Whether the money is coming from outside investment, a one-time grant, or the federal government, a capital infusion into a small business will have a substantially more dramatic impact on that business than it would on a larger concern.
That was the recent conclusion of researchers at Indiana University, Washington State University (WSU), and the University of Central Florida, who conducted a study in which they tracked results from about 130 ventures at eight business incubators in the southeastern United States over a four-year period.
Small companies receiving a grant, for example, experienced strong revenue growth—an average of 1,000 percent over two years. By comparison, mid-sized and larger firms in the business incubators reported flat or declining growth trajectories after receiving a grant.
“From a public policy perspective, awarding grants to smaller ventures appears to generate better returns for economic development,” said Alex Kier, assistant professor of entrepreneurship in the WSU Carson College of Business.
He pointed to Paycheck Protection Program (PPP) loans as an example.
“We’ve heard the stories on the news about large, multimillion-dollar organizations that got pretty substantial Paycheck Protection Program loans,” he said. “Our research indicates that money may have been better spent by spreading out the PPP loans to smaller firms.”
Regan Stevenson, assistant professor of management and entrepreneurship and the John and Donna Shoemaker Faculty Fellow in Entrepreneurship at the IU Kelley School of Business added that when small firms obtain a modest grant, it can increase the company’s long-term viability.
“Our data indicates that even micro-grants can produce an inflection point for smaller businesses, rapidly propelling their revenue growth trajectories,” Stevenson said. “In addition, we found that when small firms receive their first grant, this also signals to investors that the venture may represent a ‘good bet.’ As a result, smaller firms immediately become more attractive to investors and secure more external funding.”
This is a very valid point. Investors will always do their due diligence. But the fact is that if a small business has already been thoroughly vetted by a team in charge of administering grants, we, as investors, will take notice and factor that validation into our decision whether or not to fund the business.