What is a small business? The Small Business Administration (SBA) is an independent agency of the federal government that was formed to aid, counsel, assist, and protect the interests of small businesses. The SBA defines a small business as one that is independently owned and operated and not dominant in its field of operation.1 To qualify for governmental programs and benefits specifically targeted for small businesses, a small business must also meet employee and sales standards established by the SBA. In general, most small businesses must have fewer than 500 employees. However, as Figure 5.1 shows, nearly 90 percent of all small businesses have 20 or fewer employees.2 The SBA also places restrictions on how much annual revenue a small business can earn to qualify for its programs. The limits on average annual revenue vary significantly by industry, but for most industries the standard annual revenue ranges between $7.5 million and $38.5 million.3

Figure 5.1

U.S. Small Businesses by Number of Employees

Why are small businesses important to the economy? Small businesses are important to the U.S. economy and job market. Small businesses create nearly 65 percent of all new jobs in the United Sates and generate nearly one-half of the nation’s gross domestic product.4 As Figure 5.2 shows, if U.S. small businesses made up their own economy, it would be one of the world’s largest.5^,6 Small businesses also export about one-third of the total goods exported from the United States.7

Figure 5.2

U.S. Small Businesses versus World Economies GDP

How do small businesses foster innovation? Small companies often introduce new products or procedures that many large businesses do not have the flexibility, the time, or the inclination to produce or offer. In fact, small businesses create more patents per employee than do large firms.8 The impact of small business innovations is well known in the computer, information technology, and communications industries. Legendary entrepreneurs include Mark Zuckerberg, who created Facebook from his Harvard dorm room at the age of 19, and two Stanford students, Larry Page and Sergey Brin, who began Google as part of a graduate project. Many years earlier, Michael Dell shook up the computer retail industry by being the first to market computers directly to customers via the Internet rather than through retail stores.

Other industries besides the technology field also have benefited from the innovative contributions of small businesses. For example, in the biotechnology industry, many small businesses have found innovative solutions to medical issues. The flexibility small businesses have allows them to react more quickly than larger companies to changing market trends and needs. As such, small businesses play an important role in maintaining a healthy economy.

The “green industry”—businesses that provide environmentally friendly products and services—are a hotbed for small start-up businesses. Entrants into this new industry seem to be one of two types: Someone either takes an existing product and makes a business out of making it green or has an idea for a green product and creates a business to produce it. Wind turbines, solar panels, recycling, and recycled products have spurred many business initiatives. GigaBiter is a small business that benefits the environment as well as people’s security and privacy by safely grinding old computer equipment into dust that is 100 percent recyclable.9 The outdoor clothing and gear maker Patagonia was the first company to use recycled plastic bottles—and later recycled polyester—to create Polartec fleece.10

How do small businesses help bigger companies? Small businesses often operate in cooperative relationships with bigger businesses. In the automotive industry, for example, small businesses are important because they make and supply the parts needed to manufacture cars. In fact, many of the parts that go into automobiles, such as seats, engine blocks, and bumpers, are provided by independent suppliers. Small businesses also provide larger companies with new and better product designs. For example, heated seats and intermittent windshield wipers were first developed by small companies and later sold to large car manufacturers.

How do small businesses help consumers? Small businesses directly provide us with many of the specialized products and services we use every day. Service businesses, such as hair salons, landscapers, and dry cleaners, as well as local restaurants, auto repair, and many other mom-and-pop stores, provide the services and goods larger businesses can’t or don’t want to provide.

What kind of workers do small businesses employ? Almost all new businesses are small and account for most of the new jobs created in the economy. In addition, small businesses hire a larger proportion of younger workers, older workers, and part-time workers, so they help employ millions of people who do not fit into a traditional corporate structure.

Do small businesses provide opportunities for minorities? Many individuals see owning and operating their own businesses as a means of achieving the American dream. To that end, women, minorities, and immigrants are becoming more important players in the small business arena. According to the SBA Office of Advocacy, more than one-third of all U.S. small businesses are owned by minorities, with the largest growth and ownership occurring in Hispanic-owned businesses (see Figure 5.3). Hispanic-owned businesses account for 12 percent of all U.S. firms, African American-owned businesses account for 9 percent, and Asian-owned firms account for 7 percent of all U.S. firms. Women, who own 5.3 million businesses, make up approximately one-third of all small business owners.

