Gazelles, and Why They Matter

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November 29, 2012

Gazelles, and Why They Matter

A gazelle, as you may recall from your favorite wildlife show, is one of those antelope-like animals that run around in herds across the plains and are known for their speed. Sheltered by the herd at birth, their youth is short-lived. In no time flat, gazelles are expected to be up and running or they will be easily devoured by hungry lions.

Probably because of that imagery, the word gazelle is also used in the business literature to represent a young firm that grows very quickly in a relatively short period of time. According to Kauffman Foundation research, the fastest-growing 1 percent of firms typically account for about 40 percent of job creation in the United States. Of that 1 percent, three-quarters are less than six years old. Research also shows that these high-growth young firms are more likely to provide solutions to other businesses than directly to consumers, have some form of intellectual or technological property, and tend to be started by entrepreneurs with business startup experience.

To learn more about the role of gazelles and the challenges they face, the Federal Reserve Bank of Atlanta recently hosted Amy Wilkinson, a senior fellow at Harvard University and a policy scholar at the Woodrow Wilson Center. Wilkinson is a leading entrepreneurship scholar. Her current research focuses on entrepreneurs who scale their company to reach $100 million in revenue in less than five years. (You can see her discussing the topic here.) She has shown that these "founders" tend to drive innovation, and ultimately job creation, in the U.S. economy. These young, high-growth firms are typically driven forward by entrepreneurs with high aspirations, novel ideas, and a strong support system. This support system is analogous to the gazelle's herd'it is a network of financial and human capital providers that help the businesses grow to potential.

To get a perspective on the key drivers and impediments to growth for high-growth-potential firms in the current economic climate, the Atlanta Fed also hosted an entrepreneur roundtable in November. The roundtable included founders of Southeast-based businesses in various stages of development, along with representatives of "the herd."

Many participants indicated that attracting capital in the Southeast has always been challenging, but it has been even more difficult in recent years. Investors in general are more hesitant to take on risk, and the market available for early-stage financing has shrunk. But the biggest impediment to growth in recent years has been the recession and the halting nature of the recovery. The Atlanta Fed's poll of small businesses has noted that business startups today are much more reliant on personal capital versus external capital than was the case for businesses started prior to the recession. The word "uncertainty" was also mentioned a lot, prompting even this group of risk takers to take a bit more conservative stance in their growth expectations.

On the topic of labor, many of these firms cited the importance of having the right talent in place to make a business successful. Participants noted that the person who starts a business is often not the right person to propel the business forward. Recognition of the correct timing of a leadership change and the ability to make hard decisions generally were deciding factors on whether a firm would continue to grow rapidly or plateau. The Kauffman Foundation also cited the important role of talent in its poll of fast-growing firms conducted last year.

Another theme of our recent conversations with entrepreneurs and business experts is the crucial role of the supporting herd in nurturing and enabling a young business to succeed. In building a business from the ground up, a first-time entrepreneur confronts a significant learning curve'from figuring out the tax code to securing financing. The business information and support networks that exist are evolving, but matching ideas to money to people is still not a straightforward process. To complicate things further, "the herd" is not a one-size-fits-all concept; it differs geographically and across industry. As highlighted in a recent Kauffman Foundation study, high-growth firms are more prevalent in some areas of the country, and there are hot spots for certain industries. One group working to make these connections stronger and more efficient is Invest Atlanta, the city of Atlanta's economic development agency. The agency recently launched Start Up Atlanta. The stated aim of Start Up Atlanta is to "'bring together and build Atlanta's entrepreneur ecosystem." Similar efforts are under way across the region.

Considering the significant impact that high-growth firms play in innovation and job creation, researchers at the Atlanta Fed continue to explore the various issues facing young, high-growth potential firms. If you are a small firm and are interested in contributing to this research, we would love for you to sign up for our semiannual poll of small business financing by sending an email to smallbusinessresearch@atl.frb.org.

By Whitney Mancuso and

Ellyn Terry, senior economic analysts in the Atlanta Fed's research department

 

November 29, 2012 in Small Business | Permalink

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