Small Business 2001

If small business were a boxer, the blows of the past 12 months might have left it on the ropes. First came the demise of the dot-coms, their death or near destruction provoking relieved I-told-you-sos from the partisans of big businesses. (Puh-leeze. Did eToys really believe it could compete with Toys 'R' Us?) Then the continuing wave of mergers and acquisitions created market-dominating behemoths of seemingly impossible size, in industries ranging from telecommunications and financial services to pharmaceuticals and the media.

But the counterattack of the Fortune 500 wasn't just on Wall Street; Main Street consumers have had ringside seats as well. Yet another hardware store goes under, KO'd by the new Home Depot on the outskirts of town. Yet another local coffee shop can't stand up to Starbucks. In late January a group of some 200 independent video-store owners sued Blockbuster -- itself owned by media giant Viacom -- alleging monopolistic practices. Blockbuster described the action as a "desperate court maneuver," a description that may be accurate.

And finally came the recession. Or slowdown, pause, hiccup, or whatever else it may be dubbed by the time this issue hits the newsstands. The apparent end of the amazing 1990s boom was taking its toll on small business as early as last November. Small companies were "shelving expansion plans," reported Business Week. "The byword is caution." By January the mood had darkened. "Small-Business Optimism Plunges Amid Recession Fears," announced the National Federation of Independent Business (NFIB) in a press release after its monthly survey. "America's entrepreneurs are increasingly pessimistic about their business prospects in 2001," said the NFIB's chief economist, William C. Dunkelberg.

Put those developments together, and the state of small business, vintage 2001, can seem a little iffy.

But as the French say, Courage, mes amis. We've been here, done that. "In the 1970s there were congressional hearings concluding that small business was an endangered species," remembers William J. "Denny" Dennis Jr., senior research fellow at the NFIB Education Foundation. Small companies back then were already proliferating and growing, to the point where David Birch, then at Massachusetts Institute of Technology, would soon announce his dramatic finding that entrepreneurial ventures were creating most of the new jobs. But nobody knew that then. "There we were, predicting their demise," muses Dennis.

So it helps to get a little historical perspective. Keep in mind that for the past three decades the number of businesses in the economy, as measured by tax returns, has been growing faster than the labor force, and there's no sign of a reversal in that trend. From 1991 to 1999, the annual number of launches of companies that had a payroll rose about 9%. "I call it the atomization of the economy," says Birch, who now runs the research firm Cognetics, based in Waltham, Mass. "You're still looking at an explosion of entrepreneurship."

But what's interesting isn't just the trend; it's the social and cultural shifts that indicate how durable the trend is. Consider just two:

Entrepreneurship has become mainstream. Starting a business is never easy. But it was once a whole lot harder than it is today. Entrepreneurs these days have access to capital sources that barely existed in the past. They can take advantage of incubators, training courses, and support networks. Business schools teach the fundamentals of entrepreneurship, which weren't even part of the curriculum at most places until the 1990s. "It's like tennis -- I can't guarantee how good you'll be if you take a course," says William Gartner, a professor of entrepreneurship at the University of Southern California's Marshall School of Business. "But we can pretty much get you up to speed. We can provide the skill sets."

The "knowledge economy" has grown tremendously. Granted, the phrase has been beaten to death. But the fact remains: the more our economy depends on intellectual rather than physical capital -- that is, the more it depends on information and new products and specialized services rather than on warehouses and big factories and centralized paper processing -- the stronger will be the centrifugal forces impelling people toward small companies. To be sure, a few centers of growth in the marketplace are dominated by the so-called network effect, in which a product gains value when more people use it. (Microsoft and Visa International, among others, can thank their stars for that effect.) But many more knowledge-based markets are dominated by the need for rapid-fire innovation, specialized production and marketing, and customized personal service. Small companies thrive in such situations.

And then there's the downturn. If it deepens into recession, yes, small companies will be hit hard. Some will go out of business. But large companies will be hit harder. (Would you want to be a major shareholder in Xerox right now?) Some of the giants will also go under -- and those that survive will cut their payrolls, close plants or offices, and outsource even more than they have in the past. All those moves provide opportunities for smaller, nimbler competitors. "Large companies really collapse, especially toward the end of a recession," says Birch, who has studied the phenomenon for more than 20 years. "Smaller ones bob and weave and change the product or go abroad or do whatever they have to do to adapt. That's why smaller companies actually grow during a recession while big ones actually shrink."

The facts and figures in this issue will put some flesh on all these state-of-small-business bones. In part one, you'll see how many small companies there are, not to mention how many different ways there are to count them. You'll learn essential truths about where the companies are, what they do, and who owns and works for them. You'll also learn a few interesting facts -- about job generation, for example, and the trend in self-employment -- that our friends in the mass media still don't quite get. Part two reports everything we know about America's newest companies and the entrepreneurs behind them; thanks to a rather amazing collection of researchers, we now know a whole lot more than anyone ever did about that difficult, tortuous, imaginative process called starting a business. And part three presents some savvy speculation about what the immediate future may hold.

The next few years probably won't be as one-directional as the 1990s -- up, up, up -- nor as gloomy as the first few months of 2001. Whatever happens, it will be interesting to watch the many, many small companies and start-up entrepreneurs in the American marketplace bob, weave, and fight their way back.

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Published on: May 15, 2001