1.

Are small businesses just micro-versions of larger businesses or do they have particular
distinguishing features?

Small businesses are characterized by specific features. Boston Committee identified their main
characteristics in: Independency, managed by its owners or part-owners in a personalized way, having
a small market. It can be possible to define small businesses by using certain indicators such (as the
number of employees or sales turnover) identified for each sector. However, some industry sectors
are not included, therefore the definition does not take into account many other sectors that are
developing nowadays. In 1996, another simple definition was issued and categorized the enterprises
into four classes:

Micro enterprises - with less than 10 employees;

Small enterprises - with at least 10 employees and less than 49;
Medium enterprises from 50 to 249 employees;
Large enterprises - with more than 249 employees.

Small businesses are firms whose size falls within certain occupational and financial limits.
Therefore, they have objective difficulties in accessing financial resources and achieving certain level
of sales. Small businesses usually have a flat organizational structure (overlap of strategic policy and
control) rather than vertical or transversal as in large businesses (different bodies for direction and
control). While in big companies, the organizational structure is articulated into several business
units/or functional units, where jobs and tasks for each individual/group are well defined. Small
businesses tend to personalize their management: few individuals are accountable for different
functions.
Crucial is customer relationship management, small businesses have with their customers a close
relationship and can interact directly with them and learn exactly what their needs are, important for
customer satisfaction. Large businesses often arrange meetings and processes to handle important
matters. Whereas small businesses, do not usually have time for neither of these practices and find
that it is more effective to simply address problems quickly and independently. In conclusion, small
businesses may evolve into large business according to structural, innovation processes, changes to
their assets and their characteristics may get closer to the large business layouts.
2. Read the paper from Schindele and Weyh (2011), answer the following questions:

3. What is survival rate of small business in manufacturing service sectors? What are the reasons
for this level of survival rate?
A survival rate is defined as the share of new businesses that survived up to a certain year after
their start-up, specular to hazard rate the share of new businesses that exited the market in a year t
given that they survived until t - 1. The analysis by Fritsch and Weyh is specific to Western German
start-ups in the years 1976-2004. On average, 94,669 start-ups were formed each year, when looking
at the overall private sector industry, of which 23% are in manufacturing and 77% in the service
industry. The shares are relatively stable over time, the number of start-ups varies between 81,809
and 115,859. The survival rates depend on liability of newness: the risk of young businesses are
relatively higher at start-up time and then decreases over time. Therefore, the risk of failure for start-
ups in the first year is very high.

4. Do new businesses contribute to the employment?

The average initial size of employees is 2.04; specifically, in the manufacturing sector it amounts to
2.75 while in the service sector is 1.82; as it considers the share with more than one employees then
the increase is steeper (34,56) in all private industries. Only few of the surviving businesses grow and
create jobs, especially the manufacturing sector. It is important to take into account that the database
records only businesses with at least one employee other than the owner, start-ups without any
employees are not included. Therefore, if the data would instead include new businesses with zero
employees the average initial size would otherwise be lower.

The number of employees increases in the rst years and then falls below the initial level after about
8 years. After 29 years, the number of employees is about 50% of the initial number of employees in
all private-sector industries. It depends on the mortality risk that increases after in average 18 years
due to liability of aging. Liability of aging involves: liability obsolescence in which an erosion
of technology, products, business concepts, and management strategies occurs over time, and the
liability of senescence, which concerns the aging of long-established organizations. A
phenomenon that would prevent liability of aging is the lack in finding a successor to take on the
business.

With regards to the size, at least 50% of the firms start with only one employee. As stated in the paper:
After 10 years, more than 82% of the employees work for the largest 25% of the initial start-ups.
The paper highlights that the contribution of new businesses to overall employment in 2004,
compared to the previous years, has increased more in the services rather than in the manufacturing
sector. However, just a small proportion of new businesses create jobs. In the long run, only the firms
with a consistent initial employment grow over the first years with an average growth of 150%, but
due to the liability of obsolescence after 25 years, the number of employment declines.

5. Why are there differences in small firm formation rates between countries?

The formation of small businesses may depend on several variables such as macroeconomic, social
and political factors; their flexibility, globalization and opportunity in the market, the availability of
information and others which determine differences in the formation rate between countries.

In particular, it is important to highlight the following aspects:

- Higher unemployment rates of a country may result in self-employment rather than an

exhaustive search for a job.
- Government support: Government often provides incentives for small businesses (fiscal or
financial benefits) to stimulate new business formation.
- Niche markets: these are formed by highly specialised businesses and there are low entry
barriers. Small businesses find it easier to access these markets and find opportunities given
the small pool of potential customers.

Another important aspect concerns the availability of capital or rather financing capital.
Venture capital and business angels typically assist young and growing firms.

6. What are the major differences between business angel investors and venture capital companies?

Financed subjects: Business angel is generally likely to finance start-ups: companies that have not
yet entered the market (or have just entered), which have a small business size and growth and
expanding projects. Venture Capital companies, on the other hand, tend to grant financing to already
solid businesses which have already well-established market positions and great opportunities to grow
their business in a relatively short time. They select the companies through market search to invest in
so to avoid adverse selection- (due diligence).

Financial amounts: the amounts provided to the firms by Business Angels is lower (50-100k) than
that of Venture Capital companies.

In particular, the Business Angel is often a wealthy person who seeks for investment opportunities
and is able to better advice on start-up processes and during the development phase. Venture capital
companies are entities or business enterprises developed with the intent of profiting financially. The
participation of the venture capital has more a "control" function, such as monitoring, staging etc.,
rather than a procedural development one: they invest funds in stages, make legal contracts: managers
are remunerated through dividends instead of salary, they can do better things, they may require an
appointment of a non-executive director within the board of directors).

Venture capital businesses are interested in high returns in the short terms and gain through holding
shares in companies in which they have invested. It could involve mezzanine nance, between debt
and equity, bear interests, often carrying the option of giving to the lender a stake in the equity. ON
the other hand, Business Angels are interested in the long-term performance of their investment and
usually gain in exchange of convertible debt or ownership equity.