An article in the Wall Street Journal earlier this week (Why Washington Has It Wrong on Small Business) highlighted a subset of firms referred to as “high potential startups,” those that account for the bulk of job creation and economic impact from small businesses. As noted in the WSJ article, only 6.3% of companies in the U.S. created all the net new jobs between 1994 and 2008. Over 94% of these companies were small firms.

What is a high potential startup?  A common perception is that only conspicuous growth industries like technology and health care spawn high-potential startups. But in writing about these companies in a report for the Small Business Administration, Spencer L. Tracy (“Accelerating Job Creation in America: The Promise of High-Impact Companies”) notes that “they are found in relatively equal shares across all industries, even declining and stagnant ones.”

High potential businesses have common characteristics.  They

  • Introduce new products or categories of products to a market;
  • Create markets that did not exist before;
  • Pioneer new methods of production or ways to deliver services;
  • Generate new sources of supply.

High-potential startups are key to economic growth: they created an average of over 2.5 million new jobs annually between 1994 and 2008.

High potential startups need capital to grow, particularly in their early stages. That’s where Investment Crowdfunding comes in. Not all potential high growers find investment from venture capitalists or Angels. Bank and the Small Business Administration loans are close to impossible for growing companies to secure (see our blog Where Do Entrepreneurs Get Investment Capital?). That means many startups with high potential wither for lack of capital.

The interactive nature of Investment Crowdfunding and its associated “diligence by the crowd” is particularly suited to identifying these companies and providing the necessary financial, networking, and advisory support levels needed to take them to the next stage. 

What about startups that are not “high potential”?

While we point to the impact small business has on job creation and its strength as an economic driver, most small companies remain small companies. In fact, the WSJ points out:

  • Two-thirds of small firms won’t grow big because their business model has natural limits.  Think of small local service businesses, mainly owner-operator businesses like plumbers, accountants, store owners, landscapers, or truck drivers.  Even consultants in transition between employers or postponing retirement.
  • Three quarters of small firms do not have plans for growth. While this captures the point from above, it indicates that even businesses that have growth potential are not necessarily seeking a path to growth.
  • Less than 1 in 10 firms grow to reach 20 employees within their first 10 years.

While these companies do not have aspirations to become the next Facebook, they still make excellent candidates for Investment Crowdfunding.  Many slow- or non-growth businesses produce attractive profits and cash flow. And many need cash to establish themselves, to purchase equipment, or to address contingencies.  Raising non-equity capital through crowdfunding might be an attractive approach for these companies and their investors.