The 7 Myths Of High Growth Firms

The mythical unicorn

These days, who doesn’t like entrepreneurs? After all, they’re the lifeblood of any economy. But our love of enterprise hasn’t always been so strong. At the extreme, Communism and Fascism offered different models – where the economy is directed through the state or large state-backed companies. In both instances, entrepreneurs were seen as irritants to the efficiency.

Although we have learned to appreciate entrepreneurs, we still have a lot to learn about the role of entrepreneurs in economic growth, how best to support them and how to structure government programmes to properly test their effectiveness. But though progress is slow, there are some great academics revealing the benefits and tradeoffs of incentivizing entrepreneurial activity.

A recent debate article by Ross Brown, Suzanne Mawson and Colin Mason caught my eye. Myth-busting and entrepreneurship policy: the case of high growth firms challenges some commonly held beliefs about high growth firms (HGFs):

Myth #1: HGFs are all young and small

Evidence suggests that the majority of HGFs are older and larger than previously believed. The paper cites research from the US which found that HGFs are on average 25 years old and that even smaller HGFs (employing 1–19 employees) exhibited a more advanced average age of 17 years.

Myth #2: HGFs are predominantly high tech

HGFs are not all tech firms. In fact, “only around 15 per cent of HGFs are operating in high tech sectors.” And high tech doesn’t always mean innovative, though HGFs are strongly correlated with innovativeness (measured as patents for R&D spending). 

Myth #3: Universities are a major source of HGFs

“The evidence strongly indicates that very few University Spin-offs (USOs) grow and the vast majority remain very small.” In fact, research suggests that in terms of sales growth and survival rates, company spin-offs (CSOs) do much better. The paper raises the concern that “intensive early stage support for embryonic business concepts can effectively result in ‘killing firms with kindness’, preventing them from developing as independent and self-sufficient organizations.”

Myth #4: HGFs are mostly VC-backed

Recent empirical evidence from the UK suggests that only a tiny fraction of UK HGFs are VC-backed, and survey evidence puts the figure at of UK high growth SMEs that have to utilized risk finance such as venture capital or business angel funding at 4.8 per cent.

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