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Report - November 2016

Scale Up New York: Creating Middle Class Jobs By Growing New York City’s Small Businesses

Despite the surge in the number of new small businesses and start-ups, too few of these companies manage to achieve sustained growth. A strategy to help small companies scale up is one of New York’s greatest unrealized opportunities for economic and employment growth—and one of the best chances to expand the number of middle-class jobs.

by Charles Euchner


Tags: economic growth | economic opportunity | innovation economy | small business | middle class | middle class jobs project


New York City is humming with small business activity. The city’s entrepreneurial environment has expanded greatly in recent years, thanks to an explosion of new businesses in fields from financial technology and digital health to artisanal food manufacturing and film postproduction. Over the next few years, turning more of these small companies into larger businesses is one of New York’s greatest opportunities for economic and employment growth—and one of the best chances to expand the number of middle-class jobs.

The opportunity is clear. The city is home to more than 207,000 businesses with 20 or fewer workers. The number of businesses employing fewer than ten workers has increased by nearly 12 percent since 2008. Over the same period, Brooklyn added more than 8,000 new businesses with fewer than ten workers, growing nearly 22 percent.

Unfortunately, too few of the city’s small business manage to scale up and achieve sustained growth. Despite the surge in the number of new small businesses, growth among businesses with more than 100 employees has been largely flat since 2008 and the number of businesses with more than 1,000 employees decreased 1 percent during the same period.

Not every small business has the potential to expand. And some business owners are content to stay small. But there is a clear opportunity for many more of the city’s small firms to grow to the next level. As this report details, the path to growth for small businesses in New York City is exceedingly difficult. Among those small firms in the five boroughs with growth potential, a significant share get tripped up along the way. Many don’t even try.

A strategy to help more small businesses scale up would do more than just bolster the city’s strong economy. It could be the city’s best opportunity to boost its supply of middle-class jobs.

Firms with fewer than ten employees tend to be top- and bottom-heavy, with many of their jobs in executive positions or at the lowest rung of the job ladder. But as small businesses grow, they often add middle-wage positions and increase benefits for their workers, including paid sick leave, time off, and subsidized healthcare.

This report—the latest publication of the Center for an Urban Future’s Middle Class Jobs Project, a research initiative funded by Fisher Brothers and Winston C. Fisher—examines the potential to boost the number of middle income jobs in New York by scaling up small businesses. It takes a close look at the challenges and barriers facing small businesses and identifies strategies for helping more of them to grow. Although it is difficult to predict which industries are best positioned to add jobs over the long term, one thing is clear: New York City has enormous potential to grow more of its small businesses of all kinds, creating thousands of middle-wage jobs in the process.

For this report, we interviewed dozens of small business owners from all five boroughs and in a bewildering array of industries, as well as government officials, economic development professionals, and other small business experts. Our goal was to better understand the pain points that emerge as small businesses struggle to grow and to offer concrete ideas for helping more New York City companies to scale up.


Barriers to Growth

Despite the city’s advantages as the most dynamic and connected economy in the Western hemisphere, New York’s small businesses often struggle to grow. Companies with fewer than 50 employees accounted for nearly 98 percent of the growth in businesses citywide from 2000 to 2013. As of 2014, nearly two thirds of the city’s private sector businesses had fewer than five employees, and these very small businesses were responsible for nearly a quarter of all new hires between 2007 and 2012.

New York’s high tax rates and demanding regulatory burdens are well known. So, too, is the city’s expensive real estate market. These barriers often prompt companies to look outside the city to expand operations. But most business owners accept these burdens as a cost of doing business in a city that boasts 8.5 million residents, attracts 60 million tourists a year, and stands as one of the globe’s leading cultural and economic centers.

The greater challenge, say New York City’s small business owners, is the opacity and complexity of the city’s business environment and the lack of coordinated resources along the way. Small business owners struggle to understand the taxes and regulations that affect their firms’ operations—a more frustrating hurdle than simply affording the bill. Even when business owners think they are obeying the city’s regulations, they are too often surprised by a fine or a new demand for paperwork. If they are able to find a suitable facility in which to expand, they struggle to secure a reasonable lease or outfit it with the necessary equipment and services. And although they are impressed with the diverse pools of talent in the city, they struggle to find workers with the right mix of technical and soft skills.

Too many businesses in New York City run into obstacles when they try to add employees. Labor costs are compounded by the additional costs of growth, including office space, training, human resources, middle management, and mandated benefits such as sick leave, healthcare, workers’ compensation, and unemployment taxes. In a costly, competitive, and complex business environment, growing from a handful of employees to 20 or more often requires rethinking every aspect of business operations. The more that small businesses succeed, the more complex— and overwhelming—their operations become. Many owners lack the expertise or connections to make the transition from everybody-does-everything companies to large-scale organizations based on extensive specialization and division of labor.

