High-Growth Firms (or scaleups) have been proven to drive economic growth by academics, because these firms are responsible for a disproportionate number of jobs and revenue in their communities. It even seems like entrepreneurship policy circles are catching up to use these findings, refocusing their attention from startups to scaleups. But because high-growth firms are famously difficult to identify before the fact, stakeholders often turn to misleading signs and patterns to identify them.
To clear up some confusion about scaleups and where to find them, Ross Brown, Susan Mawson, and friend of the blog Colin Mason recently published a paper, called Myth-busting and entrepreneurship policy: the case of high-growth firms. Below are a few of their key findings to keep in mind about high-growth firms.
- High-growth firms vary in age and size. Policymakers often conflate size and age in drafting entrepreneurship policy, and understandably so, because it is of course much easier to grow a smaller firm by 20 percent annually. However, high-growth firms are not always young. And while we are on the topic of age: the entrepreneurs behind high-growth firms have been often found significantly older than the average entrepreneur.
- High-growth firms are not all high-tech. In fact, in the UK, only about 15 percent of high-growth firms were found to be in the high-tech industry.
- High-growth firms rarely grow out of universities, and universities are rarely used as a source of innovation in high-growth entrepreneurship. What happens instead is that some high-growth companies require a certain type of talent as they grow, and if the entrepreneurship scene is otherwise supportive, companies are willing to move to large university towns to tap into their talent pool, and universities start training the talent that the local companies need. (Silicon Valley’s famous conception story supports this argument: when Fairchild Semiconductor began, Stanford University was not the internationally known talent power house it is today, but it later grew up to the task of supplying talent to the Valley’s tech companies.)
- The growth trajectories of high-growth firms are uneven, and painful. Instead of growing linearly, most high-growth firms stagnate and then undergo brief spurts of intense growth. Moreover, this growth is often not organic. Often a buyout or merger changes the resource allocation at a company, and this is what allows them to suddenly make a big leap. Conversely, it is important to remember that while VC funding is sometimes a helpful contributor to high growth, scaleups are not always VC-backed. In part, this is because of the diverse industries that high-growth firms can come from.
- Location determines the economic impact of high-growth firms. As the authors compared the prevalence of high-growth firms in Scotland and the UK, they found a lot of regional variation in the economic impact of high-growth firms on their communities. Based on Endeavor Insight’s research, it seems likely that at least some of this variation could be explained with entrepreneurial networks and the external economies of scale that they create. The more successful entrepreneurs are connected to others in their communities, the greater their companies’ impact on the economy.
In conclusion, the authors have a couple of important suggestions for policymakers. They emphasize the importance of looking beyond high-tech firms; they encourage policymakers to think about timing, and to keep in mind that scaleups grow unevenly. At times high growth is beneficial for them, but at our times it might be lethal. Because buyouts and exits often set off high growth, policymakers should be mindful of these events. Finally, it is always a good idea to leverage the knowledge of already successful entrepreneurs as mentors or advisers.
To access the original paper, please click here.
Contributed by Lili Torok.