Micro-businesses in the Shadow of CrisisHow Can Non-traditional Entrepreneurs Contribute to Boston’s Economy?

Alvaro Lima, Director of Research, BRANortheastern University, January 2010

WHY SUPPORT MICRO-BUSINESSES?

If micro-businesses do not

accelerate entrepreneurship grow create employment spark economic development

MANY REASONS:

they provide an important strategy for self-employment;they are a vital entry point in the economy for immigrants and low income populations;they are crucial for the maintenance of existing physical infrastructure;they create “social capital” in communities that need to build “strong ties,” particularly among immigrant communities;they supply needed goods and services to all the neighborhoods of Boston ;their job creation capacity is not insignificant, particularly for certain segments of the population (immigrants, low-income populations, youngsters; etc….)

Let’s start with the questions posed by some researchers:

Micro-businesses in Boston employ 20,165 people out of a total of 546,046…or about 3.7% of all jobs.

Boston's Employment by Firm Size for Industry Sectors

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Professional, BusinessServices and Information

F.I.R.E. Health care and socialassistance

Leisure and Hospitality Educational services Wholesale Trade andTransportation

Retail trade Utilities and Construction Manufacturing Other

1 to 4

5 to 9

10 to 19Employees

20-49Employees

50 to 99 Employees

100 or MoreEmployees

129,653 115,576 105,059 28,48631,79852,534 14,009 25,27315,90927,751

Source: U.S. County Business Patterns, 2002, BRA Research Division Analysis

Boston’s Total Employment by Employment-Size Class (1-4 Employees)

Source: U.S. County Business Patterns, 2002, BRA Research Division Analysis

Micro-businesses in Boston make up 9,206 of 18,583 establishments…or about 49.5% of all establishments.

Boston's Establishments by Firm Size for Industry Sectors

0%

20%

40%

60%

80%

100%

Professional, BusinessServices andInformation

F.I.R.E. Health care and socialassistance

Leisure and Hospitality Educational services Wholesale Trade andTransportation

Retail trade Utilities andConstruction

Manufacturing Other

1 to 4 Employees

5 to 9Employees

10 to 19Employees

20-49Employees

50 to 99

100 or More

4,936 2,482 1,619 1,0583032,221 2,5723887392,265

Source: U.S. County Business Patterns, 2002, BRA Research Division Analysis

Number of Establishments by Employment-Size Class (1-4 Employees)

Source: U.S. County Business Patterns, 2002, BRA Research Division Analysis

Types of “businesses” with 1-4 employees:

Communications Computer Dealers, Repair & Training Construction & Demolition Business Consultants Convenience Stores Copying & Duplicating Services Cosmetics & Perfumes Retail Credit & Debit Counseling Dance Companies & Instructions Data Processing Services Day Care Centers Dentists Delivery Services Designers Driving Instruction Economic Research Analysis Educational Consultants Electric Contractors Employee Benefits & Compensation Plans Employment Agencies & Opportunities

Entertainers Events Executive SearchExercise & Physical Fitness Exporters Manufacturers Facilities Management Fashion Designers Financial Advisory Services Floor Laying Refinishing & Resurfacing Florists Food Markets Lawyers Fruits, Vegetables & Produce Fuel Management Fund Raising Counselors Funeral Homes Garbage Collection General Contractors AND THE LIST GOES ON……

What is the problem with the actual research on micro-businesses?

Their conclusions and policy implications are drawn from data and not from theory or practice…

ENTERPRISE DEVELOPMENT

BENEFITS• Independence• Limited liability

(easy to exit)• Ability to gain

more than wage

CHALLENGES/ LIMITATIONS

• Volatility/high failure rate

• Limitations to profit

• Limited capacity

BENEFITS• Improved stability• Higher profit• Improved customer

reach

CHALLENGES/ LIMITATIONS

• Increased competitive threat

• More difficult to exit

• Higher managerial involvement needs

• Limited capacity

BENEFITS• Lower failure rate• Steady profit• Further customer

reach• Scale economies

CHALLENGES/ LIMITATIONS

• Management delegation

• Attracting skilled managers

• Growing IT/ computer needs

Domestic & Wage Labor

Self-employed

SmallEmployer

GrowthBusiness

ENABLERS• Build reputation

and steady client base

• More capital - fixed costs

• Get licenses/ permits

ENABLERS• Expand client

base• Expand org.

structure• Get mgmt.

training• Get loans

variable costs fixed coststechnical skills managerial skillsincome target return on capital

entry points

?

?

