Tag Archives: Gazelles

Innovation is not about small or large, it’s about fast.

The debate is recurrent and in my last post, I was questioned about my fascination for start-ups and Silicon Valley. In a way this is related, I will come back on this at the end. Two recent articles nearly surprised me. The first one has a famous author, Clayton Christensen. The Empires Strike Back – How Xerox and other large corporations are harnessing the force of disruptive innovation was published in the latest issue of the MIT Tech Review.

Here are short extracts: “It has been a long time since anyone considered Xerox an innovation powerhouse. On the contrary, Xerox typically serves as a cautionary tale of opportunity lost: many obituaries of Steve Jobs described how his fateful visit to the Xerox Palo Alto Research Center in 1979 inspired many of the breakthroughs that Apple built into its Macintosh computer. Back then, Xerox dominated the photocopier market and was understandably focused on improving and sustaining its high-margin products. The company’s headquarters became the place where inventions in its Silicon Valley lab went to die. Inevitably, simpler and cheaper copiers from Canon and other rivals cut down Xerox in its core market. It is a classic story of the “innovator’s dilemma.” […] But now Xerox is turning things around […] In the past, Xerox’s success would have been an anomaly. Less than a decade ago, when we were finishing the book The Innovator’s Solution we highlighted the fact that disruptive innovations are typically introduced by startups, the rebel forces in the business universe. […] Throughout the 1980s and 1990s, only about 25 percent of disruptive innovations we tracked in our database came from such incumbents, with the rest coming from startups. But during the 2000s, 35 percent of disruptions were launched by incumbents. In other words, the battle seems to be swinging in favor of the Empire, as the following examples confirm. The author mentions examples such as GE, Tesla competing with GM, Dow and Microsoft in the article.

The second article comes from The Ecomist and is entitled “Why large firms are often more inventive than small ones.” Let me quote it a little more extensively: “Joseph Schumpeter […] argued both sides of the case. In 1909 he said that small companies were more inventive. In 1942 he reversed himself. Big firms have more incentive to invest in new products, he decided, because they can sell them to more people and reap greater rewards more quickly. In a competitive market, inventions are quickly imitated, so a small inventor’s investment often fails to pay off. […] These days the second Schumpeter is out of fashion: people assume that little start-ups are creative and big firms are slow and bureaucratic. But that is a gross oversimplification, says Michael Mandel of the Progressive Policy Institute, a think-tank. In a new report on “scale and innovation”, he concludes that today’s economy favours big companies over small ones. Big is back, as this newspaper has argued. And big is clever, for three reasons.” The arguments are that 1-ecosystems are big, 2-markets are globals and 3-problems to be solved on a large scale. This is not for small companies. “He is right that the old “small is innovative” argument is looking dated. Several of the champions of the new economy are firms that were once hailed as plucky little start-ups but have long since grown huge, such as Apple, Google and Facebook. […] Big companies have a big advantage in recruiting today’s most valuable resource: talent. (Graduates have debts, and many prefer the certainty of a salary to the lottery of stock in a start-up.) Large firms are getting better at avoiding bureaucratic stagnation: they are flattening their hierarchies and opening themselves up to ideas from elsewhere. Procter & Gamble, a consumer-goods giant, gets most of its ideas from outside its walls. Sir George Buckley, the boss of 3M, a big firm with a 109-year history of innovation, argues that companies like his can combine the virtues of creativity and scale.”

Well I was not surprised for long. The debate is not about small or large. Let me explain by quoting my book again and more specifically the section Small is not Beautiful [page 111] “There is one misunderstanding concerning start-ups. Because they would be young, recent companies, and because many macroeconomic analyses focus on the jobs generated by small structures, there is a tendency to consider with high regard that “small is beautiful” as if it were a motto for start-ups. The ambition of a start-up is not to stay modest. On the contrary, the successful companies have become large, sometimes dinosaurs. In early 2007, Intel had 94’000 employees, Oracle 56’000, Cisco 49’000 and Sun 38’000. These “start-ups” have become multinational companies. […] The San Jose Mercury News, the daily newspaper at the heart of Silicon Valley, publishes once a year for example the list of the 150 biggest companies. The simple comparison of the list between 1997 and 2004 shows that among the top 50 in 2004, 12 were not part of the first 150 in 1997. Zhang also analyzed this astonishing dynamics by comparing the 40 biggest high-tech Silicon Valley companies in 1982 and in 2002 as provided by Dun & Bradstreet. Twenty of the 1982 companies did not exist anymore in 2002 and twenty one of the 2002 companies had not been created in 1982. These dynamics of birth and death are known and positively acknowledged.”

