Small Business Ecosystem Dynamics

Identifying the small businesses currently most likely to experience substantial growth

Prime growth firms are four times more likely to currently experience substantial growth than small businesses in general.

Background

Developed by SMB Intelligence in 2018, Prime Growth is a growth-based classification standard for the small business sector. Growth-based classification uses development stage, growth format and growth scale to categorize firms rather than traditional small business segmentation (revenues, company age, company size, and digital engagement).
 
The purpose of the standard is to identify current prime growth firms and segment them by their current growth priorities.
 
 

What are prime growth firms?

Prime growth firms are independents or small chains, that are employers, with a commercial location(s), that are currently at a seed (new, pre-opening) or expansion (high growth) development stage.
 
They are the small businesses currently most likely to be motivated by growth¹ and receptive to new solutions², and if successful in their current growth plans, to experience substantial growth³ and create new jobs⁴.
 
At any given time only roughly 1% of all small businesses would be defined as prime growth⁵.
 
 

Substantial vs. incremental growth

We define substantial growth as both quickly increasing revenues and adding new jobs. We define incremental growth as gradually increasing revenues.
 
It’s important to make this distinction as most small business owners are motivated by lifestyle considerations (being their own boss, controlling their own schedule), not growth⁶, and they do not expect or even want to experience substantial growth⁷. This does not mean they don’t want their business to grow, rather that they are more likely to be pursuing and to experience incremental growth.
 
 

Why this matters

The vast majority of small businesses do not experience substantial growth – a seminal Brookings Institution study found that approximately 80% of small businesses do not grow at all, even over a relatively long period, and the overwhelming majority do not add jobs year-to-year⁸.
 
This is reflected in recent surveys of small business owners: both Bank of America and TD Bank found 22% of owners planning to add employees in the next 12 months as of Spring 2018⁹, the National Federation of Independent Business reported in June 2018 that net 20% of small business owners planned to create new jobs¹⁰, and Wells Fargo reported 31% of owners planning to add jobs in the next 12 months as of May 2018¹¹.
 
The Bank of America report also found that while 71% of owners expect savings from the 2017 tax policy changes, only 14% of them plan to use those savings to hire more employees⁹.
 
In contrast, the overwhelming majority of prime growth firms are highly likely to experience substantial growth. In our 2018 Q1 Prime Growth Briefing, 92% of prime growth firms reported high confidence they would both substantially increase revenues and create new jobs in the next 12 months¹².
 
 

The big question

Why are prime growth firms the small businesses currently most likely to experience substantial growth?
 
 

Employers are more likely to experience substantial growth than nonemployers.

Employer firms are more likely to see higher revenues: 81% of employer firms have revenues over $100,000¹³, while 90% of nonemployers have revenue under $50,000¹⁴.
 
Employer firms are also more likely to add employees: there is only a 23% chance that a nonemployer will add an employee in their first year¹⁵, and 40% of nonemployers will never hire an employee or will cease operations before they do¹⁶.
 
The decision to have employees signals an ability and willingness to take on higher commitment, operational complexity, and financial risk than nonemployers. Employers also have the ability to pursue opportunities in industries that are not available to nonemployers.
 
 

Firms currently at a seed or expansion development stage are more likely to experience substantial growth than firms at other stages.

Prime Growth defines a firm to be at a seed stage when they are a new, pre-opening, pre-revenue firm currently planning their launch. Seed stage firms are highly likely to see substantial revenue growth and to create new jobs, as they are starting with zero revenue and need to hire initial employees to launch and operate the firm.
 
Prime Growth defines a firm to be at an expansion stage when they are currently planning to add an establishment, relocate the firm or an establishment, or have just closed a substantial funding round.
 
Adding an establishment will likely increase revenues, and the firm is highly likely to hire new employees to operate the establishment.
 
Relocating a firm or establishment is most often for expansion, which is likely to increase revenues and to need additional employees, or to move revenues and jobs to a new area, creating new revenues and jobs in that area.
 
Existing firms that have just closed a substantial funding round have signaled their growth intent by raising money, investors have signaled their confidence in the firm’s growth potential, and the firm is now likely to allocate all or some of this funding towards growth, often through adding employees and investing in marketing/sales, with the intention of substantially increasing revenues.
 
Firms at the other seven development stages are generally focused on survival, incremental growth or maintaining the status quo.
 
 

Firms that are highly digitally engaged are more likely to experience substantial growth than those with low engagement.

Prime growth firms are highly digitally engaged¹⁷. Small businesses with an advanced level of digital engagement have nearly four times the revenue growth¹⁸ and are nearly three times as likely to create new jobs¹⁹ as those with a basic level. Only 20% of all small businesses have an advanced level of digital engagement²⁰.
 
 

Firms with a commercial location are more likely to experience substantial growth than home-based.

Firms with commercial locations have ten times higher average revenues²¹ and ten times more employees²² than that of home-based firms.
 
The decision to have a commercial location signals an ability and willingness to take on higher commitment, operational complexity, and financial risk than home-based firms. Commercially located firms also have the ability to pursue opportunities in industries that require a commercial location, that are not available to home-based firms.
 
 

What about the traditional small business segmentation of industry, revenues, company size and company age – don’t they help determine who will experience substantial growth?

Traditional segmentation provides some insight into substantial growth propensity, however, development stage outweighs traditional firmographics as an indicator of current substantial growth propensity²³. Learn about growth-based classification vs. traditional small business segmentation.