The Mouse That Roared
Once upon a time, in a kingdom called American Business, there lived three animals. One animal, the elephant, had ruled the kingdom for many years, using its mighty size to intimidate the citizens of the land into submission. However, when a nasty drought plagued the kingdom, the elephant became considerably weakened and was forced to give up the throne.
To determine who would inherit the kingdom, the citizens set up a race between the two remaining animals: the gazelle and the mouse. The citizens showed up at the race to cheer on the mouse, who had become a familiar sight around town, always willing to help others in times of crisis. But when the gazelle, a newcomer to the kingdom, showed up at the starting gates, the citizens were awed by its beauty and dazzling speed.
With the race moments away, the people began to fervently chant the gazelle's name. Meanwhile, the mouse, trying its hardest not to be dismayed by the fickleness of the crowd, began to warm up . . .
This '90s-style parable began not once upon a time, but about 10 years ago, when business researcher David Birch stumbled across a pattern in his data. While word was spreading that small businesses were creating all the jobs in America, Birch discovered a relatively minuscule subset of companies wedged between the large companies that were declining and the small companies that he claimed were stagnant. This group contained both large and small businesses, all of which had one thing in common: at least 20 percent increases in annual revenues over a period of four or five years. Voilà, Birch's pet project was born--the large businesses he named elephants, the fast-movers he called gazelles, and the smallest companies he dubbed mice.
Since then, whether by studies or merely by virtue of the name "mice," small businesses have fallen prey to veiled disrespect, even among professed advocates of small business. The contradictions, meanwhile, intensify, as illustrated by the mixed messages typically sent out by statisticians and the media. Are small businesses really the heroes of the economy, the ones creating the jobs in America? Or are they in fact merely overhyped, pesky little creatures content to hide in the shadow of the gazelles that go before them? Do gazelles alone truly deserve the glory being heaped upon small businesses in general?
The Starting Line
No matter how complete the data or how seamless the methodologies, all statisticians are more or less infants when it comes to studying small business. "Old myths die hard," says Bruce D. Phillips, director of economic research for the Small Business Administration's (SBA) Office of Advocacy. "To chief economists who were raised in business schools back in the '40s and '50s, large corporations were the be-all and end-all of growth. That [gospel] was still being preached in this country until about 1960. The data to prove otherwise wasn't available until the late '70s and early '80s. So it's really only in the past 15 years or so that we've had the information to be able to study this in a scientific way."
Even in the face of recent statistical revelations, some people just can't seem to let go of old ways. "The biggest problem I see is academicians who refuse to recognize that small firms are creating virtually all the jobs," says Phillips. "Even when the data, whether it's from Dun & Bradstreet or the Census Bureau, indicates that large firms play a declining role in job creation, the [academics] still [try to] create theories that would argue that's not happening. We've done everything you can imagine to look at every theory to see if there's any way some of these [skeptics] have a basis for what they're saying, and they very clearly don't."
The race track gets even muddier when you explore the supposed discrepancy between gazelles and mice. However, with gazelle fever seizing the country, Birch's data has unfortunately been twisted to meet certain agendas and is sometimes misinterpreted to suggest that any small business other than a gazelle is worthless to society.
A recent issue of Inc. magazine, for instance, quotes a Birch calculation that gazelles created 5 million jobs in the economy between 1990 and 1994, and compares that performance to the nation's total job creation of 4.2 million, implying that all other companies besides gazelles were responsible for a loss of 0.8 million jobs. A more complete breakdown of Birch's data tells the real story: Large businesses lost 3.8 million jobs from 1990 to 1994, while companies with fewer than 100 employees actually created 7.7 million jobs.
"The [Inc.] article really only gives part of the picture," says Phillips. "It doesn't say that in this country, about 16 percent of our businesses are new every year, and that when that rate declines, the economy goes into recession. Looking back at the past couple of business cycles, the statistics bear this out."
Though Phillips acknowledges that "looking at gazelles is important, and the relatively small percentage of rapidly growing small firms that generate lots of jobs is obviously important, what's more important is to keep a healthy supply of new small firms [overall]. To do that, we need to maintain a healthy economic growth and access to capital as the areas of major importance."
Phillips notes that the nation experienced record numbers of new small business start-ups in the past two years, as the U.S. Department of Labor recorded 807,000 new firms in 1994 and 819,000 in 1995. Though the SBA doesn't have specific statistics on the number of jobs these new firms created, Phillips points out that "[since] on average, a brand-new firm has two to three employees, you're looking at several million new jobs right off the bat."
Despite the numbers exalting all small businesses, however, it's hard to deflect the spotlight from the more glamorous gazelles. "People like to talk about power players," says Phillips. "They make good press. Everybody would like to have the next Microsoft in their district, but that's atypical in terms of the average growing small business."
The Race Is On
The event starts getting interesting when you consider that, according to Birch, 97 percent of gazelles go into their growth stage with fewer than 100 employees--in other words, they start out just like mice. In that sense, even the staunchest supporter of gazelles can't discount the importance of mice, as it's practically impossible to predict which small companies will morph into gazelles.
