the go. If you had the money, you could hire someone to do it for you. It was more or less.
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