ENABLERS• Easy to start

– easy to reach customers

– little skill training

– low capital requirements

• Fast breakeven

?

progression

ENTERPRISE DEVELOPMENTExamples

TRANSPORTATION

BEAUTY/GROOMING

CLEANING SERVICES

EATING PLACES

RETAIL

• Taxi/Limo driver• Delivery (food,

other)

• Manicurist• Hair Stylist

• Janitor• Cleaning person or

House cleaner• Maid/hospitality

• Cook• Waiter• Caterer

• Cashier• Salesperson• Stock manager

• Taxi/Limo driver• Delivery (food,

other)

• Leased seat in hair salon

• House calls

• Solo operator (janitor, cleaning person)

• Solo franchise

• Take-out stand• Burrito cart

• Door-to-door sales• Third-party

marketing franchise

• 1-3 limos• Multiple (leased)

medallions• 1-3 delivery cars

• Nail Salon• Beauty Salon

• Local contractor• Dry-cleaning

storefront• Small cleaning

business

• Restaurant (with eat-in, take-out, delivery)

• Small catering service

• Small franchise• Small store• Third-party mktg.

• Multiple cars (3+)• Multiple services

(delivery services, or limo services)

• Chain of nail/beauty salons

• Multiple services

• Regional contractors (commercial, residential)

• Multiple services

• Multiple restaurants

• Multiple services (catering, delivery)

• Food services

• Retail chain

GrowthBusiness

SmallEmployer

Self-Employed

Wage Labor (Employee)

SUCCESSFUL INNER-CITY ENTERPRISESExamples

FIELD

Transportation

Cleaning

Eating Places/ Restaurants/ Catering

BUSINESS

Your Limo Services(Rita McGlaughlin - since 1993)

Majestic Cleaning(Sheila Martinez - since 1994)

Bob the Chef’s(Darryl Settles - since 1989)

SUCCESS DRIVERS

• Niche focus - transportation for the elderly and the handicapped

• Focused marketing• Personal skills - dedication,

persistence, previous business experience

• Niche focus - residential cleaning for young professional families

• Marketing - “environmentally friendly products”

• Personal skills - hard work, dedication, persistence, professionalism

• Image - “trendy locale”• High standards of excellence• Personal skills - dedication,

business vision

SUCCESS MEASURES

• Grew from 2 to 20 vehicles, in 6 years

• Employs 25 people • Acquired 25,000 sq. ft. site

(capacity expansion)

• Grew from 20 to 60 customers in 3 years

• Employs 5 people

• Renowned in Greater Boston

• Grew sales by X% in last 10 years

• Employs 37 people

SUCCESSFUL INNER-CITY ENTERPRISES GROW SLOWLY Enterprise Stage Duration(1)

(1) from business inception until 1999

Source: ICIC Boston & BCG

1

4

4

3

2

4.5

9

6

8

7

5.5

5

8

0.5

3

0 2 4 6 8 10 12 14

Your Limo

First Choice Limo

Brighton Limo

Primetime Express

Majestic Cleaning

Banshee

Mass Paint & Cleaning

Nartoone Security

Bob the Chef's

City Fresh Foods

Merengue

Tacos El Charro

Years

Tra

ns

po

rta

tio

nB

uil

din

g

Ma

inte

na

nc

eR

es

tau

ran

ts/

Ca

teri

ng

Self-Employed Small Employer Growth Business

??

??

A better framework to understand “micro-businesses” is to look at the social forms of production:

productionfor income

productionfor direct

use

productionfor profit

Self-employment

(micro-businesses)

Small businesses

Growth businesses

Production for Profit – How do they differ?

Ownership Structure1. Single owner or not incorporated 2. Independently or family owned3. Limited liability & more complex legal structure

Employment & Revenue Size & Capital Structure1. 1-2 people & < 10K & < $100K2. < 500 people & < $20M …3. > 500 people …

Financial Structure & Ability to Leverage1. Simple cash flow & no ability to leverage2. Bank financing3. External financing, investors, VC, investment banks

Management Structure1. Hands-on worker & control everything2. Management across all functions3. Professional management, board, investors

Skill Sets1. Finding & servicing customers2. Detailed understanding of industry3. Financial and organizational skills

Employment Size & Structure

Technology, Production & Markets1. Low to no technology2. Single technology, production & markets3. Multiple products, technology & markets

Success 1. Make enough individual income & control lifestyle2. Salary & Profits & Value of Company3. IPO/share price

Where do we go from here? “Micro-businesses” are important for job creation, fostering entrepreneurship,

and economic development on their own terms

Research, guided by theory and practice, is needed to better understand how to support “micro-business” in its varying forms so that they can:

they provide an important strategy for self-employment;they are a vital entry point in the economy for immigrants and low income populations;they are crucial for the maintenance of existing physical infrastructure;they create “social capital” in communities that need to build “strong ties,” particularly among immigrant communities;they supply needed goods and services to all the neighborhoods of Boston ;their job creation capacity is not insignificant, particularly for certain segments of the population (immigrants, low-income populations, youngsters; etc….)