By Robert Hurst, Athena Global
Is your business large enough to be considered Small?
At Athena two very important abbreviations have been battling for supremacy, and finally one has come out on top. We’ve decided to use the term SGB (Small and Growing Business) rather than SME (Small- or Medium-sized Enterprise), because the former abbreviation is simply more appropriate for what Athena is all about. However, it’s a bit of a complicated issue, and the change is proving to be more challenging than we anticipated. SME is used all over the place by many different types of non-profits, DFIs, banks, consulting agencies, governments, you name it. It’s entrenched. It’s still the default. So it tries to sneak into our reports and communications 24/7.
The term SME has its origins in the 1970s, when the system of international finance and banking was taking shape. Keep in mind that the definitions of official terms like these aren’t just floating in the void for us to admire, or to help us sort out types of businesses in our heads. These pretty letters aren’t just for show. They have very real consequences, determining eligibility for government programs and investments, tax rebates, etc. There’s big money in little abbreviations.
It turns out that the term SME means wildly different things depending on what industry you’re talking about and where you are. In the United States, almost every type of business has a different definition, based on company assets and revenues or number of employees. [See the SBA’s classifications here (pdf).] Gold- and coal-mining outfits, along with several other types of heavy industrial enterprises, can employ up to 1500 and still be eligible for SME-related programs and tax rules. An oil refiner can process up to 200,000 barrels of crude per day (8.4 million gallons) and employ 1500 and still qualify as SME. On the other hand, generators of renewable energy, say solar or geothermal operators, must employ fewer than 250 to be eligible for the same programs. If you suspect that some of these guidelines were crafted to help funnel “small business” investments to businesses that aren’t actually small, and that the definition of SME varies largely based on the lobbying power of the industries in question, you might be on to something.
In the EU, it’s a very different ballgame. A business must have fewer than 250 employees to be granted SME status. In emerging markets the definition is similarly humble, but not consistently so. There are about as many definitions of SME as there are national governments.
That’s where “SGB”—Small and Growing Business—comes in, an attempt at some clarification from the Aspen Network of Development Entrepreneurs (ANDE). ANDE defined an SGB as a business with between 5 and 250 employees—interesting to me that they still choose to use the word “employees,” a charged legal term here in the US—that are at least trying to grow. (As you can see, this is very close to EU’s definition of SME.) Typically these businesses will be seeking capital in the range of a few tens of thousands to a few million.
The more honed definition of small business puts the impact investment focus back on smaller enterprises, which is welcome and makes sense. But notice what else they’ve done with this definition: They put a floor under it. Businesses must have at least 5 employees and must be looking to grow to be considered SGB. Businesses must be large enough to be considered Small.
The bit about growth is key too. Sometimes we forget that not all businesses are trying to grow. Some small businesses, many family businesses for instance, are satisfied right where they are. That’s just fine, but it’s not really what impact investors are looking for. Impact investors want to make sparks and start big things, create new jobs and change communities, not simply help a family business keep paying the bills. ANDE’s definition reflects those priorities.
Beyond the very interesting question of whether non-growing but sustainable family businesses are worthy of impact investment dollars, the arbitrary 5-employee minimum might be harmful to growth-minded entrepreneurs who don’t meet the criteria. It might also be blatantly counterproductive to investors’ goals, including profit. For example, a small business with 3 employees might be better poised for big growth and hold more potential to create impact and profits than a small business with 50 employees, yet only one of those would qualify as an SGB. Investors that use the common definition to guide real-world money will miss out on those ground floor opportunities.
From Athena’s international perspective, neither SGB nor SME is completely satisfactory. But we still think SGB works better than SME, which includes much larger enterprises. So you’ll see SGB in all our reports and communications. Don’t be surprised if a few SMEs sneak in though. And don’t be surprised if we come up with our own definition and abbreviation in the near future.