It is exactly what the Economist article explains: “However, there are two objections to Mr Mandel’s argument. The first is that, although big companies often excel at incremental innovation (ie, adding more bells and whistles to existing products), they are less comfortable with disruptive innovation—the kind that changes the rules of the game. The big companies that the original Schumpeter celebrated often buried new ideas that threatened established business lines, as AT&T did with automatic dialling. Mr Mandel says it will take big companies to solve America’s most pressing problems in health care and education. But sometimes the best ideas start small, spread widely and then transform entire systems. Facebook began as a way for students at a single university to keep in touch. Now it has 800m users. The second is that what matters is not so much whether companies are big or small, but whether they grow. Progress tends to come from high-growth companies. The best ones can take a good idea and use it to transform themselves from embryos into giants in a few years, as Amazon and Google have. Such high-growth firms create a lot of jobs: in America just 1% of companies generate roughly 40% of new jobs. Let small firms grow big The key to promoting innovation (and productivity in general) lies in allowing vigorous new companies to grow big, and inefficient old ones to die. On that, Schumpeter never changed his mind.”

I say it again, there is a difference between start-up and SME. This does not fully answer Christensen argument about the Empire striking back. Well it means large companies have smart managers who learnt from the mistakes of the past. But he also implicitely say that 65% of disruptive innovations come from new comers, not incumbents. Gazelles still have a bright future.

Gazelles and Gorillas – part 2

Following my post of April 19, Gazelles and Gorillas – high growth startups, I went back to the chapter 8 of my book where I compared the growth of the European and American gorillas. I had not computed then the 5-year and 10 year growth of these very successful companies. The following table gives the results of my work this morning. These are not gazelles (20% growth), there extremely fast gazelles!

Gorillas seem to grow at 100% rates or doubled their sales each year on average… Now growth is never an easy path (ask Steve Jobs about Apple growth!) so let me add much more details. Below, you will see the yearly growth of all these companies and you may notice there are sometimes a lot of ups and downs!

Gazelles and Gorillas – high growth startups

Since I have been interested in start-ups, i.e. 1997, I have always been puzzled about the macroeconomic impact of start-ups, i.e. fast growing companies, mostly in high-tech. The famous Intel, Apple, Microsoft, Cisco, Yahoo, and other Google have an impact, but what is it exactly for the economy?

Surprisingly, it is not that well-known. I have read in the past weeks some recent papers on the topic that you may download if you are interested. The Kauffman foundation which I have mentioned already is doing a great job and particularly Dane Strangler. He is the author of High-Growth Firms and the Future of the American Economy and of Exploring Firm Formation: Why is the Number of New Firms Constant? as well as Where Will The Jobs Come From?

Thanks to his reports, I became aware of older studies such as Gazelles as Job Creators – A Survey and Interpretation of the Evidence and High-Impact Firms: Gazelles Revisited both dated 2008. Finally the Brittish government has its own study, High growth firms in the UK: Lessons from an analysis of comparative UK performance.  This last report is interesting as it not only considers gazelles, the fast growing companies, but also gorillas, the young fast growing companies which reached a large size in less than 10 or 15 years.

The first answers were provided in 1981 by David Birch who showed that large firms were not the providers of job creation anymore. But even today, the answer to the question is not so clear. At least it took me longer than I would have thought to understand what all these reports claimed. So for example, here is a table of how small, mid-size and large firms create jobs in the USA. The numbers come with no real guaranty as I have compiled them from a number of sources, mostly the High-Impact Firms: Gazelles Revisited

So what does this mean? First high-impact firms contribute to most of the new job creation in the USA. What are high-impact firms? These are the firms which grow at a 20% annual rate (in jobs and sales*), the fast growing firms. As you may see, low-impact firms also create jobs but only if they are SMEs (small and mid-size). It explains why we think that fast-growing small firms are so important.

But it is an over-simplification. High-impact firms are not small and all these studies also show that:

– they are not young. On average, they are 25-years old.

– they are not necessarily high-tech, they can be found in all sectors of the economy.

– a minority is VC-backed. This is obvious as we have here about 300’000 gazelles and probably only a few thousand companies are VC-backed each year in the US.

More on gazelles here. Now, what about Gorillas? Gorillas are extremely fast growing and young companies. The UK report above defines them as less than 15 years old, with the same growth as gazelles. I remember that Geoffrey Moore defines them as leaders in their market. Well, not much is known about them. The UK report mentions there was no Gorilla in the UK whereas Yahoo, eBay, Amazon, Yahoo and Google were Gorillas in the USA.

Dane Strangler in his report is providing more interesting data. They are not the gorillas per se, but probably quite close:

– In any given year, the top-performing 1 percent of young firms generate roughly 40 percent of new job creation.
– Fast-growing young firms, comprising less than 1 percent of all companies, generate roughly 10 percent of new jobs in any given year.

Qiote impressive! Well, I still do not have all the answers I would like to have, but I now know gazelles are important, and gorillas maybe even more. And at the end, what is the impact of high-tech, of venture capital is just another but interesting story!

*: Growth in terms of jobs is more complex than 20%… experts use the Employment Growth Quantifier (EGQ), that is the product of the absolute and percent change in employment over a four-year period of time and take it as bigger than 2 for “high-impact”… A 20% increase in sales is also a factor 2 over the same period of time.