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.
By Steve Waters
Founder & CEO, SMB Intelligence
May 22, 2018
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.
1. Waters, Steve. “Most Small Business Owners are Motivated by Lifestyle – Not Growth”, SMB Intelligence, May 2018. Available online.
2. Waters, Steve. “Identifying the Small Businesses Most Receptive to New Solutions”, SMB Intelligence, May 2018. Available online
3. Waters, Steve. “Which Firms are Most Likely to Experience Substantial Growth”, SMB Intelligence, May 2018. Available online.
4. Waters, Steve. “These Firms are the Engine of Small Business Job Creation”, SMB Intelligence, May 2018. Available online.
5. Waters, Steve. “Quantifying Prime Growth Firms”, SMB Intelligence, May 2018. Available online.
6, 7. Only 24% of owners report wanting their firm to be “as large as possible”, and more than 50% of owners cite lifestyle benefits such as “flexibility over schedule” or “be my own boss” as a primary reason for starting their firm. Pugsley, Benjamin Wild and Erik Hurst. “What Do Small Businesses Do?”, Brookings Papers On Economic Activity, Fall 2011. Available online. Only 33% of owners say their primary goal is to grow. The Hartford. “2015 Small Business Success Study”, 2015. Available online. 50% of owners started their business for non-financial reasons like wanting to be their own boss, tired of working for others, wanting to set their own hours, and the desire to pursue a passion. Only 12% of owners want to grow to staff larger than 50 people. Infusionsoft. “Defining and Achieving Small Business Success”, 2016. Available online. While 88% of owners report “increasing revenues” as their key business goal over the next three years, only 24% report wanting to add an establishment. Shopkeep. “2018 Shopkeep Small Business Pulse”, May 2018. Available online.
8. The overwhelming majority of small firms do not grow by adding employees from year to year or even over three year periods. Approximately 80% of small businesses do not grow at all, even over a relatively long period. Most surviving small businesses do not grow by any substantial margin – most start small and stay small. Pugsley, Benjamin Wild and Erik Hurst. “What Do Small Businesses Do?”, Brookings Papers On Economic Activity, Fall 2011. Available online.
9. 22% of small businesses are planning to hire additional employees in the next 12 months. Bank of America. “Small Business Owner Report”, Spring 2018. Available online. 22% of owners are planning to hire new employees in 2018. TD Bank. “2018 Small Business Survey”, May 2018. Available online.
10. Seasonally adjusted net 20% (of small business owners) plan to create new jobs. NFIB. “NFIB Small Business Jobs Report”, NFIB, June 2018. Available online.
11. Over the next 12 months 31% of small business owners expect the overall number of jobs at their company to increase, 62% expect it to stay the same, and 7% expect a decrease. Wells Fargo. “2018 Small Business Index Survey”, April 2018. Available online.
12. SMB Intelligence. “Prime Growth Briefing Q1 2018”, April 2018.
13, 14. Calculations by author based on data from US Census, 2012 Survey of Business Owners, and Nonemployer statistics by receipt size class for the US: 2014.
15, 16. Fairlie, Robert W. “Crossing the Employer Threshold: Determinants of Firms Hiring Their First Employee”, Small Business Administration, December 2013. Available online.
17. Waters, Steve. “Measuring the Digital Engagement of Prime Growth Firms”, SMB Intelligence, May 2018. Available online.
18, 19, 20. Collins, George and John O’Mahony and Sara Ma. “Connected Small Business US”, Deloitte, 2017. Available online.
21. Average home-based revenues $69,936 vs. average commercial-based revenues $818,773. Calculations by author based on data from US Census, 2012 Survey of Business Owners.
22. Home-based firms have average of 2 paid employees, firms with commercial locations have an average of 21 paid employees. Calculations by author based on data from US Census, 2012 Survey of Business Owners.
23. Waters, Steve. “Growth-Based Classification vs. Traditional Small Business Segmentation”, SMB Intelligence, May 2018. Available online.