Want a healthy economy? Get businesses small, big and new

Small business isn’t the predictor of economic vitality you might think it is.

Of the 10 countries in the world with the highest rates of companies with fewer than 250 employees, Paraguay, Kenya and Ecuador are included — not exactly major economies. The US states where small business holds the highest share include Wyoming, Montana and North Dakota — which have among the smallest state gross domestic product totals.

The most robust economies don’t have the most small business, or even the most big business, they have the most new businesses. Yet it seems any place with too much of one won’t thrive. This demonstrates the effectiveness of the common “ecosystem” metaphor: A healthy modern economy has an interplay between a range of different species. Small companies contribute to local culture, and big companies focus on efficiency across massive markets. New businesses are vital experiments: some close, some stay small, some grow big, but they all can contribute innovation.

All rely one way or another on a fuzzy fourth category of institutions, a catchall for the government, nonprofit and similar civic organizations that underpin so much economic activity, adds Troy LeMaile-Stovall.

LeMaile-Stovall, CEO of Maryland-state backed investment firm TEDCO, leads just such an institution and sees how they all interact.

“At the end of the day, 80% of startup enterprises fail,” he told Technical.ly. “Some will last and a few will grow big. That activity is the fuel of a vibrant economy.”

While nearly half of US economic activity is generated by small businesses, the Center for Economic and Policy Research has pointed out the American economy has less self-employment and more big companies than other rich world peers. The majority of Americans work at a company with at least 250 employees. In contrast, according to influential research from 2013, when defined as those 10 years or younger, all net new jobs come from new companies. Put another way: If you want to grow your economy, you need new starts.

That’s why it was so worrying that American entrepreneurship declined for decades. That all changed during the pandemic — the United States has had some of the fastest increases in business starts across the rich world, according to the World Economic Forum.

Why then does so much local economic development strategy still focus on courting big companies to relocate or open satellite offices? Big companies are considered safer.

Last month, the SEC filed a fraud complaint against a Philly-area founder who had received investment from the city’s state-backed funder, alongside a slew of prominent individual investors. That’s every economic development strategist’s worst-case scenario. Plus, as one longtime Pittsburgh economic development veteran told me this week: Startups don’t buy anybody lunch, take anyone out for golf or install their logo on the top of some building.

Adding: “Growing a startup ecosystem is hard work.”

That’s true because startup engagement requires a lot of squeeze for the juice. One consultant who advises mid-sized US cities on business growth told Technical.ly this year that most entrepreneurship support programs are far too generic to be effective. Rather than one call to a corporate executive, it takes many parallel efforts.

Left to its own devices, a given economy tends to reward market consolidation, a once controversial idea that most scholars today agree on. That’s why governments fund business support services to support market dynamism — Maryland first authorized backing TEDCO in the late 1990s. Whereas traditional business investors intend to maximize financial returns, LeMaile-Stoval has a balanced set of priorities — including companies of various sizes.

“If they get to be a $10, $15, $20, $30 million dollar company,” he said, “We should understand that that’s just as much a success as one that becomes an IPO or becomes a billion dollars or becomes a unicorn.”

That may not be true from a pure financial gain but it is, LeMaile-Stovall says, as we understand a business ecosystem. Like company size, government investments and economic development strategies have also taken an interest in the demographics of entrepreneurs.

Of the 100-plus business deals TEDCO approved in LeMaile-Stovall’s tenure so far, he reports nearly 60% of them went to an entity led by someone of color or a woman.

“That’s something I’m very proud of,” he said. The social justice gains of that effort may be laudable, but there’s a business case, too. The American pandemic-era entrepreneurship boom was disproportionately led by women and founders of color, and inclusive investment theory argues that “Lost Einsteins” can be found where they have previously been overlooked.

The lesson then is of moderation. LeMaile-Stovall added: “Any ecosystem needs a balance of many parts.”