Birch acknowledges that a company can become a gazelle at any point in its life span--Wal-mart, for instance, attained gazelle status after 30 years in business. "Most don't become a gazelle in their first few years. It takes time to figure out how to manage people, learn where your market is, and get your system and your accounting in place," he says. "God knows which company will become a gazelle. But if you don't have the seed being planted, you're not going to get any sprouts."
Phillips agrees that gazelles, like mice, typically spend their first couple of years "trying to survive and meet a payroll, bouncing around in terms of number of employees. At some stage, they may get a large infusion of capital, and then they take off."
Yet Birch believes it's not merely the numbers that give gazelles their identity--it's their mind-set. "Size is a relatively uninteresting way to look at companies," contends Birch. "The dynamics of the firm are more important."
Birch also claims he doesn't prefer gazelles to mice but merely recognizes they fulfill completely different purposes. "The mouse, in general, is looking for an independent source of income, while the gazelle is looking to create wealth, sometimes at the expense of income," says Birch. "In other words, they'll take a salary reduction and do anything to conserve cash and grow. The mouse, [in contrast], may be looking at their enterprise as a source of as much income as possible."
Yet Jere W. Glover, chief counsel of the SBA's Office of Advocacy, refutes that mice and gazelles differ in their motivation, charging that very small businesses, even individual entrepreneurs, are just as interested in establishing a presence over the long run as they are in making a quick buck. "People start a business because they think it's the right thing to do at the right time," says Glover.
"Innovation can come in any sector," Phillips points out. "And clearly, what small firms do is create whole industries. A small company invented something called the airplane. Small firms create industries that are not even known to us yet, that are still in somebody's lab or in some university professor's computer."
Birch points out that the success of gazelles revolves around one very important factor that every mouse possesses, too: the entrepreneur. "They may have different businesses and a different number of employees, but they still have a lot in common," he says. "If you put two founders of [a mouse and a gazelle] in a room with thousands of people, I think you would find you have two birds of a common feather. They have a common bond, a common understanding."
They also share a common hell. Birch acknowledges that the life of a gazelle is, while desirable from afar, pure terror in the midst. "It's a tremendously stressful process and involves enormous uncertainty," says Birch. "The more visible you become, the more terrifying it becomes, because you can potentially look more stupid. If Bill Gates blows it, they'll be talking about it for decades."
In short, Birch says, the best way to describe the psychological ex-perience of a gazelle is "terror. And there are very few people who can deal with terror on a continuous basis year in and year out."
Birch says Intel, for instance, must turn over practically 100 percent of its product line every 18 months to stay ahead of the pack. "If you think about the consequences of not doing it right," he says, "it's terrifying."
So maybe it's not that most mice aren't good enough to become gazelles--maybe they're just not self-sacrificing or even masochistic enough to lead that particular lifestyle. "For those who are good at it, it's an enormously exhilarating experience," Birch says. "But they're consumed by what they're doing. It's not [a lifestyle] for everybody."
Another stumbling block that may sprain some gazelles' ankles is a lack of venture capital. Glover calls it the glass ceiling for entrepreneurs: "Venture capital deals aren't prevalent--there are fewer than 1,000 done each year," he says. "So gazelles run into a situation where they can't grow any larger or any faster because they just can't get the money."
Whether they are constrained by resources or by stress, Birch points out that even gazelles find it difficult to maintain their status; 50 percent of them slip out of the gazelle category each year. "The very top of the pile is churning constantly. A gazelle's failure rate doubles when the company stabilizes," says Birch. "They're in a game they can't get out of. There's no logical exit strategy, unless they sell."
By definition, gazelles have been entered into a race they can never finish. Crossing the finish line means stagnating, which means they either become mice or elephants.
Mouse Takes The Lead?
Birch, who considers himself a gazelle, admits he sometimes longs for the lifestyle of a mouse. "It would involve fewer hassles in a nice, stable market," he says. "What's wrong with that? That's not bad--that's terrific."
And yet it may be simplifying matters to characterize mice so plainly. Mice aren't, well, mousy. They're not meek. They may start out slowly and steadily, and face unfair comparisons to the gazelles they are pitted against, but when it comes down to what matters--the finish line--the mice are usually the victors.
"The Clinton administration recognized that the smallest firms, those with under five employees, were creating the most jobs," says Glover. "We've been following that data from 1989 through 1994, and the trend has continued. The companies that jump from 4 to 100 employees are statistically not creating the most jobs. The smallest firms are still creating the vast majority of jobs."
The moral of the story? Favoritism is a nasty thing. There should be no competition for honor between the mice and the gazelles. Without mice, the gazelle phenomenon simply couldn't exist. These two elements of the kingdom of American Business must complement each other's efforts rather than race for the same prize. And on the day when people acknowledge this, and nurture and respect mice just as much as they do gazelles, we'll be closer to living happily ever after.
Cognetics Inc., 100 Cambridge Park Dr., Cambridge, MA 02140, (617) 661-0300;
Dun & Bradstreet, Small Business Services, 3 Sylvan Wy., Parsippany, NJ 07054, (800) 552-3867;
Small Business Administration, Office of Advocacy, fax: (202) 205-6928, www.sbaonline.sba.gov.