One pair of boots belongs to Gary Kunkle, founder and CEO of Outlier and research fellow of the Edward Lowe Foundation’s Institute for Exceptional Growth Companies. His specialty is economic development and firm growth, a field he’s been working in since 1988. In 2005, he was hired by Pennsylvania—whose governor at the time was Ed Rendell, a liberal Democrat—to investigate the role of high-growth companies (or “higros,” as he calls them) in job generation. The program has since been expanded by Rendell’s successor, Tom Corbett, a conservative Republican. In the meantime, Kunkle has been hired to put together similar projects for Louisiana and Indiana. Along the way, he has done hands-on research into more than 600 high-growth companies and come to some interesting conclusions.Among other things, Kunkle has found that many existing government programs are counter-productive. “The policy makers don’t understand what’s going on at ground level,” he says. “They don’t know the causal factors for growth, and so they pursue wrong-headed strategies left and right.” He cites direct financial assistance as a prime example. “When we make cheap capital available to companies, we’re actually doing three very negative things. One, we’re taking away their incentive to monitor utilization rates, and so they wind up with too much capacity, which can come back to haunt them. Second, the cheap capital distorts the process by which the market screens out bad ideas and shifts capital to better ideas, and so bad ideas get overfunded. Third, the companies get saddled with more debt than they’ll be able to handle, which increases the chance of them going bankrupt.” A case in point: Solyndra, the best-known of the Obama administration’s failed green energy initiatives. “It’s a huge issue. Cheap capital is the main policy tool of both state and federal governments, but all it does is create an unsustainable growth spurt while destroying capital stocks and putting employees and taxpayers in a worse position afterwards.” To be sure, it would come as a surprise to owners of fast-growing companies that having too much cheap capital could actually be a problem. After all, they’re more likely to go out of business due to insufficient capital, as has been documented by Doug Tatum, the author of No Man’s Land and co-founder of professional services firm Tatum, which—during his tenure as CEO and chairman—focused on providing financial expertise to high-growth companies. Through his work there, he came to see that one of the greatest threats to gazelles is the capital gap they run into when they reach the stage of being too big to receive loans secured by personal guarantees and too small to be profitable investments for banks or private equity firms. “Lack of capital is one of the biggest problems, maybe the biggest problem, these companies face,” Tatum says. But he doesn’t dispute Kunkel’s main point. “Cheap capital is a problem when it’s the government, rather than the market, deciding who gets it.”
So is there any positive role that government can play in the job generation process? The answer is yes, although it’s different from what small business advocates typically push for. For one thing, they tend to focus on programs at the federal or state level, while the government that matters most to gazelles is usually local. “When you get down to ground level and see how they operate, you may find some things with implications for federal policy,” says Kunkle, “but a lot more issues have to do with the local environment—the local facilities they’re in, the local employment pool they draw on, the local government agencies they deal with.”There are, indeed, some initiatives already under way that hold promise, while others could be implemented to address the documented needs of gazelles. For example:
This is another area in which Kunkle sees misguided government policy at work. “In most cases, government-sponsored job training is actually a social program” aimed at preparing people for entry-level jobs, he says. “But companies that grow and create jobs can usually find the entry-level people they need. Growth begins to stall when they can’t find supervisors to manage all those entry-level employees.” If we want to help gazelles create jobs, he argues, it makes more sense to train hourly people to become supervisors, rather than programs to train unemployed people to become entry-level employees. “By giving people the ability to rise up in a company through hard work and aptitude, you create social equity and solve a big problem of growing companies at the same time.”
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Bo Burlingham: Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business. @boburlingham