Why Small-Biz Expansion Depends on a Few High Fliers
How much will the economy grow this year? How can we help it grow more? Will tax cuts stimulate growth? Will the next debt-ceiling drama quash it?
Small-business growth is a crucial element in the overall health of the U.S. economy. As politicians never tire of telling us, small companies create more jobs than large ones, and start-ups are often the engines of innovation that drive industries into new, profitable directions.
But just as small businesses are founded for many different reasons and fail for many different reasons, they also grow for different reasons. It's impossible to talk about small-business "growth" as a single, monolithic phenomenon.
First of all, many small businesses simply don't want or need to grow. And -- brace yourself -- that's just fine.
According to Census data, about three-quarters of all U.S. businesses have no employees. These businesses encompass the people who are doing some consulting between full-time jobs, or the parents who work from home part-time so they can pick their kids up from school. They serve a specific purpose and provide income, but very few were ever founded with the intent of expanding.
Small-business growth rests, then, with a very small subset of companies that want to grow. What qualities do these companies share? And how can they be nurtured along?
In an article published recently in McKinsey Quarterly , two analysts examined the common attributes of high-growth firms (defined as those that double their revenue and employment every four years). One striking similarity is age: Three-quarters of the companies that are growing the fastest are less than five years old.
But that was about the only common ground. In other respects, high-growth firms are a strikingly diverse group. Contrary to stereotypes, high-growth firms can be found in all regions. (Silicon Valley, it turns out, doesn't have a monopoly on entrepreneurial drive.) Companies with high potential for growth can be found in big cities, suburbs and rural areas, so geography alone doesn't seem to be a deciding factor.
And contrary to the all the tech and green-energy hype, no particular industry has a monopoly on growth, either. Studies have found that high-growth start-ups have made up a slightly higher percentage of companies in fields such as oil and gas extraction, industrial instrumentation and social services in recent years. But the opportunities for growth exist almost everywhere. Promoting growth in only a few key industries means missing out on possible success stories elsewhere.
According to a research paper published by the SBA, High-Impact Firms: Gazelles Revisited , many state and regional economic programs don't address directly the needs of companies with high growth potential. State economic-development offices focus instead on appealing to large corporations, hoping to attract a manufacturing plant or corporate headquarters. Many states also do a good job of encouraging would-be entrepreneurs to get started by sponsoring education programs.