Hunting Gazelles: Figuring Out What Makes Companies—and Jobs—Grow

Posted by Tim Fernholz

Last year, a study seriously dented the conventional wisdom about job creation. It found that a disproportionate share of jobs are created not by big or small business, but by fast-growing new businesses who occupy a middle space between the two. These “gazelles” are less than 1 percent of all companies, but generate 10 percent of new jobs every year. GOOD talked to Tim Kane, a senior scholar at the Kauffman Foundation, the entrepreneurialism-focused think tank behind the study, about the impact of these companies on the economy. An edited version of our conversation follows.

So what’s the deal with these gazelle companies?

A lot of us believe that entrepreneurship matters to empower people, but I think the research surprised us. Ten to 15 years ago, the data didn’t exist to answer the questions we really wanted to answer. You can look at companies now by firm age, by their size. I’ve started a couple companies, [but] I was blown away to find out that start-ups, these zero-year-old firms, create 100 percent of net jobs year after year in the U.S. economy.

What were you expecting?

It surprises our biases because the media is telling us about AT&T cutting jobs, and we assume that in good times AT&T is hiring 50,000 people. In fact the daily story is that there are thousands of people starting companies in every city in America every year, but it doesn’t seem like a big deal. You maybe hear about a friend who started an oil changing business or a restaurant, but if you multiply that by 300 million people, you have a big story. Some of them become gazelles, some of them stagnate after three years.

How does a company find itself in that category?

The ones that become gazelles have the ability to scale, whether through brand or through technology, and the internet really enables a lot of scaling, but you don’t have to be an internet business. You can use some kind of outsourcing, whether outsourcing their taxes or their accounting.

Your research shows these companies drive job creation, but that they’ve been underperforming in recent years. How do you explain that?

This great recession we’re going through. Technically, it’s over, but the person on the street doesn’t think it’s over, and economists are starting to catch up—realistically, we’ve never gotten out of this recession. No one wants to risk their capital right now

Can we find and boost these gazelles to help grow our way out of the recession?

If we knew who the gazelles are, then we could target policy to grow the gazelles. We can’t know that until after the fact. Nobody thought there would be a social network boom, everyone thought it was biotech ten years ago. Now they’re saying it’s green jobs and energy, but we don’t know. That’s the danger in thinking you can choose gazelles. I don’t think we can understand them on a sectoral level, we can understand it on a growth level: When a company is at a hundred employees and going to a thousand, what are the impediments to growth?

What are some of those impediments?

There are real structural impediments to starting a firm. If you’re a big company, it’s easy to hire people because the law says you have to prepare health care benefits, and it’s kind of hard for an entrepreneur to create that kind of package. Labor regulations can make it difficult for entrepreneurs to even leave, and difficult for firms to hire more people. A third of all jobs in the U.S., you have to have a license for.

The [Sarbanes-Oxley accounting law] is particularly galling because it seems like its killing off our IPO industry.  Without an IPO or the promise of an IPO on the horizon, why start a tech company? The Sarbox rules, consensus estimates are, they cost a public company about a million dollars a year. Not a big deal if you’re a multi-multi-million company, but project that over the life-cycle of the firm.

Another big one is that America has this dirty secret that we’ve bottled up technology in our universities. Our scholars at universities invent a lot of technology but for them to actually license it out—you’re a researcher at Texas Tech and you come up with something new, even get a patent on it, you have to get the university’s permission to license it. [And] we think you’ve got to have high-skilled immigration, especially if you have students here who are attending U.S. universities already and getting science and math degrees.

Photo via (cc) Flickr user Valentina Storti