Three months after he joined the National Center for the Middle Market (NCMM), business journalist turned knowledge guru Tom Stewart is busy authoring a new narrative for middle-market businesses everywhere. Middle-Market Executive recently spoke to Stewart after he facilitated a panel discussion among middle-market businesses in upstate New York. The NCMM is a collaboration between The Ohio State University Fisher College of Business and GE Capital.
MME: Why has the contribution of middle-market firms so often been ignored when it comes to the U.S. economy?
Stewart: As it has been with most things, the press’s attention has been focused on big companies. You don’t sell more magazines by putting the head of a midsize manufacturer from upstate New York on your cover, and likewise you find that there’s very little academic work because most of these companies are private and there are no data sets. You see this sort of gap in between the Fortune 500 article and the classic Inc. magazine article about someone who maxed out their mother’s credit cards — and suddenly the tide turns and they’re in good shape. There is this vacuum, and people are unaware of the power and vitality of these midsize companies. There are some exceptions: The people who sell to the middle market are very much aware of it, so whether it’s a software company or a business services company, they recognize that the middle market is where the growth in their customer base is and where they are adding customers. A surprise for me has been realizing that it’s within this band of between $10 million and $1 billion in revenues that you see organic growth. Interestingly, job creation in small businesses is just as much about new business formation as it is about growth within existing businesses.
MME: What are the commonalities shared by those states where midmarket firms are thriving today?
Stewart: The early lesson that I’m drawing is that from a national perspective, the business of luring a company from one state to another is a zero-sum game. From a national perspective, we should be focusing on things like exports or creating a skilled workforce. The other thing that I’d like to point out — and this is really my early thinking on the subject rather than research — is that states and cities, like companies, should think about their core competency. How and where will they win? If Illinois is never going to beat Texas on taxes, the question becomes, Where will Illinois win? Why would you want to locate and grow in Chicago? There’s a cost of doing business someplace and a value of doing business. Clearly, big cities have costs, and they also have consumers nearby and more skilled workers. The approach that is really interesting and that you keep hearing about is that of clusters. In New York, the wine and beer industry are interesting examples of the state saying that these are interesting industries. How do we seed the clouds to create the rain so that we can grow them more? What can we do more of to encourage the formation of clusters? And this means the right kind of cluster. You go to Wichita, Kansas, and you have a sizable aerospace cluster. I spent a lot of years in the publishing business, and for a long time, the book industry was 90 percent in New York and 10 percent in Boston. One of the biggest challenges for publishing professionals in Boston was that unlike in New York, it wasn’t always easy to make a lateral upward move for promotion or to find the next job, so the cluster both creates and attracts.
MME: What can you tell us about the different types of firms that populate the middle market?
Stewart: Well, 80 percent of the middle market is privately held today. They’re about one-third family-owned, one-third private equity, and one-third “other.” There was a recent study that showed that there are fewer small IPOs now and they are not succeeding as well, and this really reveals two things. One — the good part — is that private capital tends to be long-range — it’s not quarter to quarter. It tends to be more patient. The bad news is that it tends to be more risk-averse. These are companies that can afford to place fewer bets, so they are being a little more cautious about the number of bets. The other piece of bad news is they’re paying a little more for capital, so this may again encourage a certain amount of caution in their investment.
MME: Are we seeing an escalation in the amount of business that midmarket firms capture globally?
Stewart: Well, two macro observations: One, I think that we are increasingly seeing that services are tradable. There was a time when the feeling was that they weren’t tradable, but we’re increasingly seeing that they are, thanks to — among other things — IT. A whole bunch of sectors that many believed were not tradable globally are today tradable. The second thing is that if you put up a website, you’re all of a sudden a global company, so the mountain is coming to Mohammed as far as the global market knocking on your door goes. For these two reasons, I think that we’ll see more midsized companies pursuing global business.
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