Small Business Ecosystem Dynamics

These firms are the engine of small business job creation

Prime growth firms are four times more likely to create new jobs 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 (including in economically distressed communities and with underserved owners) 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.
 
 

Why this matters

Small business is critical to job creation in the US, providing 63% of net new private sector jobs⁶ and employing nearly half of America’s private workforce⁷.
 
However, a Brookings Institution study found that the vast majority of small businesses (80%) do not add employees year over year, even over a three year period⁸. This is reflected in Bank of America’s Spring 2018 Small Business Owner Report, where only 22% of firms reported planning to add employees in the next 12 months⁹.
 
A 2014 study from the American Economic Association found that it is a small segment of the sector: new and high growth firms, that account for nearly three-quarters of gross job creation in a typical year¹⁰.
 
This supports the findings of our 2017 Q4 Prime Growth Briefing, which shows prime growth firms – which are currently at a seed (new) or expansion (high growth) development stage – to be more than four times as likely to create new jobs than small businesses in general¹¹, with 89% of prime growth firms planning to add employees in the near future vs. the 22% reported in the Bank of America survey.
 
 

The big question

Why are prime growth firms the small businesses currently most likely to create new jobs?
 
 

Employers are more likely to create new jobs than nonemployers.

While some nonemployers will go on to become larger employer firms, there is only a 23% chance that a nonemployer will hire their first employee within the first year¹², and 40% will never hire an employee or will cease operating before they do¹³.
 
Employers are more likely to be motivated by growth than nonemployers¹⁴, and have substantially more financial resources to create new jobs: 80% have revenues over $100,000, while 90% of nonemployers have revenues under $50,000¹⁵. Employers also have substantially more capital to create jobs during their seed stage: four times as many employers access and use $25,000 or more to startup than nonemployers¹⁶.
 
 

Firms with a commercial location are more likely to create new jobs than home-based.

77% of all firms with employees have a commercial location¹⁷, and firms with commercial locations have an average of more than ten times the employees than home-based firms¹⁸.
 
 

Firms at a seed (new) or expansion (high growth) development stage are more likely to create new jobs than firms at other development stages.

New and high growth firms account for nearly three-quarters of all firm-level gross job creation¹⁹.
 
Prime Growth defines seed stage as a new, pre-revenue, pre-opening firm, that is currently planning their launch. Seed stage firms are highly likely to create new jobs, as they need to hire the initial employees needed to launch and operate their firm.
 
Prime Growth defines expansion stage as an existing firm that is either adding an establishment, is relocating the firm or an establishment, or has just raised substantial outside funding.
 
Firms adding an establishment are highly likely to hire additional employees to operate the new establishment.
 
Firms who are relocating are usually moving to expand – and are likely to create new jobs, or will create new jobs in their new location by moving existing jobs from one location to another.
 
Prime Growth views successful fundraising as a strong indicator of current or near-future job creation, as they have signaled growth motivation by raising funds, have convinced investors the firm’s future is bright, and now have considerable resources to add employees.
 
Firms at the other 7 development stages are less likely to create new jobs as they are generally focused on survival or maintaining the status quo.
 
 

Firms with a high level of digital engagement are more likely to create new jobs than firms with a low-level.

Prime growth firms are highly digitally engaged²⁰. Small businesses that are highly digitally engaged are almost three times as likely to create new jobs²¹, and experience employment growth more than six times those with a low-level of digital engagement²².
 
 

What about the traditional small business segmentation of industry, revenues, company size and company age – don’t they help determine who is currently most likely to create new jobs?

Traditional small business segmentation on its own provides some insight, however, development stage outweighs traditional firmographics as an indicator of current job creation propensity²³. Learn about growth-based classification vs. traditional small business segmentation.
 
 

References
 
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. Small Business Administration. “Frequently Asked Questions About Small Business”, August 2017. Available online.
 
8. Pugsley, Benjamin Wild and Erik Hurst. “What Do Small Businesses Do?”, Brookings Papers On Economic Activity, Fall 2011. Available online.
 
9. Bank of America. “Small Business Owner Report”, Spring 2018. Available online.
 
10. Startups and high growth firms account for about 70% of firm-level gross job creation in a typical year. Startups account for 20%, and high growth firms for 50%. Decker, Ryan and John Haltiwanger, Ron Jarmin, Javier Miranda. “The Role of Entrepreneurship in US Job Creation and Economic Dynamism”, Journal of Economic Perspectives Vol. 28 No. 3, Summer 2014. Available online.
 
11. SMB Intelligence. “Prime Growth Briefing – 2017 Q4”, December 2017.
 
12, 13. Fairlie, Robert W. “Crossing the Employer Threshold: Determinants of Firms Hiring Their First Employee”, Small Business Administration, December 2013. Available online.
 
14. Waters, Steve. “Most Small Business Owners are Motivated by Lifestyle – Not Growth”, SMB Intelligence, May 2018. Available online.
 
15. 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.
 
16. Small Business Administration. “Small Business Finance FAQ”, 2016. Available online.
 
17. Small Business Administration. “Frequently Asked Questions About Small Business”, August 2017. Available online.
 
18. Home-based firms have an average of 2 paid employees, firms with a commercial location have an average of 21 employees. Calculations by author based on data from US Census, 2012 Survey of Business Owners.
 
19. Startups and high growth firms account for about 70% of firm-level gross job creation in a typical year. Startups account for 20%, and high growth firms for 50%. Decker, Ryan and John Haltiwanger, Ron Jarmin, Javier Miranda. “The Role of Entrepreneurship in US Job Creation and Economic Dynamism”, Journal of Economic Perspectives Vol. 28 No. 3, Summer 2014. Available online.
 
20. Waters, Steve. “Measuring the Digital Engagement of Prime Growth Firms”, SMB Intelligence, May 2018. Available online.
 
21, 22. Collins, George and John O’Mahony and Sara Ma. “Connected Small Business US”, Deloitte, 2017. Available online.
 
23. Waters, Steve. “Growth-based Classification vs. Traditional Small Business Segmentation”, SMB Intelligence, May 2018. Available online.