As a part of my work with PitchBook, I have been working closely with Doug Tatum founder and Chairman Emeritus of Tatum, the largest Executive Services firm in the U.S. and the Edward Lowe Foundation in creating the website, growtheconomy.org. This site illustrates the effect of Private Equity capital on employment and revenue growth by MSA across the country and results of the research are staggering: From 1995 – 2009, private capital-backed companies grew sales by 132.8%, while the United States grew sales by 28.0% and grew jobs by 81.5%, while all other companies in the U.S. economy grew jobs by 11.7%.
David Birch of Cognetics research and M. I. T. coined the term “Gazelles” to represent these companies. Gazelles are defined as companies growing at least 20% year over year for four years straight. There are no correlations with “small business” which though they represent the highest employment block, don’t actually grow employment, nor are they “high tech” which many Venture Capital investors hope to foster.
Doug Tatum in his Book, No Man’s Land, goes into detail about how these companies are characterized. He discusses the challenges of taking companies through this rapid expansion including his four M’s: Market, Model, Management, and Money.
We found that the vast majority of these gazelles had between 20 and 100 employees. The total number of companies available to become gazelles is about 5% of all establishments in the US or approximately 1,000,000 unique businesses.
Of those 1,000,000 companies though, only 20-25% or between 200,000 and 250,000 achieve 20% year over year growth for four years, or “Gazelle” Status.
These companies are incredibly important to our economy as they represent well over 4x the average American company’s sales growth and nearly 7 times their new job growth.
The problem is it takes a lot to transition from a small highly profitable company to a large company including new understanding of the market, a new business model to penetrate it, upgrades in your management team, and growth capital to get you through “No Man’s Land” where there are new capital and infrastructure requirements. Below is an example of an industry illustrating the profitability of companies segmented by revenue. As you can see in this particular industry hitting $20m in revenue dramatically reduces your profit margin.
To say it another way, there is a high capital hurdle placed in the way of rapidly growing companies, and this epitomizes our mission at Union Bay Partners.
Many thanks to Doug Tatum with the Newport Board Group and Mark Lange of the Edward Lowe Foundation for allowing me to participate in the project. As the keynote presenters at the Alliance of Mergers and Acquisitions Advisors conference in Chicago last month, we had a lively conversation on the subject.