The Mouse That Roared The <i>true</i> state of small business

Once upon a time, in a kingdom called American Business, therelived three animals. One animal, the elephant, had ruled thekingdom for many years, using its mighty size to intimidate thecitizens of the land into submission. However, when a nasty droughtplagued the kingdom, the elephant became considerably weakened andwas forced to give up the throne.

To determine who would inherit the kingdom, the citizens set upa race between the two remaining animals: the gazelle and themouse. The citizens showed up at the race to cheer on the mouse,who had become a familiar sight around town, always willing to helpothers in times of crisis. But when the gazelle, a newcomer to thekingdom, showed up at the starting gates, the citizens were awed byits beauty and dazzling speed.

With the race moments away, the people began to fervently chantthe gazelle's name. Meanwhile, the mouse, trying its hardestnot to be dismayed by the fickleness of the crowd, began to warm up. . .

This '90s-style parable began not once upon a time, butabout 10 years ago, when business researcher David Birch stumbledacross a pattern in his data. While word was spreading that smallbusinesses were creating all the jobs in America, Birch discovereda relatively minuscule subset of companies wedged between the largecompanies that were declining and the small companies that heclaimed were stagnant. This group contained both large and smallbusinesses, all of which had one thing in common: at least 20percent increases in annual revenues over a period of four or fiveyears. Voilà, Birch's pet project was born--thelarge businesses he named elephants, the fast-movers he calledgazelles, 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 veileddisrespect, even among professed advocates of small business. Thecontradictions, meanwhile, intensify, as illustrated by the mixedmessages typically sent out by statisticians and the media. Aresmall businesses really the heroes of the economy, the onescreating the jobs in America? Or are they in fact merely overhyped,pesky little creatures content to hide in the shadow of thegazelles that go before them? Do gazelles alone truly deserve theglory being heaped upon small businesses in general?

The Starting Line

No matter how complete the data or how seamless themethodologies, all statisticians are more or less infants when itcomes to studying small business. "Old myths die hard,"says Bruce D. Phillips, director of economic research for the SmallBusiness Administration's (SBA) Office of Advocacy. "Tochief economists who were raised in business schools back in the'40s and '50s, large corporations were the be-all andend-all of growth. That [gospel] was still being preached in thiscountry until about 1960. The data to prove otherwise wasn'tavailable until the late '70s and early '80s. So it'sreally only in the past 15 years or so that we've had theinformation to be able to study this in a scientific way."

Even in the face of recent statistical revelations, some peoplejust can't seem to let go of old ways. "The biggestproblem I see is academicians who refuse to recognize that smallfirms 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 adeclining 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 theoryto see if there's any way some of these [skeptics] have a basisfor what they're saying, and they very clearlydon't."

The race track gets even muddier when you explore the supposeddiscrepancy between gazelles and mice. However, with gazelle feverseizing the country, Birch's data has unfortunately beentwisted to meet certain agendas and is sometimes misinterpreted tosuggest that any small business other than a gazelle is worthlessto society.

A recent issue of Inc. magazine, for instance, quotes aBirch calculation that gazelles created 5 million jobs in theeconomy between 1990 and 1994, and compares that performance to thenation's total job creation of 4.2 million, implying that allother companies besides gazelles were responsible for a loss of 0.8million jobs. A more complete breakdown of Birch's data tellsthe real story: Large businesses lost 3.8 million jobs from 1990 to1994, while companies with fewer than 100 employees actuallycreated 7.7 million jobs.

"The [Inc.] article really only gives part of thepicture," says Phillips. "It doesn't say that in thiscountry, about 16 percent of our businesses are new every year, andthat when that rate declines, the economy goes into recession.Looking back at the past couple of business cycles, the statisticsbear this out."

Though Phillips acknowledges that "looking at gazelles isimportant, and the relatively small percentage of rapidly growingsmall firms that generate lots of jobs is obviously important,what's more important is to keep a healthy supply of new smallfirms [overall]. To do that, we need to maintain a healthy economicgrowth and access to capital as the areas of majorimportance."

Phillips notes that the nation experienced record numbers of newsmall business start-ups in the past two years, as the U.S.Department of Labor recorded 807,000 new firms in 1994 and 819,000in 1995. Though the SBA doesn't have specific statistics on thenumber of jobs these new firms created, Phillips points out that"[since] on average, a brand-new firm has two to threeemployees, you're looking at several million new jobs right offthe bat."

Despite the numbers exalting all small businesses,however, it's hard to deflect the spotlight from the moreglamorous gazelles. "People like to talk about powerplayers," says Phillips. "They make good press. Everybodywould like to have the next Microsoft in their district, butthat's atypical in terms of the average growing smallbusiness."

The Race Is On

The event starts getting interesting when you consider that,according to Birch, 97 percent of gazelles go into their growthstage with fewer than 100 employees--in other words, they start outjust like mice. In that sense, even the staunchest supporter ofgazelles can't discount the importance of mice, as it'spractically impossible to predict which small companies will morphinto gazelles.

