The secrets of inner city business success

May 13, 2011: 7:21 AM ET
Perez CEO Angela O'Byrne

Perez CEO Angela O'Byrne

FORTUNE -- Over the past dozen years, if you looked at the circumstances surrounding New Orleans-based architecture and contracting firm Perez, the only reasonable forecast you could generate would be failure.

Six years ago, Hurricane Katrina decimated the city. In 2008, the financial downturn not only stopped the construction industry in its tracks, but it also cut off the lines of credit that many small businesses needed to survive.

Then, in 2010, BP began gushing oil into the Gulf of Mexico just off the coast of Louisiana, punishing the local economy even more. But over the past five years, Perez not only survived these onslaughts, the 54-person company experienced a year-over-year growth rate of 102%.

As exceptional as Perez's story is, their performance is on par with other companies listed on the Inner City 100 list, an annual ranking of the fastest growing small businesses in America's urban centers. Compiled by the Initiative for a Competitive Inner City (ICIC), the list is now in its 13th year and gathers insight not only about what makes these firms successful, but also about what competitive advantages they have by setting up shop in inner city neighborhoods.

"These are incredibly successful businesses with products that are crucial to today and tomorrow's economy, and with business models that are run efficiently and well," says Mary Kay Leonard, the president and CEO of the ICIC.

The firms represented on the list have shown, on average, a 30% year-on-year growth rate, she adds. "They are exactly the kinds of firms that we're banking on to pull our economy and our recovery forward."

Anchoring the neighborhood

As the ICIC interviewed this year's Inner City 100 companies, they discovered several similarities among the successful firms. For example, a lot of these small businesses -- as opposed to larger corporate entities -- have become anchors for their neighborhoods. In the wake of Katrina, Perez worked Pro bono on projects to restore the city. Other Inner City 100 businesses, like Lowell, Mass.-based Unwrapped, became neighborhood fixtures when they put large, abandoned industrial spaces back to use.

"These successful, small businesses should be looked at as the anchor -- more so than the national organizations," says Ron Walker, a founding partner and president of Next Street, a New York-based consultancy that helps small, urban businesses improve their operations and finances.

According to Walker, most small firms that have been in business for years are extremely loyal to their community base, and do lots of work around building a workforce that meets their needs.

"We hear the larger companies say this workforce is not available in the urban markets, but for small businesses, [the] workforce was not an issue at all," he says. "They're confident once they go into a neighborhood, they're going to attract employees who want to live and work in that community."

Staying strong through the downturn

ICIC also found the companies that maintained their staff rosters and budgetary continuity throughout the downturn have performed better than those that made cuts.

In a survey of more than 450 Inner City 100 companies from 2003-2011, only 23% laid off employees and 52% actually increased their marketing and outreach for more business. To keep up with the challenging times, 59% of respondents made up for budget shortfalls by reducing operating costs, including payroll.

"What's interesting to me about these firms is that they are on average 12 years old," says Leonard. "They have figured out -- over lean times and fat times -- how to consistently grow, mostly through careful use of debt, investing their own profits back into the business, and real management of operating costs."

Walker agrees, having first-hand experience helping small businesses maneuver the recession. "These companies are more flexible and nimble," he says. "They can make decisions around strategy, cost, marketing which actually allows them to weather the storm."

A clear, common thread among these successful companies is that they have plans in place that allow them to quickly identify where to make cuts so they can create capital to pursue opportunities.

Credit, by and large, was just as difficult for these companies to come by than any other firm in the market.

"Access to capital continues to be a big issue for inner city firms," says Leonard, and 69% of survey respondents said that they were negatively affected by the credit crunch. "These firms have been able to grow sometimes because of capital, but other times because they get the next big customer, because they have been able to bootstrap themselves and invest back much of their own profit into the growth of their company."

Construction and engineering companies, which make up 14% of this year's Inner City 100, embody this nimble quality in particular. (The construction industry tied for second with manufacturing on this year's list, but both are behind the first-place service industry, which claims 61% of the listed companies.)

To land the lucrative federal highway and transportation contract opportunities that have popped up, these companies must have a workforce on-hand to ramp up on projects quickly.

"We've seen companies that two years ago were really having a hard time, but because of the number of federal programs going out, [they] are actually seeing increases in their revenues," says Walker.

Making new connections

As a result of keeping budgets at status quo (and advances in technology over the past few years), Inner City 100 companies have excelled at making new connections, both in the real world and online.

CEOs of these fast-growing companies have been tactical in which business associations they join, and have attended conferences that have the potential to lead to large corporate or government clients.

Last year, 45% of the surveyed companies listed either the government or large companies as their primary customers. For example, with 80 employees and $5 million in revenue, Unwrapped stitches together bags for Trader Joes, mattress pads for Wal-Mart (WMT, Fortune 500) and Target (TGT, Fortune 500), and gloves for the U.S. Army (which accounts for 50% of the company's business).

Many of these companies also connect with customers through social media, which has helped level the playing field with larger firms, says ICIC's Leonard. By using social channels to keep customers aware of company developments and new products, "they are masterminding a very efficient and low-cost tool," she says.

And they're deploying it on a large scale. Ninety-three percent of these Inner City 100 businesses claim to use social media marketing, with 71% describing the new channel as their primary method of reaching customers. But it's not just about firing off a tweet or opening a Facebook account, says Next Street's Walker. These entrepreneurs are weaving social media into the fabric of their identity, conducting brand audits and determining the best way to reach their customers.

"We have seen that companies we work with are now looking at their marketplace and how to effectively use their website and tools to get into this marketplace," he says. "Social media is at the top of their list."

Ultimately, though, it's entrepreneurial spirit that's the most common characteristic among the Inner City 100 firms -- an attitude that a company of any size, in any location, would do well to emulate.

"The optimism that these companies portray is indicative of entrepreneurs," says Leonard, "and it's that optimism that pulled them through the recession and is pulling them forward to the kind of growth that we're seeing." To top of page

Find Homes for sale
  • Property Type
  • Find a home in:
    New York | Atlanta | Chicago | Los Angeles
    Washington D.C | Houston | Philadelphia | More options
CNNMoney Sponsors
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.