With every new contract, revenue stream, and employee, businesses take on new challenges. A city law mandates paid sick leave at five employees and the Affordable Care Act requires companies with 50 or more employees to provide health insurance coverage to all full-time workers. At the same time as the initial costs of growth are kicking in, however, a financing gap emerges. For far too many small businesses, this creates a perfect storm of obstacles that can stop growth in its tracks.

“New York is strong with the start-ups employing one to four people, but there is no growth with the 50-or-more-employee companies,” says Michael Simas, the executive vice president for the Partnership for New York City. Part of the problem, he says, is an inadequate bridge from coworking spaces to large-scale factories and private offices. “When you stick your head up from the collaborative work spaces, when you have to pay your own bills and take care of permitting and other issues, it’s a big challenge,” says Simas. “As you grow it gets more expensive—you have to deal with HR, with legal, with workers’ comp, not to mention other expenses. All that starts to add up and New Jersey doesn’t look so bad.”

Companies face a “Death Valley” of uncertainty and limited resources as they grow their companies, says Kinda Younes, the executive director of the Industrial and Technical Assistance Corporation (ITAC), which provides below-market consulting services to manufacturing companies. When they succeed, companies in all sectors need a whole new strategy to handle growing demand, add workers and business locations, fund and deploy machinery and equipment, source local materials, and decide what parts of the business to outsource and what to handle in-house.

Managing growth “itself is a full-time job that they are expected to flawlessly execute, while still being understaffed and running their business,” Younes says. “There are lots of initiatives around start-ups—entrepreneurship programs, accelerators, incubators, etcetera—but much less of a focus to actually help [companies] grow.”

Too often, small business owners say, they struggle to benefit fully from the city’s advantages, while remaining unable to escape its high costs and burdens. When they seek help—from government agencies, banks, consultants, and bigger firms—they have no reliable place to go. To grow in the city, businesses need a complete roadmap tailored to industry, location, and customer base. Longtime business owners and advisors caution that although certain kinds of tools and advice can be shared across sectors, much has to be adapted to each company’s particular circumstances. In addition, the vast range of information available only exacerbates the complexity. So small businesses improvise, adapting their traditional practices, piecemeal, to chase new programs and opportunities.

The major challenge of small businesses in New York, then, is a disconnect between everyday operations and the opportunities for growth and development. What small businesses need, above all else, are rational systems that help them understand their business operations, access local and regional markets, and identify broader opportunities for growth.

Even when the government offers services, business owners say they are often difficult to find and use. “There are so many resources out there, it can become overwhelming,” says Jill Johnson of the Workshop in Business Opportunities, which provides business services to underserved communities. Adds Sabrina Valle of Jam Stand, a Brooklyn-based jam manufacturer: “There are like a bajillion resources but I don’t really know how to navigate them. The city is trying to do things. Most of us don’t know where to look if we wanted to.”

Small Business in New York City
Business Size Number of
Companies
Total
Payroll
(billions)
Employees Average
Annual
Pay
Average
Revenues
<20 207,619 $31.7 646,593 $49,091 $880,602
20-99 21,263 $33.8 563,722 $59,930 $10,545,354
100-499 4,306 $35.3 518,535 $68,024 $35,815,650
500+ 755 $174.7 1,785,080 $97,839 $194,055,433

Source: U.S. Census Bureau, County Business Patterns

Help from City Hall

The de Blasio administration’s Small Business First (SB1) program, a $27 million initiative announced in July 2014, has developed a three-pronged agenda. First, SB1 aims to make information and compliance procedures more accessible online. Second, the program seeks to provide more direct and responsive services to small businesses to help them understand the regulatory environment and stay in compliance. Third, SB1 proposes evaluating the small business regulations on the books to determine which ones might be consolidated, simplified, or eliminated.

At the same time, SB1 leaves many of the specific obstacles to small business growth unaddressed. From attracting and retaining employees who can drive new opportunities, to coping with wage pressures and benefit mandates, to financing for equipment and real estate, to seeking new markets and breaking into supply chains, the barriers to small business growth are distinctly different from the burdens facing small businesses in general.

In order to grow more of its vibrant small businesses, New York City should develop a multifaceted strategy to bridge the disconnect between the city’s unparalleled advantages and its eager, entrepreneurial companies. Given that the challenges facing small businesses mount as they grow, it is not enough simply to reduce the barriers to starting a business. A strategy to create middleclass jobs by supporting small business growth should focus on the challenges facing New York City’s smallest companies at each pivotal step on the path to growth.