Figure 5.3

Small Business Ethnic Ownership

Why would I want to start my own business? Bill McNeely, a logistics operations manager at a training camp for the Afghan National Police, left his job to start a business so he would not have to be away from his family in Texas. But people start small businesses for many different reasons (see Figure 5.4):

Figure 5.4

Reasons to Start a Small Business

1. Opportunity knocks. As the proverb goes, “Necessity is the mother of all invention.” An idea for a new company often starts when someone envisions a product or a service that isn’t being offered yet. Just listen to any episode of ABC’s entrepreneurial showcase, Shark Tank, to understand that many new businesses are formed to solve a problem, to offer a product that improves on an existing idea, or that helps to overcome a personal obstacle. For example, Ava the Elephant is a talking medicine dropper that helps children take their medicine and Unshrinkit is a laundry solution that was developed when a borrowed sweater was mistakenly washed and shrunk. Similarly, Anthony Casalena created Squarespace, an online tool for building and publishing websites, because at the time, the existing tools were fragmented and rudimentary. Initially Casalena didn’t think he was building a business. He was merely fixing his own problem. Today, Squarespace supports more than 1 million websites.

2. Financial independence. Many people launch small businesses to achieve financial independence, although this should not be the sole reason you start a business. Why? Because most small businesses don’t start out as profitable ventures. Traditionally, it takes three to five years for new businesses to become profitable.

3. Control. Being in control and making more business decisions than their current positions allow is another reason why people start their own businesses. With fewer channels to go through when decisions need to be made, small business owners can often react more quickly to take advantage of immediate opportunities. This can be rewarding. Other people simply aren’t satisfied working for someone else.

4. Flexibility. Running their own businesses gives people the flexibility to adjust their work schedules. Many small business owners appreciate the work–life balance that owning their own businesses affords.

5. Unemployment. It is not uncommon for people to start their own businesses because they have no other employment opportunities. “Life begins when you get fired” was exactly the case for Bruce Freeman, owner of ProLine Communications, Inc. Three months after being fired, he couldn’t think of what to do next. Then, encouraged by a friend, Bruce started his own business. His first client was a company he worked with in his previous job. Now, more than 10 years later, he’s making more money than he ever could have in his old job.11

How has technology affected small businesses? Technology creates new business opportunities and new ways to conduct business. Entrepreneurial success stories, such as YouTube, Facebook, and Google, have had a big impact on small businesses. Consider entrepreneur Evan Spiegel who eventually created Snapchat in response to a conversation with a fraternity brother who regretted sending a photo to someone. Although it took several years for Snapchat (originally named Picaboo) to gain acceptance and popularity, its rapid growth fostered a $3 billion acquisition offer from Facebook, which Spiegel turned down.

Small businesses are finding that social networks, blogs, and mobile devices are more cost-effective ways than traditional advertising to interact with, market to, and keep abreast of their customers. This is what Sprinkles Cupcakes, a bakery chain based in Beverly Hills, California, does. Each day the company posts a secret word on its Facebook page. Customers who retrieve the word and mention it at any one of the bakery’s stores get a free cupcake. The company also uses Facebook to pretest flavor ideas and upcoming promotions in an effort to increase its interaction with its customers.

Facebook is not the only social media tool being used by small businesses. Twitter, Yelp, Foursquare, and LinkedIn are also popular ways to connect with customers and prospective employees. Using ­mobile-device apps consumers can access coupons, discounts, and special offers from small businesses. To help visitors with their shopping, the Grapevine Mall in Grapevine, Texas, posts signs throughout the mall to remind shoppers how to use their mobile devices to navigate the mall and find deals. Small business owners are also using devices that fit onto smartphones to process credit cards, which is a perfect solution for businesses that do transactions primarily at trade shows, flea markets, and craft shows.

However, social media can also become problematic if not managed well. Creating a fan page on Facebook without monitoring what people are saying about your business can be hazardous to its reputation. Although most consumers report that they use social media to communicate with businesses, only a few are satisfied with businesses’ responsiveness on social media. Similarly, writing a blog may help get out your message, but if no one reads the blog, it is not effective. A well-thought-out technology and social media plan is an important aspect of any business’s overall strategy.