RSSAtlanta is one of the ten best cities in the U.S. right now for job hunters, according to a recent series in Business 2.0. Newell Rubbermaid and Home Depot are looking for new employees, according to the article. However, the biggest reason to move to the Big Peach, editors say, is not because of the big companies, but because the city is also home to hundreds of young businesses with fewer than 12 employees – many of which are hiring.
Although Atlanta’s growth over the past two decades has been exceptionally strong, the outsized contribution of small business to its growth is actually not unusual. Professors at Emory University and its Goizueta Business School say that in the past decade, small business has created the majority of jobs in the country.
Companies of fewer than 20 employees account for half of nonfarm gross domestic product, and yet have generated 60% to 80% of the new jobs in the past decade, according to the U.S. Small Business Administration (SBA).
The growth of small businesses is a direct outgrowth of what is happening in corporate America, says Edward Hess, adjunct professor of organization and management at Goizueta; executive director the Center for Entrepreneurship and Corporate Growth and executive director of the Value-Based Leadership Institute. “Globalization, corporate efficiency, and the tendency toward ever-greater consolidation keep pushing more and more people out of the largest corporations,” he explains, “and that encourages more people to start their own businesses.”
It may not be surprising that small business is growing in Atlanta — Atlanta is a fast-growing city and Georgia a fast-growing state — but in fact small businesses are thriving throughout the U.S. In 2005, the latest year for which statistics are available from the SBA, 671,800 new firms were started. As of the end of 2005, there were a total of 5.99 million firms with employees, the vast majority small businesses, and 19.86 million with owners but no employees at all. Some authorities estimate that nearly 25 million people or 16% of the American workforce, are now self-employed – and that the number is likely to grow.
“Is small business the future of the American economy?” asks Hess. “It sure looks that way.”
The power of small cap stocks
Small companies are a hidden source of strength in the stock market as well. Big companies generally get the press, but the smallest public companies—those that become big enough to issue publicly traded stock– are actually better performers. “Over long periods of time, small cap stocks tend to outperform bigger cap stocks on an absolute return basis,” says Jeffrey Busse, a professor of finance at Goizueta.
The Russell 50, for instance, an index of the 50 largest U.S. stocks, grew by an average of 6.59% over the past 10 years, compared to a 10.23% annual rise for the Russell 2000, an index of 2000 small caps (stocks of companies with an average market cap of $1.2 billion) – a huge difference over that long a period: $100 would have grown to $189.31 invested in the largest caps but the amount would total $264.85 if invested in the small.
But if prospects are so good for small business, why do so many investors tend to overlook the outsize contributions all these nearly anonymous enterprises make to the economy? Name recognition, for one thing. “People just aren’t aware of these companies,” says Busse, and many investors tend to want to stick to names they know.
In addition, small cap stocks are not especially popular for mutual funds, not only because of name recognition but because it tends to be more expensive to buy the shares of many small companies than one big company, according to Busse. On top of that, thinly traded stocks can be highly volatile – a nice quality when the stocks are going up, but not so nice when they are going down and a single large sale can drag down the price.
No respect from government, either
Wall Street isn’t the only place where small business doesn’t get the respect it should. The U.S. government also tends to overlook the importance of small business. In spite of advocacy by the SBA and the potential political heft of those millions of small business owners, the cost of complying with rules and regulations is actually much higher for smaller businesses than it is for the biggest, by several thousand dollars for each employee. Firms with under 20 employees spend over $2300 a year more in meeting regulations than firms of more than 500 employees – an average of $7,647 for the smallest compared to $5,282 for the largest, according to the SBA.
Paul Rubin, a professor of law and economics at Emory, says that the difference in cost is largely because there is a large fixed cost component in handling regulations. “You have to hire a lawyer, you have to hire a staff,” he explains. But a larger company doesn’t necessarily have to hire more lawyers and compliance staffers simply because it’s larger. The SBA is trying to compensate for that issue, he says, but its had a limited ability to correct for the problem because it is inherent in the nature of regulation.
State and local governments can be just as prejudiced against small business as big government. Economic development authorities tend to spend a lot of time and money to court large companies to open plants in their town, according to Hess. When the town does land such a big deal, the plants do create jobs, he says, but the size of the subsidy often reduces the actual impact those new jobs might have.
The experience of two economic development programs in Virginia would seem to bear out Hess’s view.
Gov. Timothy M. Kaine of Virginia recently announced that Virginia and the city of Richmond had lured MeadWestvaco, a Fortune 500 packaging company to move its headquarters to Richmond, offering $6 million in incentives to bring in an estimated 400 jobs, according to a February press release of the Virginia Economic Development Partnership.
This sounds like a reasonable deal, but on a dollar-for-dollar basis, Virginia might have been better off pumping some money into the New Century Venture Center in Roanoke, Va., an incubator that grew up from a single state and federal grant of $500,000 in 1996. Since it was established, the New Century has created over 25 successful companies – and more than 200 jobs, according to an article on the National Business Incubation Association website.
