The revolution in what it means to be a small business
Part of our series on the future of Main Street
The term "small business" used to conjure up a certain idyllic scene. It's the mom and pop store, perhaps owned by a family for generations, where the proprietors know their neighborhood customers by name. These are the businesses that are the backbone of their communities.
But, the reality of Main Street — and our perception of it — is changing.
While there are still plenty of mom and pop operations the Silicon Valley startup has over the past decade in some ways supplanted that traditional small business ideal. The image of a group of young twenty-somethings — sometimes even college dropouts — working around the clock to build the next big app or social media mega-hit has become a phenomenon in and of itself.
"If you go back historically, when you thought of small businesses, you probably thought of a more traditional shop like a restaurant or a small retail store," said Dan Olszewski, director of the Weinert Center for Entrepreneurship at the Wisconsin School of Business. "Now, I think people are more likely to think of an entrepreneur. They're thinking of Mark Zuckerberg before Facebook got big."
The vast majority of businesses in the United States can be classified as "small," meaning fewer than 500 employees, according to the Small Business Administration. Most are much smaller than that. Still, small businesses create 63 percent of net new private sector jobs.
So what's driving the change in our understanding of small businesses? The simplest answer is the massive technology boom that began in the late 1990s. Thanks to the internet, offices can now be remote. Payments can be processed through smartphones. Crowdfunding — or the process of asking virtual strangers to help pay for your idea — is not only a reality, but ubiquitous.
But perhaps most importantly, social media platforms like Facebook and Twitter have given businesses the ability to grow beyond their local geography and reach customers both nationwide and globally. These tools allow a small lifestyle company in Los Angeles to reach potential clients in Boston. Or a bakery in New York City to find a market for its cookies in Phoenix.
"Anything can now be done anywhere," said Barbara Weltman, a small business expert based in Florida. "It's a dramatic shift."
Another big change has occurred in the way small businesses are financed. Gone are the days when local business owners knew the branch manager at their community bank and would be able to get financing for a new piece of equipment or to make payroll, said Peter Adriaens, professor of entrepreneurship and strategy at the University of Michigan's Ross School of Business. Now these proprietors have to rely on themselves, or maybe on the generosity of a few close friends and family members, if they want to take on debt to grow their business.
The economic crisis of 2008 and the resulting recession only made it more difficult for these traditional small businesses — the mom and pop stores — to get a loan.
"The traditional banks were loathe to give money to small businesses because nobody wanted to spend money," Adriaens said about the effect the recession had on the lending market. "There was no guarantee that these small businesses would be able sell their products or services. The banks essentially said you're too big of a risk so they started pulling away."
Venture capital, however, is still available to those companies that can demonstrate they have a market for their idea or have already begun to generate impressive levels of revenue on their own. These investors are looking for start-ups that are very scalable and have low operating costs.
Successful internet start-ups, though usually small at first, generally don't stay that way for too long. The idea is to eventually go public or be bought out by an even bigger firm for millions, if not billions, of dollars. These entrepreneurs are looking to be the next big thing, not a marginal return from investing in the local repair shop or pet store.
But whether you're talking about the corner store or the next Facebook, one thing is true about small businesses and start-ups in this country. They can be a great equalizer, allowing whomever has a good idea and a strong work ethic to realize the American dream.
"Small businesses offer an opportunity … to gain a foothold and work [your] way up in the economy," said Al Osborne, a senior associate dean at UCLA's Anderson School of Management. "That's something that's ingrained in our idea of what a small business is."