The private sector consists of a wide variance in business size, grouped into small, medium, and large organizations. The U.S. government often defines small and medium-sized businesses as firms with fewer than 500 employees. Using this definition, just over one-half of the private sector is populated by small businesses and the other half by large businesses.
While business has seen great consolidation in recent years, the share of employment in small firms has been relatively stable over the past few decades. It has fluctuated slightly in response to economic conditions, declining slightly when the economy is doing well and increasing when the economy struggles. This tracks with the slight decline in the small-business share of employment during the late 1990s and the leveling off in the 2000s.
Small businesses often serve as seeds for new industries, such as Apple and Google did in their early stages. By addressing a need left unmet or innovating more rapidly than large multinational corporations, small businesses are able to carve out new niches for themselves. Recent advancements in technology can reduce the amount of capital needed to start a small business and increase opportunities to scale up rapidly and cost efficiently.
The problem all (or at least most) entrepreneurs face on a daily basis is funding, particularly when first starting up. While different industries display differing degrees of entry barriers, most small businesses must obtain a certain amount of capital to begin operations. This can come from a variety of places, including:
- Self-financing by the owner through cash, equity, etc.
- Loans from friends or relatives
- Grants from private foundations
- Private stock issue
- Forming partnerships
- Angel investors (i.e. venture capital)
Barriers to Entry
If you’re going to start a business, it’s important to realize that there are specific forces acting upon each industry that affect profit. Industries with a high concentration of small and medium-sized businesses generally do not require an enormous amount of capital investment up front. The point here is that barriers to entry are central factors in determining the feasibility of the average business owner entering a given industry.
For example, it is not likely that you would start a company to build airplanes, as that would take a large investment of capital for property, plant, equipment, and labor. Many restaurants and bars, however, require simple premises and easy to find, local ingredients. This is a smaller barrier to entry, thus there are more small and medium-sized businesses in the restaurant industry than in the aerospace industry.
Goods or Services?
When thinking about businesses, it can be helpful to divide them into two sections: goods producers and service providers. Goods producers make and sell some sort of physical product or material, while service providers don’t make tangible goods. The service industry tends to be more small-business friendly, as it (generally) requires fewer assets.
In the United States, roughly 20 percent of small and medium businesses are concentrated in the goods-producing sector. The 80 percent that reside in the service-providing sector is largely a reflection of the overall U.S. economy (services over goods), as well as the greater feasibility of service industries for small-scale entry.
The high concentration of small and medium businesses in the service-providing sector also reflects a few realities of business. In a global economy, manufacturing goods competitively involves being able to do so in high volumes in order to remain cost efficient. This requires a large initial investment of capital and access to low-cost labor, which are both tough for small and medium businesses to access domestically. Maintaining quality across hundreds of locations in the service-providing sector is also, as you might imagine, not an easy task.
An interesting article: The Pandemic Shows Us the Genius of Supermarkets, by Bianca Bosker.
This article in The Atlantic‘s July/August 2020 issue provides examples of small business entrepreneurship in the early days of Fairway Market, that turned into big business due to the passion and drive of its founder Nathan Glickberg. It also addresses the small business entrepreneurship of long-distance truckers that supply markets, as well as offering information and musings about supermarkets in general.