By Christine Hamilton-Pennell
Growing Local Economies, Inc.
Updated December 21, 2010
I’ve been thinking a lot lately about the best target audience for an economic gardening program, particularly in smaller or more rural regions. Over the past several years, I have worked with hundreds of small businesses, helped communities around the country implement their economic gardening projects, reviewed numerous research reports on entrepreneurs, collaborated with Don Macke of the Center for Rural Entrepreneurship, and learned from Chris Gibbons at the City of Littleton. I have concluded that EG programs have three main criteria they can use to determine their target audience: company size (e.g., number of employees and/or revenues), company age, and company growth factors—or a combination of these criteria.
After reviewing all the evidence, I believe I have identified the “sweet spot”—the ideal target audience for most EG programs. First, let’s look at some facts about each of the three criteria.
YourEconomy.org, a website created by the Edward Lowe Foundation, reports data on the composition and growth of the business universe in the United States over time. I checked my analysis of these figures and my conclusions with the staff at YourEconomy.
In this database, resident companies are broken out by stage:
Self-employed (one employee)
Stage 1 (2-9 employees)
Stage 2 (10-99 employees)
Stage 3 (100-499 employees)
Stage 4 (500+ employees)
The data reveal some interesting facts that are pertinent to choosing a target audience for an economic gardening program.
First of all, during the period from 2000-2008 (the period for which figures are reported in YourEconomy.org), Stage 3 and Stage 4 companies across the U.S. as a whole experienced net losses, both in the number of resident establishments and net new jobs. I don’t know anyone who disputes the fact that even during the best of times, the job creation rate across the majority of Stage 3 and 4 firms has been around zero for many years, and losses have only accelerated during this current recession. One exception reported in the literature (Stangler and Litan) indicates that the oldest and largest firms (10,000+ employees), still produce positive employment growth.
Current wisdom in the economic gardening world is that most of the high-growth companies are found in the Stage 2 group. This may very well be true, but this does not mean that targeting this group as a whole is more productive. The data in YourEconomy.org from 2000 to 2008 do not seem to support this conclusion. During that period of time Stage 2 companies across the U.S. averaged 10.6 percent of all resident establishments and contributed 2.0 percent of net new jobs. During the period from 2006 to 2008, the percentage of Stage 2 establishments fell to 7.7 percent of resident establishments, and they contributed to a loss of -1.9 percent of net new jobs.
By contrast, from 2006 to 2008, the self-employed (nonemployers) and Stage 1 companies taken together represented almost 91 percent of all resident establishments and created virtually 100 percent of net new jobs.
A significant factor to take into account is the “churn” characteristic of nonemployer and Stage 1 companies. A large number of these firms start or expand each year, creating a substantial number of the net new jobs, but a large number also shrink or close, eliminating a percentage of the jobs. In fact, fewer than 50 percent of new firms still exist after five years. Nevertheless, the net effect on job creation is overwhelmingly positive.
Many EG programs have discovered that providing extensive services to early Stage 1 companies and nonemployers (“aspiring” entrepreneurs or those in the planning stages) is not very productive in terms of job growth. The exception is when the planned business start-up has high potential to become a growth company.
Taking all of these factors into consideration, it appears that using company size alone as a criterion for selecting a target EG audience does not guarantee the greatest economic growth for a community.
In the recent Kauffman report, Where Will the Jobs Come From?, authors Litan and Stangler analyze Census data, which reveals that two-thirds of new job growth comes from companies that are between one and five years old. Job creation comes from three sources: startups; young firms, ages one to five; and the largest and oldest companies. Taking into account the “churn” mentioned in the section above among the youngest companies, i.e., job creation and destruction, as well as the dynamic interaction between the youngest and oldest firms, they reach the following conclusion:
“…new and young companies and the entrepreneurs that create them are the engines of job creation and eventual economic recovery. The distinction of firm age, not necessarily size, as the driver of job creation has many implications, particularly for policymakers who are focusing on small business as the answer to a dire employment situation.”(http://www.kauffman.org/research-and-policy/where-will-the-jobs-come-from.aspx)
Another study by NBER, Who Creates Jobs? Small vs. Large vs. Young, supports this conclusion. The authors’ main finding is that “once we control for firm age there is no systematic relationship between firm size and growth. Our findings highlight the important role of business startups and young businesses in U.S. job creation. Business startups contribute substantially to both gross and net job creation. In addition, we find an ‘up or out’ dynamic of young firms. These findings imply that it is critical to control for and understand the role of firm age in explaining U.S. job creation.”
The most important criteria to consider when selecting an ideal EG target audience is the growth companies in the mix. From the time of David Birch’s seminal research studies in the 1980s—in which he first coined the term “gazelles”—to the present, research has conclusively shown that a small number of high-growth companies create the majority of new job growth. These companies are buried within the universe of existing companies and are the ones that break away from the pack and create an extraordinary number of jobs, as indicated in a recent report from the Kauffman Foundation.
