E-Magazine
Francis Greene
What do we actually know about high growth firms? The answer is: very little. We don’t know much more than what we did when Kilby (1971) was writing nearly 40 years ago. Even then, it was pretty clear that high growth firms were pretty rare beasts who defied easy or simple categorisation.
In this piece, I want to be even more dismal about our current understanding of high growth firms. I have three reasons for being a misery. First, much of the research on high growth firms is based upon what entrepreneurs told us was the secret of their success. Entrepreneurs are unreliable guides. Second, research tends to ‘backcast’ rather than help us forecast. Indeed, hindsight is not a great thing because it basically fails to explain why some firms grow and others don’t.
This brings me to my third reason for dourness. I think that central to fast growth is luck. And by this I don’t just mean that the ‘alert’ entrepreneur (Kirzner, 1973) needs a dollop of good fortune. No, luck is blind; entrepreneurial success is about being the ‘right’ person, in the ‘right’ place at the ‘right’ time.
Don’t get me wrong. I want to be a cheerleader for high growth firms. They are terribly important. In the 1960s, the economic problem for Europeans was getting our ‘elephants’ (big businesses) to a sufficient size to out muscle the American elephants (Audretsch, 2002; Acs and Mueller, 2008). Arguably, now what matters is that our gazelle populations (fast growth firms) are too few in number to provide much competition to the larger herd of American gazelle.
So, what knowledge can we bring to bear that will help us understand high growth firms? The typical response is to ‘talk to the entrepreneurs’. Typical of this is the autobiography which relates the trials and tribulations the entrepreneur faced out of which we, too, can learn the secrets of success. Still, I haven’t heard of anyone yet – other than the publisher or the author – who ever made ‘money’ out of a self help guide.
Before we congratulate ourselves on being above this, it is pretty clear that we all love a good war story. The truth is that the entrepreneur’s perspective is unreliable. There are cognitive biases at play (e.g. over-optimism (Cooper et al, 1988; Arabsheibani et al, 2000), hindsight bias – Cassar and Craig, 2009) or what Rosenzweig (2007) calls the halo effect. In other words, entrepreneurs (mis)place their ‘success’ as a product principally of their own agency. This ignores that in very many fast growth businesses it is the jockey (the entrepreneur), rather than the horse (business product/service), that gets changed as the business grows (Kaplan et al, 2009).
Success is also fickle. Parker et al (2005) show that success doesn’t typically breed success (serial correlation).
My second dreary note is that we have a limited grasp of what are the impetuses for growth. Admittedly, this might have something to do with there being ambiguity about what is the right currency (e.g. sales, employment, profit growth?) for measuring success. Even so, you might think that there must be something out there to explain high growth. Well, having reviewed a huge range of growth studies for two books (Greene et al, 2008; Storey and Greene, 2010), the conclusion was that being educated and incorporating a business are amongst the few factors positively related to growth. I am not alone. Coad(2007) did a similar review of growth studies. His results were just as bleak. On average, he found that less than ten per cent of the variation in growth could be explained.
What is odd about these results is that it is not as if studies predict future growth. Most growth studies ‘backcast’ rather than set out to forecast. In other words, our current approaches tend to rely on gazing back over time. Arguably, there is a need for research that is forward looking.
Sorry. That was me bordering on being positive. Let me go to my third theme. Even if we move towards a more future orientated paradigm of longitudinal research, my argument is that we have to be more cognisant of the importance of luck. We tend to downplay it or ignore it. Yet, it is fundamental to entrepreneurship. Jovanovic (1982) shows that it can be pivotal. In his model, lucky but talentless entrepreneurs can be successful whilst unlucky but talented entrepreneurs go out of business.
Although luck is key, what is still clear from Jovanovic’s model is that entrepreneurs have the ‘right’ stuff are generally more likely to achieve success. It is just that they were in the ‘wrong’ place and/or ‘wrong time’.
I cannot see the reason for being so optimistic. Again, don’t get me wrong: people do business. I can even see Ericson and Pakes’ (1996) point that entrepreneurs need not be so passive in the face of luck as Jovanovic (1982) implies, but can actively develop strategies to overcome chance.
I would argue, though, that the best analogy for understanding high growth firms is that it is like someone going into a casino. Most people go in and come out financially lighter. The odd few – usually after a few twists and turns - come out big winners. They are generally happy (unlike the poorer losers) and often very keen to tell you what their ‘strategy’ was. Suitably impressed, we might even go further and undertake some investigations into their past circumstances that might explain their new found wealth. We might then follow them for a few nights to see if they were cheats or if they were on a winning ‘streak’.
Again, I am not trying to belittle the efforts of those involved in growing successful businesses. Instead, what I am trying to do in this piece is to raise three important points. First, explaining fast growth businesses is still a mystery. Second, our techniques for understanding such fast growth remain limited. I suspect that we are often seeking to crack the atom using a sledgehammer. Third, even if we had better tools, my point is that we should not under-estimate the importance of sheer blind luck in explaining fast growth firms.
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Dr Francis Greene's Biography
Dr. Francis Greene is an Associate Professor in the Centre of Small and Medium Sized Enterprises at Warwick Business School, University of Warwick. He has written extensively on business growth, new start ups and regional policy. His most recent book was Three Decades of Enterprise Culture and his new textbook – Small Business and Entrepreneurship – will be available in Spring 2010. Dr Greene has wide consultancy experience with a range of public and private sector organizations. He can be contacted at francis.greene@warwick.ac.uk.
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