Birch acknowledges that a company can become a gazelle at anypoint in its life span--Wal-mart, for instance, attained gazellestatus after 30 years in business. "Most don't become agazelle in their first few years. It takes time to figure out howto manage people, learn where your market is, and get your systemand your accounting in place," he says. "God knows whichcompany will become a gazelle. But if you don't have the seedbeing planted, you're not going to get any sprouts."

Phillips agrees that gazelles, like mice, typically spend theirfirst 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 takeoff."

Yet Birch believes it's not merely the numbers that givegazelles their identity--it's their mind-set. "Size is arelatively uninteresting way to look at companies," contendsBirch. "The dynamics of the firm are more important."

Birch also claims he doesn't prefer gazelles to mice butmerely recognizes they fulfill completely different purposes."The mouse, in general, is looking for an independent sourceof income, while the gazelle is looking to create wealth, sometimesat the expense of income," says Birch. "In other words,they'll take a salary reduction and do anything to conservecash and grow. The mouse, [in contrast], may be looking at theirenterprise as a source of as much income as possible."

Yet Jere W. Glover, chief counsel of the SBA's Office ofAdvocacy, refutes that mice and gazelles differ in theirmotivation, charging that very small businesses, even individualentrepreneurs, are just as interested in establishing a presenceover the long run as they are in making a quick buck. "Peoplestart a business because they think it's the right thing to doat the right time," says Glover.

"Innovation can come in any sector," Phillips pointsout. "And clearly, what small firms do is create wholeindustries. 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 universityprofessor's computer."

Birch points out that the success of gazelles revolves aroundone very important factor that every mouse possesses, too: theentrepreneur. "They may have different businesses and adifferent number of employees, but they still have a lot incommon," he says. "If you put two founders of [a mouseand a gazelle] in a room with thousands of people, I think youwould find you have two birds of a common feather. They have acommon bond, a common understanding."

Stumbling Blocks

They also share a common hell. Birch acknowledges that the lifeof a gazelle is, while desirable from afar, pure terror in themidst. "It's a tremendously stressful process and involvesenormous uncertainty," says Birch. "The more visible youbecome, the more terrifying it becomes, because you can potentiallylook more stupid. If Bill Gates blows it, they'll be talkingabout it for decades."

In short, Birch says, the best way to describe the psychologicalex-perience of a gazelle is "terror. And there are very fewpeople who can deal with terror on a continuous basis year in andyear out."

Birch says Intel, for instance, must turn over practically 100percent of its product line every 18 months to stay ahead of thepack. "If you think about the consequences of not doing itright," he says, "it's terrifying."

So maybe it's not that most mice aren't good enough tobecome gazelles--maybe they're just not self-sacrificing oreven masochistic enough to lead that particular lifestyle."For those who are good at it, it's an enormouslyexhilarating experience," Birch says. "But they'reconsumed by what they're doing. It's not [a lifestyle] foreverybody."

Another stumbling block that may sprain some gazelles'ankles is a lack of venture capital. Glover calls it the glassceiling for entrepreneurs: "Venture capital deals aren'tprevalent--there are fewer than 1,000 done each year," hesays. "So gazelles run into a situation where they can'tgrow any larger or any faster because they just can't get themoney."

Whether they are constrained by resources or by stress, Birchpoints out that even gazelles find it difficult to maintain theirstatus; 50 percent of them slip out of the gazelle category eachyear. "The very top of the pile is churning constantly. Agazelle's failure rate doubles when the companystabilizes," says Birch. "They're in a game theycan't get out of. There's no logical exit strategy, unlessthey sell."

By definition, gazelles have been entered into a race they cannever finish. Crossing the finish line means stagnating, whichmeans they either become mice or elephants.

Mouse Takes The Lead?

Birch, who considers himself a gazelle, admits he sometimeslongs for the lifestyle of a mouse. "It would involve fewerhassles in a nice, stable market," he says. "What'swrong with that? That's not bad--that's terrific."

And yet it may be simplifying matters to characterize mice soplainly. Mice aren't, well, mousy. They're not meek. Theymay start out slowly and steadily, and face unfair comparisons tothe gazelles they are pitted against, but when it comes down towhat matters--the finish line--the mice are usually thevictors.

"The Clinton administration recognized that the smallestfirms, those with under five employees, were creating the mostjobs," says Glover. "We've been following that datafrom 1989 through 1994, and the trend has continued. The companiesthat jump from 4 to 100 employees are statistically not creatingthe most jobs. The smallest firms are still creating the vastmajority of jobs."

The moral of the story? Favoritism is a nasty thing. Thereshould be no competition for honor between the mice and thegazelles. Without mice, the gazelle phenomenon simply couldn'texist. These two elements of the kingdom of American Business mustcomplement each other's efforts rather than race for the sameprize. And on the day when people acknowledge this, and nurture andrespect mice just as much as they do gazelles, we'll be closerto living happily ever after.

Contact Sources

Cognetics Inc., 100 Cambridge Park Dr., Cambridge, MA02140, (617) 661-0300;

Dun & Bradstreet, Small Business Services, 3 SylvanWy., Parsippany, NJ 07054, (800) 552-3867;

Small Business Administration, Office of Advocacy, fax:(202) 205-6928, www.sbaonline.sba.gov.