5.3 Small Business: Driving America's Growth

Small businesses are the backbone of the U.S. economy, making up 99.9% of all businesses and employing nearly half the private workforce. They drive innovation, contribute to local communities, and generate 44% of the country's economic output.

The Small Business Administration defines small businesses based on industry-specific standards, while the Kauffman Foundation measures entrepreneurship through various indicators. These metrics help track trends in small business activity, including startup rates and job creation.

Small Business in the U.S. Economy

Role of small businesses in economy

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• Play a vital role in the U.S. economy by representing 99.9% of all businesses in the country
• Employ nearly half of the private workforce, providing jobs for 60.6 million people (47.1% of the private workforce)
• Generate a significant portion of the country's economic output, contributing 44% of the total U.S. economic activity
• Responsible for 43.5% of the U.S. GDP, demonstrating their substantial impact on the nation's economy
• Drive innovation and competition by producing 16 times more patents per employee than large firms (Apple, Google)
• Bring new products and services to the market, fostering a dynamic and diverse economy
• Contribute to local communities by creating jobs and providing opportunities for entrepreneurship (small retail stores, restaurants)
• Support local economies and foster community development, helping to build vibrant and resilient neighborhoods
• Utilize networking to build relationships and expand business opportunities

Definitions of small business activity

• The Small Business Administration (SBA) defines small businesses based on industry-specific size standards
  • Size standards typically expressed in terms of the number of employees or average annual receipts
  • For most manufacturing and mining industries, a small business is one with 500 or fewer employees
  • For most non-manufacturing industries, a small business is one with average annual receipts under $7.5 million
• The Kauffman Foundation measures small business activity through various indicators
  • Kauffman Index of Entrepreneurship series includes:
    1. Startup Activity Index measures new business creation
    2. Main Street Entrepreneurship Index tracks small business ownership
    3. Growth Entrepreneurship Index focuses on growing companies
  • Kauffman Indicators of Entrepreneurship consists of:
    • Rate of New Entrepreneurs: percentage of adults becoming entrepreneurs in a given month
    • Opportunity Share of New Entrepreneurs: percentage of new entrepreneurs driven by opportunity vs. necessity
    • Startup Early Job Creation: number of jobs created by startups in their first year (tech startups, service-based businesses)

Small Business Trends and Survival

Trends in small business ownership

• The number of small businesses has grown steadily over the past decade, increasing from 27.5 million in 2009 to 31.7 million in 2020
• Women-owned small businesses have seen significant growth, with women now owning 42% of all businesses (up from 4.6% in 1972)
• Minority-owned small businesses have also experienced substantial growth, with minorities owning 45% of all businesses (up from 18% in 2012)
• Startup activity has fluctuated over the past decade
  • Declined during the Great Recession (2007-2009) due to economic uncertainty and limited access to capital
  • Rebounded in the following years, reaching pre-recession levels by 2016 as the economy recovered
• The COVID-19 pandemic has impacted startup activity in various ways
  • Some sectors, such as e-commerce (online retailers) and delivery services (food delivery apps), have seen increased startup activity due to changing consumer behavior
  • Other sectors, such as hospitality (hotels) and tourism (travel agencies), have experienced declines due to travel restrictions and reduced demand
• Small business survival rates vary by industry and economic conditions
  • About 80% of small businesses survive their first year of operation
  • Roughly 50% survive five years or longer, highlighting the challenges of long-term sustainability
  • Only about one-third survive 10 years or more, emphasizing the need for adaptability and resilience
• Factors affecting small business survival include:
  • Access to capital and financing (loans, grants, investments)
  • Management skills and experience of the business owner (financial planning, marketing, operations)
  • Market demand and competition in the industry (consumer preferences, market saturation)
  • Economic conditions and business cycles (recessions, industry-specific downturns)
  • Ability to maintain positive cash flow and manage expenses

Key Components of Small Business Success

• Conduct thorough market research to identify opportunities and understand the target market
• Develop a comprehensive business plan outlining goals, strategies, and financial projections
• Create a viable business model that generates revenue and provides value to customers
• Assess scalability potential to ensure long-term growth and sustainability