I know I was complaining about this earlier this year but I have to say that April was really quiet, as far as small business research goes.
The good news is that there are some real gems among the few releases we had.
In light of the frequently repeated jobs-jobs-jobs mantra, a policy brief out of Harvard’s Kennedy School of Government answering the question “What Makes A City Entrepreneurial?” was both timely and intriguing.
On the surface, the answer to that question is fairly intuitive — although I’ll put it differently than the good researchers at Harvard did. The easier and cheaper it is to start and run a business, and the more room there is in the local or regional economy (less dominated by large companies that crowd out the smaller ones), the more independent small businesses there are.
That matters because these guys found that a 10% increase in average establishment size in a metropolitan area corresponded with a 7% decline in subsequent job growth due to new startups (and you’ll recall that the Kauffman Foundation has pretty well established that startups are responsible for all net new jobs).
For that matter, even new startups that are associated with older, larger, established firms don’t really help. In that situation, there was a 5% decline in employment growth due to new startups.
Conversely, they found that:
In fact, along with January temperature and share of the population with college degrees, an abundance of small, independent firms is one of the best predictors of urban growth, a fact that raises questions about the occasional local development strategy of chasing large employers with generous tax breaks. (Emphasis mine)
Since this is a policy brief, it would have been incomplete without a few policy recommendations. First on their list: lawmakers, stop with the smoke-stack chasing, they say. Those big boys “may provide an immediate headline associated with new jobs,” but for sustained job growth you do better with small business startups.
Another policy recommendation: instead of doing things that government isn’t good at (like playing venture capitalist), policy makers should focus on “quality of life policies that can attract smart, entrepreneurial people” and then, once they arrive, get out of their way.
The Real Voice of Small Business … No, Really
The National Federation of Independent Business (NFIB) came out with a rather bizarre piece of research this month in answer to the question, “Does the NFIB’s research reasonably represent the majority of small business owners?” (The paper can be downloaded with this link.)
In order to answer that question, they performed parallel surveys of their members and a group of business owners discovered by way of DUNS numbers. They found that the responses of the two groups were very close, except that, on occasion, the DUNS group was a bit more conservative. Thus, they concluded, their surveys were a valid voice of U.S. small businesses.
The only problem with that is that small businesses with DUNS numbers are not typical of the majority of U.S. small businesses either. Most microbusinesses, for example, don’t have DUNS numbers. So, given the nature of the DUNS number business population, this research hasn’t really proved anything — or at least, not to anyone who was inclined to ask the question to begin with.
Speaking personally, I don’t really know why the NFIB would care one way or another. They do good, clean small business research, and if their samples tend to better reflect the larger small businesses that would be called medium-sized businesses anywhere else in the world, that’s not a bad thing. Somebody needs to do research on them; they are seriously outnumbered by microbusinesses but they serve an important purpose for the economy, as important in their way as those feisty startups that everybody loves this week.
Microloan Under The Microscope
During the first half of last year, domestic microfinance outfits found themselves at the center of quite a bit of warm and fuzzy attention as one of only a handful of financial services providers still providing loans to small businesses.
In fact, there were some small business owners who would otherwise not have considered for a microloan (being outside their normal target market), who concluded after an experience with a microfinance organization that the typical combination of financing plus technical assistance was the best thing since sliced bread.
The Aspen Institute has been tracking outcomes for U.S. domestic microfinance efforts in an initiative called MicroTest and a recent report looks at five years’ worth of outcomes to get a bigger picture.
The picture is not what you might expect. There were not as many episodes of “build the business from scratch” stories to be had. Over the five years of data that had been collected, the most successful microloan borrowers came into the program with an existing business that was earning something along the lines of $100,000 in average annual revenues.
The five-year survival rate for these firms was 88% and earnings increased over the period (with microenterprise development organization support) to an average of about $170,000 per year. Successful microfinance clients also tended to stay small but they still tended to better-than-double the size of their workforce, on average, over the five-year period (from 2.1 workers to 5.6 workers).
Most significant from this study is its finding that success for these clients is positively related to borrowing. Getting business management training alone is not enough. Given the way that most microbusinesses are undercapitalized, that makes quite a lot of sense but is also only underscores the difficulty that microbusinesses were having with access to capital long before Wall Street crashed and burned.