What Is a Small Business?

In a previous post, we discussed the motivation for the series Zebras & Horses. Next, we discussed the relevance of representation in capital distribution.

In Kwame and I's conversations, I asserted that Small Businesses are, by definition, ineligible to receive Venture Capital. This framing was based on the premise that Venture Capitalists look for growth on a scale that Small Businesses are not designed to handle or deliver on. An essay I read by Paul Graham was primarily responsible for this premise.1

Of course, that framing was only partially correct because companies that are eligible for Venture Capital can be Small Businesses.

What led me to frame this incorrectly was the process I followed when completing the first draft of this article. I narrowed my research by adopting the U.S. Small Business Administration's (SBA) definition of a Small Business:

Companies where firm revenue ranges from 1 to 40 million dollars.

When I shared this with Kwame, he rightly pointed out that there is another marker for identifying a Small Business: headcount. This second marker is the reason why, for example, many VC-backed companies qualified for programs administered by the SBA during the COVID-19 pandemic (e.g., PPP loans).2

With this data point added to the fold, we changed the direction of our research and operationally defined a Small Business as the following:

Small Businesses are defined by firm revenue (ranging from $1 to 40 million dollars) and the number of employees they have (from 100 to over 1,500).

That is the official SBA definition. I should have paid more attention to its full scope in the first draft.

A small business in one industry has different characteristics from a small business in another. Making that distinction requires knowledge of the industry's size standard. To find the size standard, look at the Small Business Size Regulations in the Code of Federal Regulations (CFR).

Once you do, it's clear that Small Businesses and Venture Capital eligibility aren't mutually exclusive.

In an upcoming article, we will describe what it means to be a Venture Capital-eligible small business.