As part of this strategy, the city needs to identify gaps in government services and programs for small businesses. These service gaps—which include investments in facilities, capital equipment, revolving loan funds, and training and consulting programs— should focus on helping businesses deal with the issues that emerge as they grow, not just supporting businesses as they first get off the ground. Companies that invest in their own equipment upgrades, operational systems, space expansions, and marketing— and combine those investments with investments in their workforce—not only succeed but also create real opportunity for their workers.

In addition, the city should develop a comprehensive online tool that connects New York’s businesses with their obligations and opportunities. This system should gather all of the essential information for businesses to succeed in New York—including taxes and regulations, labor market data, real estate assistance programs, training and workforce development opportunities, government-backed financing programs, and consulting services—so that every aspect of the business environment is transparent and understandable, and services are centralized in a single location.

Finally, the city should redouble its efforts to invest in its infrastructure. The city has always benefited from coordinated investments in transportation, utilities, industrial spaces, parks, neighborhood revitalization, and environmental reclamation, which have the added benefit of creating additional jobs. These investments make business operations more efficient and effective, while improving the quality of life for employees and employers alike. By strengthening communities all over the city, investments in public spaces and resources cement the bond that both companies and people have with New York City.

The Levels of the Challenge 

Small businesses face obstacles to growth at four distinct levels.

The challenges begin with people, as companies struggle to find the talent necessary to grow their
businesses, streamline their operations as they grow more complex, finance investments in facilities and equipment, and connect with markets and supply chains to sell their goods and services on a larger scale.

At the level of business operations and the built environment, businesses cite three major obstacles to growth: difficulties securing financing, a lack of affordable real estate, and decaying public infrastructure. Not only is real estate expensive but the search can take months and even years. Leases for most small businesses are short and subject to exorbitant rent increases, which can kick in just as a business is beginning to invest in its own growth. Investment in capital equipment also proves a challenge. Banks usually require a level of cash flow or collateral that many small businesses lack. Venture funding is available to highgrowth companies but almost never to small independent businesses.

At the level of government and policy, firms struggle to meet their obligations and to make the most of New York’s advantages, especially as they seek to grow and add employees. Taxes and regulations are more burdensome in New York than most other cities—and their complexity makes them even more onerous. Procurement offers small businesses contract opportunities worth billions, but too often the process is opaque, confusing, and too time-consuming.

Scaling poses a daunting challenge across sectors. Once producers reach a certain threshold, they need more space, equipment, and workers. Growth typically takes place in leaps rather than steady increments. That puts companies in the uncomfortable position of taking huge risks without a high degree of confidence in the prospects for success.

Number of Small Businesses by Sector
Sector 2010 2011 2012 2013 2014
Retail trade 30,135 30,671 31,298 31,693 32,085
Professional, scientific, technical services  23,417 23,775 24,284 24,804 25,393
Other services (not public administration)  22,144 22,725 23,363 24,010 24,426
Health care and social assistance  19,146 19,443 19,692 19,893 20,110
Real estate and rental and leasing  18,104 18,300 18,401 18,640 18,994
Accommodation and food services  17,140 17,403 17,728 18,286 18,459
Wholesale trade  15,098 14,995 14,941 14,962 14,916
Construction  11,209 11,145 11,373 11,931 12,323
Finance and insurance  9,684 9,608 9,763 9,874 9,497
Administrative/support and waste/remediation  6,879 6,976 7,134 7,277 7,335
Manufacturing  4,998 4,875 4,808 4,650 4,644
Arts, entertainment and recreation  4,818 4,906 5,030 5,159 5,359
Information  4,749 4,739 4,882 5,103 5,254
Transportation and warehousing  4,274 4,461 4,487 4,506 4,696
Educational services  2,283 2,339 2,527 2,635 2,674
Management of businesses  742 694 738 748 766
Industries not classified  536 485 258 446 587
Utilities  57 52 58 66 69
Agriculture and forestry  14 14 17 12 14
Mining, quarrying, and oil and gas extraction  13 18 18 21 18
Totals  195,429 197,584 200,800 204,716 207,619

Source: U.S. Census Bureau, County Business Patterns

This report is a publication of the Middle Class Jobs Project, a research initiative made possible by the generous support of Fisher Brothers and Winston C. Fisher.

Previous publications in this series include “Making It Here: The Future of Manufacturing in New York City” (July 2016), “Jobs in Transit: Opportunity in the Transportation Sector” (September 2016), and "The Rise (and Fall) of Middle Wage Industries in New York City" (May 2016).

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