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An Inc. executive editor speaks with noted economist David Birch about how growth companies really behave.

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David Birch was first to tell us how growth companies really behave. Now he's telling us what they really need. Is anybody listening?

"On my tombstone," says an amiably frustrated David Birch, "they'll write, 'David Birch discovered that small firms create most of the jobs.' God gives you one sentence--that's as much as people can remember about anybody--and that's the one they'll be writing about me."

They already are. In Stockholm last year, Birch was awarded the first annual Nutek Prize--a kind of "baby Nobel" is how the Swedes characterize it--which recognizes work in the field of entrepreneurial- and small-business research that has stood up to time and has broken a new path for work that's come after it. Birch, the award's prototype recipient, was feted at a ceremonial gala in the stone-arcaded banquet court of Stockholm's city hall. People from 67 countries were there. So was Sweden's king. And at the heart of the proceedings was another riff on that eulogistic sentence: "Dr. Birch is best known for having identified the role of new and small firms in job creation, which has considerably contributed to the recognition of the small-firm sector."

And contributed it has. In fact, from the moment of Birch's tide-changing 1979 study, innocuously titled "The Job Generation Process," his career seems to have moved in lockstep with entrepreneurship's march from irrelevance to center stage. Sometimes it was Birch himself who had to kick the campaign forward. "You should have seen the audiences I got when I started in 1980 to 1982. I was like the freak show at the carnival. There was the mainstream thinking--all about the role of the large company--and then there was this kook over here talking about something else. If I got 30 people in a room, it was a good day. Once, when I was invited to a huge university auditorium, I got 12--half of them my own employees. God, it was awful."

Those stories of the early days remind us that it's only much later, when everyone's mind has been changed and important people show up with prizes, that it feels good to be a pioneer. But Birch carried on. And events caught up to his small-business obsession: as it turned out, 1979 was more than the year of his research breakthrough--it was also when the employment rolls of the Fortune 500, which had expanded every year for a quarter century, began a contraction that still hasn't stopped.

Today, Birch speaks about company growth in countries throughout the world and draws audiences in excess of 1,000. His own company, Cognetics Inc., in Cambridge, Mass., continues to thrive as a repackager of his research on job generation and entrepreneurial activity. And foreign leaders, corporate CEOs, and fellow academics call him for advice. Birch, like the once-peripheral subculture he studies, has arrived.

Imagine our surprise, then, to find him still feeling misunderstood. We began our interview by asking what misconceptions have remained about the birth, life, and death of businesses, and he immediately cited the oversimplification that could one day become his epitaph: Small companies create the most jobs. "That implies that Norman Rockwell's Main Street America is where growth is coming from, and that's not true," Birch says. "In fact, most small firms don't grow. The gazelles do. And that's only 3% of all the small companies out there."

The behavior of those "gazelles" --companies that grow at least 20% a year for five years in a row--has preoccupied Birch in recent years. That preoccupation has made him an expert on their makeup. Where do they come from? What are their special characteristics? What nourishment do those fast growers need?

We asked him what he's found.

Q. You've said that the role of the entrepreneur, of small businesses creating jobs and wealth, has become such a clichÉ that most people miss one critical fact: only a tiny subset of small companies--3%--do most of the growing. What danger does that misunderstanding pose? What does it cost us?

A. It costs us the chance to have a meaningful discussion about how to really help nurture young firms--how to take some of the terror out of company building--and that's dangerous for our economic future. The claim that small firms create jobs greatly oversimplifies things and leads us as a country into some very fuzzy thinking.

Q. Leading to bad public policy?

A. Yes. Things like small-business exemptions from health-plan requirements or other regulatory measures. Special subsidies and incentives based solely on a company's size. You've heard the argument offered whenever such special treatment is being proposed--it's that these are the companies that create jobs. Well, most of them don't. But people keep using our findings to make the job-creation argument when they need it, neglecting the fact that you're wasting an enormous number of bullets when you institute a program so broadly. If there are 10 million small companies out there, and you've got only 200,000 you're trying to encourage, it's awfully wasteful to give something to 10 million to do it, right?

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