Creating conditions to foster entrepreneurial activity is often more cost effective — and simpler — than the traditional big company incentive deals, contends Hess. Local governments can help improve the environment for entrepreneurs by funding entrepreneurial incubator programs or funding entrepreneurial networks to help mentor new business owners. The NBIA, a trade group of small business incubators, claims that publicly supported incubators create jobs at a cost of about $1,100 each, whereas other government-supported job creation mechanisms can cost taxpayers as much as $10,000 each.
Yet company formation is not a simple formula. Incubators can help, but businesses are started as a result of a variety of factors, Hess says, such as access to capital and an educated work force. Recent SBA research, has also found that a variety of factors affect the growth of small business. Spending on education, highways, and natural resources positively affects the rate of startups— and to a lesser extent, expenditures on healthcare, parks, and recreation.
Business formations sometime occur simply because a number of people who knew each other from the same college decide to start a business nearby. This has often been the case at Stanford University, which had Silicon Valley grow up around it. Other times, this process is aided through more formal means, such as Atlanta’s EmTech Bio, a commercial research and development center whose partners include Georgia Tech, Emory University, and the Georgia Research Alliance.
A secure job…with a start-up
Investors and politicians may not give small businesses the respect they deserve, but job hunters should. Healthy small companies tend to be growing faster than large ones, says Ted Daywalt, CEO of VetJobs.com, an Atlanta-based online job service for military veterans. Fast growth translates into more opportunities for promotion.
Indeed, taking a job at a small business may not be any more risky, statistically, than accepting one at a large firm, especially considering the speed with which many people change jobs. According to a 2006 SBA study, 75% of businesses with more than 4 employees that existed in 1998 were still in business in 2003.
Additionally, small business owners are less inclined to fire quickly than big businesses, according to Daywalt. Many large companies have subscribed in the last two decades to consulting fads such as Business Process Reengineering, which encouraged indiscriminate layoffs. “People became widgets, just another stock item in the company,” notes Daywalt, who is a Goizueta alumnus.
Perhaps, Daywalt adds, small business owners are less quick to layoff workers because they actually know what it costs to train somebody. The typical small business manager “understands turnover much better than a corporate exec in a large big box store,” he explains.
Isn’t it romantic?
Wall Street, Capitol Hill and City Hall may not give small business the encouragement it deserves, but the many stories about hero-entrepreneurs may bear some of the blame as well.
All those profiles of remarkable Hewletts and Packards who built something in their garage that changed the world may be pretty discouraging for a person who might succeed with a simpler plan, such as becoming a dry cleaner or buying a Krispy Kreme franchise. The good news, for those who suspect they may never be in touch with their inner Michael Dell, is that there isn’t really such a thing as an entrepreneurial personality, according to Hess. “The research is pretty clear that entrepreneurship is not personality dominated, it’s not trait dominated, it is a mixture of environment plus opportunity,” he says.
However, learning certain entrepreneurial skills can improve chances of success, Hess adds. He believes that some skills, such as opportunity recognition, and learning how to adapt to changing circumstances, can be taught – at least to an extent: “It’s not like math or engineering skills or learning a language, but I think you can increase somebody’s ability to do those things more productively or efficiently,” he says.
Nor do you necessarily have to wait for a big idea. Entrepreneurs start companies for several different reasons, according to Andrea Hershatter, associate dean and director of the BBA Program at Goizueta, who studies and teaches entrepreneurship.
“There are entrepreneurs who start with an idea and build a business around it; entrepreneurs who start with the desire to build business almost independent of the idea,” she says, “and accidental entrepreneurs who find themselves creating business because the moment seems to demand that they do so.”
Among the high-flying entrepreneurs, the idea-driven, in Hershatter’s estimate, include Howard Schultz of Starbucks, who wanted to bring the Italian espresso bar environment to the U.S., and Phil Knight, of Nike, who, as a runner, believed someone should import low-cost running shoes to the U.S.
Others, such as Wayne Huizenga, are entrepreneurs who thrive on the excitement of starting a business, she says. Huizenga, for example, bought a friend’s garbage collection company and turned it into Waste Management, then subsequently created Blockbuster and AutoNation. Richard Branson, who started by publishing a college magazine, then created Virgin Records, and Virgin Air, and eventually built the Virgin empire, is another.
Finally, there are those who become entrepreneurs through circumstance or necessity. “Bernie Marcus and Arthur Blank started Home Depot after they were fired from Handy Dan’s Home Improvement. Mary Kay Ash founded Mary Kay after her career as a top saleswoman floundered while less talented men around her were rewarded with raises and promotions. Anita Roddick started the Body Shop in an effort to work from home and support her children,” Hershatter says.
Today, the group who’ve had entrepreneurship thrust upon them may be the fastest-growing, in Hess’s view. For many people, he says, the perception of job insecurity in the corporate world is motivating them to strike out on their own. “Lifetime employment is rare now,” he says. Many people think, “`I may have more control over my destiny in my own business than working for somebody.’”
Web Links
Money.cnn.com: Business 2.0: America’s hottest jobs
SBA.gov: The Small Business Economy 2006
National Business Incubation Association
SBA.gov: The impact of regulatory cost on small firms
Emory’s Department of Economics
VetJobs Homepage
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