When Big Businesses Help Small Businesses
Daniel Levy, owner of Manhattan Home Design, a New York-based modern furniture seller with around $500,000 in annual sales, knew he needed a leg up in tough economic times. So when he heard that Goldman Sachs was creating a $500 million program to help small companies by providing them with mentors, management training, and access to capital, he did everything he could to get in.
The program, called 10,000 Small Businesses, paid off for Levy. "I made the kind of connections it would be very hard to do for a small company," he says. "I had Goldman Sachs executives as a mentor, I met Warren Buffett -- we got the type of personal guidance that I'm sure I could not have gotten otherwise."
Fortunately, the Goldman Sachs program is hardly unique. Since the beginning of the economic downturn in 2008, large U.S. corporations have increasingly been launching programs to help small businesses, including ones focused on mentoring and raising capital.
Coalitions of Help
A coalition of larger companies including IBM and Pfizer came together to create a joint website, Supplier Connection, designed to help small firms with getting contracts to supply goods and services to them. Working with the federal government, earlier this year Intel and several other large tech companies announced plans to spend $150 million to $200 million each on programs to boost investment in startups. L'Oréal recently launched a program to help small salons that carry its products market themselves more effectively on Facebook. British Airways even chartered a cross-Atlantic flight and filled it with American and British entrepreneurs to help them network.
The big business connection can be critical for small firms. A study by the Center for an Urban Future, a New York-based think tank, found that small companies that became suppliers to large firms more than doubled their revenues, compared to small companies that did not become suppliers.
What's In It for Them?
But even as entrepreneurs take large companies' largesse, many small businesses can't help looking the gift horse in the mouth -- wondering why corporate America has suddenly discovered them.
To be sure, PR is one major reason for big business's interest in small companies. Goldman launched its 10,000 Small Businesses initiative shortly after the financial institution came under a harsh spotlight for its role in peddling risky derivatives before the economic downturn.
"Goldman needed to repair its image, [but] what they did for small business helps a lot," says Rieva Lesonsky, small business consultant and AllBusiness.com editor-at-large.
And there are other benefits for the big boys, too. Lesonsky says that by investing in these small companies, which doesn't cost much by Goldman standards, Goldman gets its brand name in front of the entrepreneurs, so if one of the startups turns into the next Facebook or Twitter, they're more likely to use Goldman's services -- and make money for the bank.
A Dark Side?
Larger companies often believe fostering small business will eventually produce other benefits for themselves. For large firms such as IBM or Home Depot, training small companies increases their pool of suppliers, which means they may actually be able to negotiate lower prices from these small suppliers, by playing them off of each other.
And it gets worse. Jeffrey Leonard, head of a small private equity company that invests in small business, notes that even though large firms tout their aid to small companies, they're actually hurting entrepreneurs on a daily basis. The key punishment? Refusing to pay small suppliers until four months after their services are delivered, a popular new tactic in corporate America.
Whatever big business's reasons for launching these programs, entrepreneurs can still benefit, if they understand how to take advantage and remain wary of the risks.
Just as large retailers like Home Depot want to find new suppliers, small companies can use the programs to gain entrée to top executives at Fortune 500 companies and get their products in front of decision-makers with enormous budgets. Without special access, most small companies have trouble getting into large firms' supply chains and may not even be able to find out who to pitch at big firms, notes Mark Foggin of the Center for an Urban Future.
Still, Foggin warns that smaller firms run a risk working too closely with large companies. They can become too dependent on a few large customers to provide them with work and assistance; if something happens to those relationships, their entire business could be threatened.
Other small business experts believe that for many companies, dancing with the elephants is worth the risk. For example, with banks still cautious about lending to small firms, entrepreneurs can leverage their relationships with large businesses to gain access to needed capital. Because the Goldman program, for example, chooses small companies that have already been in business for two years and developed a solid cash flow, membership is like a stamp of approval.
"I don't need to raise capital now, but if I did, having executives from Goldman alongside me, it would really help," Manhattan Home Design's Levy says.
Entrepreneurs can also use the mentoring portions of these programs to gain needed skills, especially in marketing and promotion.
Ironically, the most valuable aspect of these big-business programs may be the networks formed with other small business people.
"I didn't expect it, but I wound up finding people in the program in similar situations, and we developed a close business relationship," Levy says. "One [of the other participants] does delivery for me, I can call one who's in construction … I wound up with a community of other entrepreneurs."
