Module 2 - MBEs

1

Module 2 - MBEs

Leslie Lum

Bellevue Community College

2

How businesses evolve

3


Self-Employed Employer Firms Gazelles Long-lived Firms

Definition Firms with one owner/employee

Firms that have employees

Coined by David Birch, fast-growing businesses that typify the best in US entrepreneurship

Established large enterprises characterized by public companies.

Number 9 to 10 million 5 to 6 million 350,000 17,000

Characteristics Most self-employed start businesses to accommodate lifestyle choice

Most are small marginal businesses and continue to be small.

Growth rates of over 20% per year.

S&P 500 growth rates.

Capital Low capital requirements: 75% start with less than $5000. Over 90% start with less than $25,000.

Low capital requirements: About 75% start with less than $25,000. Over 50% required less than $5000.

Don’t differ much from employer firms. Two thirds use less than $50,000 to start their businesses. More capital seems to accelerate process, though it does increase profitability. Key is that the entrepreneur knows how to bootstrap. Only 4% use venture capital.

Large banks and public financial markets.

Industries Professional and other services, retail, and construction.

Most are low capital and low barrier industries.

“Fuzzy” market opportunities not completely defined. No major competitors.

See S&P 500 classifications.

4


Owner characteristics

Wants to be own boss, control over number of hours worked, and family reasons.

Risk-aversive. Strong tolerance for ambiguity. Strong self confidence. Sales skills. Problem solving in a fuzzy environment. Open to learning from mistakes. Previous experience in industry.

80% have college degrees.

Leadership. Audacious goals. Strategic outlook. Coherence of goals.

Business characteristics

Marginal businesses with low-risk incremental opportunities.

Most popular are restaurants, beauty salons, and construction.

Few substitutes for products/services. Not an original idea.

Portfolio of businesses.

Revenue generation Most generate less than $50,000 and one third operate at loss.

Most do not grow. Bulk have less than $100,000 in sales.

High revenue growth of over 20% a year.

Job generation None. Only 24% of employer firms tracked over 10 years show any growth in employment

Estimated that these generate 60% of the new jobs.

Generate one-third of net jobs.

Cycle Self-employment increases during economic downturns.

Growing at 1% to 2% a year. Follows business cycle with more starts during expansions and more deaths during downturns.

Business cycle specific to industry.

5


Survival One study showed 51% survive five years as compared to 82% of businesses with employees.

About 500,000 started every year and about 500,000 terminated. Only 30,000 are bankruptcies. One SBA study shows lack of capital is a major source of business dissolution.

Survival may be subject to industry life cycle.

Escape velocity If self-employment becomes primary source of income then move to become employer firm. 41% contribute less than 10% of family income.

Choosing a market without major competitors.

Information about the market is imperfect and evolving.

Previous experience in that industry.

Strong sales skills.Bootstrapping and making do

with little at the fledgling stages.

Ability of management to transition from entrepreneur to manager. Vision to set audacious goals. Moving from single business to portfolio of businesses. Ability to motivate teamwork. Coherence of vision.

6

Growth in MBEs

Five year percent change in number of firms

14

11

55

38

73

46

72

26

22

68

46

76

310

46

7

4

30

26

30

84

30

0 50 100 150 200 250 300 350

All US Firms

Nonminority-Owned

All Minority-ownedFirms

Black-Owned

Hispanic-Owned

Native American

Asian Pacific Islander

1992-97

1987-92

1982-87

7

Growth in MBEs

8

Hitting critical mass

0%

5%

10%

15%

20%

25%

Lessthan25K

25 to49K

50 to99K

100 to249K

250 to499K

500 to999K

1 to 2.49M

2.5 to4.99 M

5 to 9.99M

Over10M

Percent of MinorityBusinesses

Percent of NonHispanicWhite Businesses

Minority businesses have less sales

Source: Federal Reserve Bulletin April 2001

9

Hitting critical mass

0%

5%

10%

15%

20%

25%

30%

35%

0 to 4 5 to 9 10 to 14 15 to 19 20 to 24 Over 25

Percent of MinorityBusinesses

Percent of NonHispanicWhite Businesses

Years with Current OwnerSource: Federal Reserve Bulletin April 2001

Minority businesses are younger

10

Social values

Unemployed and Looking For Work as Percent of Group

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

White Black Native American Asian Total

Source: Minorities in Business, 2001, SBA

11

Self employment

Self-employed as Percent of Labor Force

0

2

4

6

8

10

12

1991 1992 1993 1994 1995 1996 1997 1998 1999

White

Black


Native American


12

Self employment

Self-Employment Major Source of Earnings

0

1

2

3

4

5

6

7

8

9

1991 1992 1993 1994 1995 1996 1997 1998 1999

White


Native American

Black


13

Marginal businesses

Most Popular Small Businesses Total Number of Firms

Trade contractors 1.8 million

Administrative and support services 1.4 million

Personal and laundry services 1.1 million

Nonstore retailers 1 million

Professional and Consulting services 1 million

Artists and entertainers 0.9 million

Real estate 0.7 million

Child care 0.6 million

Store retailers 0.4 million

Repair services 0.4 million

14

0% 10% 20% 30% 40% 50% 60%

Agricultural

Construction

Manufacturing

Transportation

Wholesale

Retail

Finance, Insurance and RealEstate

Services

Native American

Hispanic American

Asian-American

African-American

All

Distribution of Firms by Industry

Source: U.S. Census of BusinessesUnclassified industries excluded

15

Percent Employer Firms of Group

0% 5% 10% 15% 20% 25% 30% 35%

Total US Firms

Nonminority-OwnedFirms

All Minority-Owned Firms

Black-Owned Firms

Hispanic-Owned Firms

American Native-OwnedFirms

Asian-Owned Firms


16

17

18

19

Survival rates from 1992-96

20%

25%

30%

35%

40%

45%

50%

55%

White Black White Hispanic Asian

Source: SBA Office of Advocacy

20

21

Employment Sizes of Businesses (Percent of Group)

11%

66%

11%9%

2%

16%

69%

8% 6%

1%

14%

71%

9%6%

1%

11%

72%

9%7%

1%

15%

69%

9%7%

1%0%

10%

20%

30%

40%

50%

60%

70%

80%

0 Employees 1 to 9 Employees 10 - 19 Employees 20-99 Employees Over 100 Employees

Nonminority-Owned Firms

Black-Owned Firms

Hispanic-Owned Firms

American Native-Owned Firms

Asian Pacific Islander OwnedFirms


22

Percent of Firms in Group with Revenues

0%

5%

10%

15%

20%

25%

30%

35%

Less than $5000 $5000 to $9999 $10K to $24K $25K to $99K $100K to $499K Over $500K

Nonminority

Black

Hispanic

Native American



23

Large enterprises no longer rule

WHITE NONHISPANIC MARKETNational demographics

Mass marketingEnglish language

Single cultural dominanceLarge scale operations

White NonHispanic

MexicanAmericans

LatinoAmericans

AmericanIndians

ChineseAmericans

IndianAmericans Japanese

Americans

FilipinoAmericans

VietnameseAmericans

Hawaiians

HispanicBlacks

Africa-bornAmericans

US-born AfricanAmericans

NativeAlaskans

MULTICULTURAL MARKETSMicromarket demographics

Targeted segmentsMultiple languages

Multiple cultures and culturalfusion

Small scale operations

Markets aretransforming from

single culture to manycultures.

Module 2 - MBEs

Documents

administrative office