There’s no question that small businesses play an important role in our communities and in the country overall, from the dry cleaner on the corner to the local veterinarian or plumber to the vast array of independent retailers. But with the proliferation of startups and online businesses, too, it’s easy to romanticize every small business story into a potential Facebook (started in a dorm room), Apple (began in a garage) or Nike (launched from the trunk of a car).
Couldn’t any business, we rationalize, with the right idea and combination of hard work and luck, grow to become the Next Big Thing?
The answer is probably not—and probably more important than that, many, if not most, don’t want to.
Business consultant and former small business owner Josh Patrick wrote about this very thing last November in The Big Decision: Stay Small or Try to Grow on the New York Times blog, You’re the Boss. Definitions of ‘traditional’ small businesses vary, but Patrick defines them as those with five to 25 employees and $1 to $5 million in sales. He cites Census Bureau data that puts U.S. small businesses at 1.7 million, with only 300,000 in the lower middle market—an indicator, he says, of just how difficult that growth can be.
Drawing on his own experience with a family business, Patrick points out that deciding to push beyond being a small business to the next tier—lower middle market—usually means acquiring new skills and taking on a whole new level of complexity. In fact, the nature of your business can change entirely, along with what it will take to operate it. While you may have been enjoying a certain comfort level in a small business that had become, for the most part, predictable and manageable, growing it can take you right back to working around the clock. When the cost-benefit analysis is done, some business owners will opt to try to grow; others will choose not to. Both are legitimate decisions. Mr. Patrick chose to grow; his father, on the other hand, decided not to.
But the notion of a small business making it big is one that persists: It is part of the American dream, after all. But when you dig even deeper into the numbers, it seems that much of the small business ‘story’ told every day is more myth than fact.
A year and a half or so ago, University of Chicago researchers published a study called What Do Small Businesses Do? The study examined the small business landscape in the U.S. from the perspectives of size and growth and also innovation. The researchers concluded that not only will the vast majority of businesses won’t grow beyond a certain point (Of all U.S. firms with paid employees, 90 percent have fewer than 20 employees.)—but also that most don’t want to.
Business owners, the study says, more often have non-monetary reasons for wanting to operate a small business. Sure they want to make a decent living, but being your own boss and flexibility often out rank financial reasons. Most have absolutely no interest in becoming the next Microsoft or Google.
We—and politicians—are prone to using terms like small business owner and entrepreneur interchangeably. We assume that small businesses across the board are innovative, coming up with new ideas one after the other. Not so, researchers say. The vast majority of small businesses fall within a relatively narrow band of business types, and most are not providing new products and services, but instead offer those already being offered by other businesses. Innovation comes from a tiny percentage of small businesses.
Read some commentary about the study here, and if you’re really brave, the entire study is here.
Obviously, there’s room for all types and sizes of all small businesses; all have their place. But understanding the distinctions between typical small businesses and true entrepreneurs, for example, is important in how we view small businesses, how expectations are managed and where we look for innovation. This understanding is also critical in shaping public policy and determining how government support is provided to small businesses and entrepreneurs.
