Growth Is in Overdrive on This Year’s Inc. 500

Inc.'s inaugural ranking of fast-growth businesses, published 30 years ago this year, would not have won any awards for design. In December 1981, our cover trumpeted this unmellifluous mouthful: "The Inc. Private 100: One Hundred of the Fastest-Growing Privately Held Companies in the United States." Worse was the typeface, a baroque script that (and this is just a guess) may have been meant to suggest the work of a quill pen, the sort wielded by the signers of the Declaration of Independence.

Conceptually, though, the message was right on. Thirty years ago, the list was revolutionary.

In 1981, economist David Birch had yet to isolate the job-creation might of fast-growth companies, which he famously dubbed gazelles. The venture capital industry was just starting to bulk up; it raised $4 billion in 1980. But the Inc. Private 100 was already pounding home some central tenets of contemporary entrepreneurship: the tendency of private companies to outpace public ones in performance and employment, the desirability of organic growth, the ascendancy of asset-light enterprises over capital-intensive ones.

And while the public perception of entrepreneurs as a heroic, exotic breed was still nascent, their distinctive psychology emerged full blown in interviews with that year's honorees. The CEOs on the 1981 list sound a lot like those on the 2011 list—and on all the lists published in between. They were master narrators of their own stories, displaying the particular entrepreneurial blend of hyperconfidence and pragmatism.

In the 1981 equivalent of this introduction, for example, the founder of a $27.8 million discount brokerage predicted he would one day preside over a $200 million business. Three decades later, his company, the namesake Charles Schwab, isn't just still standing, it is towering, with 2010 revenue of $4.5 billion and 12,800 employees. The software developer SAS, another 1981 honoree, is now a $2.4 billion company with 12,000 employees. (Read our interview with James Goodnight, founder of SAS and perhaps the quintessential Inc. 500 CEO.) Godfather's Pizza and DHL, also on that initial ranking, became huge household names before being acquired.

We are punch-proud of those early alums and of other titans that have graced our list over the years: Microsoft, Jenny Craig, Oracle, Timberland, Domino's Pizza, and on and on. View a graphic representation of the impact made by some of the best-known Inc. 500 alumni.

There is an extraordinary amount of talk about job creation today, and growth companies, not large corporations, are where the action is. In the United States, companies five years old and younger account for virtually all net job growth. Of this year's Inc. 500 honorees, 488 added jobs from 2007 to 2010. Collectively, they generated 35,823 jobs over three years. The companies in the Fortune 500, by contrast, eliminated 821,000 jobs in 2009 alone, despite buoyant profits.

As it goes here, so it goes around the world. The Global Entrepreneurship Monitor, or GEM, studies activity in and attitudes toward entrepreneurship in 59 economies, representing 84 percent of world GDP. In 2010, 63 million respondents to GEM's survey said they expected to hire at least five employees over the next five years, and 27 million anticipated hiring 20 or more. Entrepreneurship's reputation is also ascendant. "In a lot of the developing economies, there is a big increase in positive attitudes," says Donna Kelley, an associate professor at Babson College and a GEM director. "Entrepreneurship's status in society is rising in places like China and Korea, where it was considered a noble career to be hired by a large company or the government. In places like Argentina and Brazil, entrepreneurship is becoming part of the common vocabulary."

Yet while it is tempting to wax David and Goliath-y in this anniversary year, we should give due credit to behemoths and behemoths-to-be. Fantastically successful companies that outgrow the Inc. 500 live in different worlds, and their leaders have different concerns from most of our readers. But that doesn't automatically make them less admirable, less innovative, or even necessarily less likely to create jobs. In the overall economy, the big guns still make the most noise. Perhaps then, in these troubled times, what we need is more howitzers.

That, at any rate, is the contention of Robert Litan, vice president of research and policy at the Kauffman Foundation, a nonprofit that studies and promotes entrepreneurship. Last year, Litan published a fascinating paper contending that the United States could goose GDP by 1 percent annually if every year it minted 30 to 60 companies that eventually reached $1 billion in annual revenue. In the paper he concluded that, over a century, a 1 percent annual bump would mean "a dramatically lower level of poverty, while the average American would have a living standard that is three times as comfortable as one that he or she would otherwise enjoy."

Litan's inspiration was a study by Yale economist William Nordhaus, who suggested that inventors capture only 4 percent of the value of their inventions, while the other 96 percent "leaks out" to other businesses and industries. Substituting entrepreneurs for inventors, Litan calculated the impact of so many large, successful businesses, which would become substantial employers, create work for suppliers and distributors, and—most intriguingly—inspire additional start-up activity around new platforms they might invent. "I picked a billion dollars as a proxy for firms that generate substantial externalities," says Litan. "You build a company that size, and a lot of people benefit. If you are a car company, for example, you have employees and suppliers and dealers, and the employees of those suppliers and dealers. Add up all those things, and they swamp what the founder gets."