Small Business 2001

Pennsylvania would like more of them. So would Arizona and probably every other state. "Wanted: More Small, Fast-Growing Firms" was the plaintive title of a recent article by an economic- development official in the University of South Carolina's Business and Economic Review. Politicians and planners have learned what researchers discovered many years ago: there are small businesses, meaning everyday, Main Street companies that start small and stay small, and then there are hot rocket-ship companies that start small and get bigger fast. If you want a lot of new jobs, you want a lot of the fast-growing entrepreneurial businesses known as "gazelles." (See "Birch's Bestiary," below.)

But few segments of the small-business landscape generate quite so many misconceptions. Among them:

Gazelles are all in high tech. Nope. Of course, many of the most visible small companies are. For example, a sizable percentage of the businesses that make Fortune's annual list of the 100 fastest-growing small companies are in high tech. Those companies (by definition) are all publicly traded, which skews the list toward technology. Overall, though, close to 30% of all gazelles are in wholesale and retail trade (not too tech-y), according to David Birch of the research company Cognetics. Another roughly 30% are in services (some tech-y, some not). Of the gazelles on last year's Inc. 500, only 47% were in computers or other electronics. Just as typical were companies like HealthScribe Inc. (#20), a medical-transcription service.

Gazelles get venture capital. Well, yes, VC firms hope that all their investments will go to gazelles. But most gazelles don't get any formal VC money at all. The proof is in the figures: gazelles as a group number some 350,000, and even in last year's VC boom only about 5,000 companies got funding.

Gazelles are all young. Interestingly, Birch's research finds that as a group, gazelles are somewhat older than small companies in general. Sure, a few companies take off like rockets almost from birth. More common, says Cognetics in a study of gazelles, is a "gradual development phase followed by a robust (but not explosive) growth." Nearly one-fifth of gazelles have been in operation 30 years or more.

Gazelles are all small. Small-business advocates like to make that claim -- and certainly new gazelles are necessarily small -- but gazelles as a group include companies of all sizes. The big ones (think Cisco Systems, which has grown its revenues at a compound annual growth rate of about 57% over the past five years) aren't significant in their numerical totals, but they account for a sizable share of the new jobs created by gazelles.

Gazelles operate in national or international markets. Not necessarily. A study of fast-growing companies in Georgia a couple of years ago, published in Economic Development Review, found that some gazelles did go national or global, but many didn't. Among those that didn't: a catering company and a seven-outlet fast-food franchise. "Most growth companies are in low-tech or traditional industries," concluded researchers Emil E. Malizia and Rebecca M. Winders. "Most serve local markets," says Winders.

Birch's Bestiary

Gazelles? Gazelles? Some years back, David Birch of the research company Cognetics conferred that name on fast-growing companies, thereby distinguishing them from the "mice" on Main Street and the "elephants" on the Fortune 500. The name stuck. We're looking for "gazelles," the president of an incubator in Tucson recently told the Arizona Daily Star -- companies that can "run fast and jump high."

Birch's definition, also widely adopted: a gazelle has to grow at least 20% a year for four years, from a base of at least $100,000 in revenues -- in effect, at least doubling in size over that four-year period. A modest hurdle? Not really. By Birch's count, only about 352,000 companies qualify. That's only about one out of every 16 companies with employees.

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Published on: May 15, 2001