Small, But Fierce: How Tiny Firms Can Pack a Big Punch

Written by Chris Matthews, FORTUNE
. This article was originally published in FORTUNE on October 17th .

In an economy hostile to small business, how are the most successful small firms surviving?

If you compare the American economy to an automobile, then 2009 was the year it careened off the road.

We’ve since towed it out of the ditch but, make no mistake, we’ve still got engine trouble. And there’s no better way to understand this fact than to look at the state of small business in America. These enterprises, led by risk-taking entrepreneurs, have always been the true driver of job growth and innovation in America. And there’s plenty of statistics that show that, while larger firms are getting back to full strength, small businesses are still hung over from the worst recession in generations.

Take, for instance, the National Federation of Independent Business’ small-business optimism index, which fell in September and remains five points below the pre-recession norm. Meanwhile, inventory and sales data from the same survey reflect a business environment that “is more like a recession period than one of expansion,” according to a report from the NFIB.

At the same time, the rate in which new businesses have been forming in the U.S. has been steadily on the decline for decades. And Harvard Business School’s annual survey on U.S. competitiveness, released earlier this year, showed a yawning gap between large and small businesses’ respective outlooks for the future of the U.S. economy.

Of course, not every small business is down in the dumps. On Friday, the Initiative for a Competitive Inner City (ICIC) released the Inner City 100, a list of the 100 hundred fastest growing inner-city companies in America. The experiences of some of these business leaders may shed light on how small businesses can succeed, even in today’s inhospitable economy.

Financing

As former Small Business Administration head Karen Mills showed this year in a working paper published by Harvard Business School, bank lending to small businesses collapsed during the financial crisis and has yet to recover. In interviews with many of the CEOs on the ICIC 100 list, leaders told Fortune that keeping their businesses properly funded throughout the financial crisis, and even during the recovery, has been their single biggest challenge. Take Devon Henry, CEO of Team Henry Enterprises, a contracting firm based in Newport News, Va. “We did everything we possibly could to keep the business afloat” during the worst of the recession, he says. That included taking out a home equity loan, drawing from his 401(k), and, crucially, leaning on SBA-backed loans.

Marc Talluto, CEO of Fruition Partners, the fastest-growing firm on this year’s Inner City 100, says that “financing was the single most difficult challenge we had trying to grow the company.” Fruition eventually had to forsake bank lending and turn to venture capital to power its post-recession expansion, in which they grew by a whopping 2,700% between 2009 and 2013. And Darryl Smith, CEO of Premier Logitech, a supply-chain provider, relied on private financing from high-net worth individuals, which he calls “absolutely essential” to keeping his company going through the recession.

The fact that these companies, which represent some of the most successful small businesses in the country, were often quite close to not securing the necessary funding to keep their operations afloat brings into sharp relief how difficult is is for other, less successful, small firms to get the financing they need. Mills argues that bank regulators need to make sure that smaller community banks, which provide the bulk of lending for small businesses, are not overburdened by regulations implemented in the wake of the financial crisis. She is also hopeful that new online lenders like OnDeck and Kabbage can help breathe new life into small-business financing.

Finding good people

Another challenge highlighted by Harvard Business School’s competitiveness survey, for both large and small businesses, is finding the right mix of talent. Harvard lecturer Joseph B. Fuller sees big problems in the supply chain for labor, with employers reluctant to hire full-time and invest in training workers, and prospective workers unsure of the skills they need to succeed in today’s economy. The companies that made the Inner City 100 have somehow avoided or solved these problems by focusing on company culture and creating an environment where workers can advance quickly and feel a sense of personal accomplishment.

Most of the CEOs interviewed said they had fears about investing time and money in workers who would then turn around and leave for greener pastures. But smaller companies, argues Talluto of Fruition Partners, have unique advantages in retaining employees if they know how to leverage them. He says that today’s generation of workers in particular are “looking to make a mark, or a big contribution.” For the younger workers at his firm, he has gotten just as much out of trusting them and giving them more responsibility as he has through offering higher pay or perks. “We’ve had people two or three years out of college opening up new offices,” he says. “You can get loyalty from your workers if you give it in return.”

Make small an advantage

And it’s not just in workforce management that smaller firms can have an advantage over their larger peers. Sure, big companies have better access to credit, more sway with the government, and the wherewithal to weather economic storms. But large companies are also notoriously slow to recognize shifts in the marketplace. Take All Terrain, another Inner City 100 firm, which is an experiential marketing firm that launched 16 years ago, just as the rise of the Internet was enabling a revolution in that industry. While larger firms continued to focus on mass-marketing campaigns, All Terrain’s co-founders Sarah Eck-Thompson and Brook Jay had the foresight to see that customers relationships with companies would be upended by new media and that reaching potential customers would require novel thinking.

At one point, All Terrain was hired to lure customers to the trendy Las Vegas resort The Cosmopolitan. They came up with the idea of teaming up with United Airlines to distribute elaborately crafted gift boxes that contained discounts and other special offers for The Cosmopolitan. The campaign was a huge success and Eck-Thompson and Jay chalk that up to the firm’s small size. “A bigger agency would never have thought on such a small-scale, tactile level,” Jay says.