High-Growth Firms and the Future of the American Economy shows that the top-performing one percent of firms generates roughly 40 percent of new jobs. The “average” company in the U.S. economy creates roughly two or three jobs per years, whereas the “average” company in this top-performing one percent contributes 88 jobs per year. And fast-growing young firms, while they represent less than one percent of all companies, create roughly 10 percent of all new jobs in any given year, or 27 jobs per company.
High-growth companies are found in all sectors (including retail and services) and nearly every geographic region. They are relatively young (three to five years old), and in their early stages are subject to a significant amount of “churn.” The fastest growing young firms (five percent) generally have 20 to 249 employees, although a significant number are larger. Once these companies have stabilized, their failure rate is very small (about three percent).
Since high-growth companies clearly have the greatest economic impact on the economy in terms of job creation, isn’t this the logical audience for an EG program to target?
The “Sweet Spot”
There are a number of reasons why local economic gardening programs might find it difficult to target these high-growth companies. Being relatively rare and often flying below the radar, these companies are hard to find, and may not even exist in every community. In addition, their needs are very specialized, and local communities often do not have the technical resources to help them. A recent study in Connecticut found that “while firms with low margins may worry chiefly about the high costs of taxes and healthcare, for fast-growing companies the primary issues have to do with networks—both social and physical.” They are looking for both strong professional networks and state government support for their needs.
Creating the best conditions for their growth generally entails policy decisions at higher levels of government than can often be affected at the local or regional level. Finally, the entrepreneurs who establish these companies are driven to create them whether we help them or not.
On the other hand, the high-growth companies had to start somewhere, and much of their initial growth spurt happens when they are late Stage 1 or early Stage 2 companies. The key is to identify these potential high-growth companies early in their life and help them avoid the pitfalls that may lead to early failure as they begin to grow.
These companies will not all become high-growth companies, but if they experience continuous—or sporadic—growth at all, they will likely contribute new jobs to the economy.
So what does this mean for a local or regional economic gardening program in terms of targeting a particular audience (or audiences) for its services? Taking all of this data into account, I have come to the following conclusion:
I would argue that the “sweet spot” for most economic gardening programs is to target entrepreneurs who have started a venture that is between one and five years old and want to grow it, regardless of its size. These ventures aren’t necessarily “high-tech,” but they have developed some sort of innovation in their product, process or delivery method. They also have a potential or actual market outside the local economic region, and create quality, living-wage jobs.
Finding these entrepreneurs is the tricky part. They may start out as a home-based business, or look like a secondary business such as a local retail or service business that is exploring an outside market through the Internet or franchising. We will explore the problems with finding growth-oriented entrepreneurs in a future blog entry.
According to Don Macke of the Center for Rural Entrepreneurship, an EG program should ask three questions of potential candidate for its program:
1. Do they have a niche where they are competitive?
2. Are they committed to growth?
3. Are they actively exploring creating an external market footprint?
By getting help at this crucial phase, Stage 1 and early Stage 2 growth-oriented entrepreneurs will be more likely to make good decisions that will allow them to remain viable and sustain their growth to reach the next level, however we define it.
I welcome your discussion and responses.
- Acs, Zoltan, William Parsons and Spencer Tracy. “High Impact Firms: Gazelles Revisited.” Small Business Research Summary, no. 328, June 2008, www.sba.gov/advo/research/rs328tot.pdf.
- Pickett, Casey R. and Matthew Nemerson. The Connecticut Competitive Agenda Project. Connecticut Technology Council, December 2010. http://www.slideshare.net/CTTech/study-reports-connecticut-risks-losing-its-fastest-job-growth-technology-firms.
- Haltiwanger, John C., Ron S. Jarmin, and Javier Miranda. Who Creates Jobs? Small vs. Large vs. Young. NBER Working Paper No. 16300, August 2010, http://www.nber.org/papers/w16300.
- Henrekson, Magnus and Dan Johansson. “Gazelles as Job Creators – A Survey and Interpretation of the Evidence,” Small Business Economics, published online February 2009, http://www.springerlink.com/content/c341050r0573835v/.
- Stangler, Dale. High-Growth Firms and the Future of the American Economy. Kauffman Foundation, March 2010, http://www.kauffman.org/research-and-policy/high-growth-firms.aspx.
- Stangler, Dale and Robert E. Litan. Where Will the Jobs Come From? Kauffman Foundation, November 2009, http://www.kauffman.org/research-and-policy/where-will-the-jobs-come-from.aspx.
©Christine Hamilton-Pennell 2010, Growing Local Economies, Inc.