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 (SMBs, also referred to as small and medium-sized enterprises, or SMEs) 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.
Employment
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.
Entrepreneurship
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.
Small businesses' share of employment, 1988–2006
The small-business share of employment is relatively stable, as shown in the graph above: the bold red line representing all small businesses stays at around 50 to 55% of the total share of employment.
Funding
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)
- Bank