Tackling myths in entrepreneurship policy: what high growth firms really look like

By Dr. Ross Brown and Dr. Suzanne Mawson 

Ever since the US economist David Birch provocatively asked “who creates jobs?” in the 1970s, the topic of rapid firm growth has captivated the entrepreneurship and small business communities. Prior to Birch, most economists and policy makers assumed that corporate behemoths like IBM, Ford and General Electric were the primary creators of new jobs in the US. Birch’s pioneering work, however, found that small rapidly growing firms – so-called “gazelles” – were in fact the primary source of new net job creation within the US economy.

It is hard to overstate the impact that Birch’s findings have had on policy makers in the US and further afield in other advanced economies.  This is no more evident than here in the UK, where for over a decade, policy makers have focused on stimulating a business climate that helps firms to grow and scale up rapidly.  This focus on gazelles partly owes to their perceived ability to create jobs, but also aims to tackle the UK’s key entrepreneurial “deficit”.  Indeed, the government’s recent green paper on Industrial Policy highlighted that while the UK ranked third among OECD economies for start-ups, it ranked 13th for the number of businesses that successfully scale-up.

So how do we transform more start-ups into high growth scale-ups?  Over the last decade we have undertaken numerous studies to explore this issue, examining the nature and types of interventions designed to help foster “gazelles” or high growth firms (HGFs).  On closer inspection of the evidence, what is clear is that policy makers have certain misconceptions about the nature of these firms.  These “myths” are at odds with the empirical evidence and yet they continue to shape (both intentionally and unintentionally) entrepreneurship policy.

Myth #1 HGFs are young and small

Given that interest in HGFs stemmed from the observation that young, small fast-growing firms created the bulk of jobs, it is unsurprising that HGFs continue to be portrayed within policy circles as dynamic young ventures.  However, a considerable body of work has shown that many HGFs are often quite well-established, with some averaging 20 years or older.

Myth #2 HGFs are high-tech

Despite significant interest in ‘high-tech’ firms, HGFs are not synonymous with high tech industries. Yet although there is plenty of evidence proving this, the belief subsists among politicians that high tech sectors are the most likely to produce HGFs.

Myth #3 HGFs come from Universities

Related to the myth of high tech, there is an entrenched belief within public policy that universities generate HGFs. Despite this belief, the evidence shows that very few university spin-outs grow and the vast majority remain very small. Few ever become HGFs.

Myth #4 HGFs are VC-backed

Related to the myths that HGFs are young and high-tech, they are also believed to require venture capital (VC) and funding from business angels. Recent evidence from the UK shows that only a tiny fraction of UK HGFs (less than 5%) are VC-backed, with the majority preferring to use their own internal funds or conventional debt-finance like loans. 

Myth #5 HGFs grow steadily

A hangover from the early firm growth literature – still evident in policy circles to this day – is that HGFs experience steady linear growth akin to the human lifecycle. Considerable evidence now shows that rapid growth is in fact erratic, unpredictable, sporadic and often of limited duration. Furthermore, a large minority cease to exist post-high growth: some label them “Icarus firms” as a result.

Myth #6 HGFs grow organically

Many policy makers still view growth as the result of internal “organic” processes within firms. Recent evidence suggests however that many HGFs emerge from existing firms undertaking a period of organisational change – such as a management buy-out (MBO) or management buy-in (MBI) – and that they frequently grow thanks to acquisitions.

Myth #7 HGFs are the same irrespective of location

HGFs are believed by many policy makers to have the same impact on job creation and wider economic development regardless of their location.  Yet research shows that the economic impact of HGFs varies spatially, with HGFs in regions such as Scotland creating considerably fewer jobs than their counterparts in London or the Home-Counties.

Conclusion

Despite convincing evidence to the contrary, policy makers commonly view gazelles as a homogeneous group of small firms that are predominantly high-tech, university-derived and VC-backed. In reality, gazelles are a highly heterogeneous set of firms.

Yet myths about the nature of HGFs strongly shape our current policy landscape, from the targets of entrepreneurship policy (young and high-tech firms) to the thematic orientation of programmes (R&D support and co-investment schemes), to the eligibility criteria for interventions (age of firms, university spin-outs, organic growth and so on).

It is clear that there is a critical misalignment between the assumptions of policy makers and the developing evidence base on the nature of HGFs, which is worrying given the current policy focus on these firms. If the goal of generating more scale-ups is to be effectively realized, policy makers urgently need to realign their interventions with the empirical evidence.

Dr. Ross Brown (Ross.Brown@st-andrews.ac.uk) is a Lecturer at the School of Management, University of St. Andrews.

Dr. Suzanne Mawson (Suzanne.Mawson@stir.ac.uk) is a Lecturer at the Management School, University of Stirling.