It is time to question the current obsession with Unicorns and Gazelles

In an invited paper in the Academy of Management Perspectives, Howard Aldrich from the University of North Carolina, and Martin Ruef from Duke University, challenged the logic of the current obsessive pursuit of high-growth start-up business ventures.

Researching the a-typical outlier not the main street business venture

Their paper, “Unicorns, Gazelles, and Other Distractions on the Way to Understanding Real Entrepreneurship in America”, argues that too much attention has been given by academics to chasing the “black swans of the entrepreneurial world”.

They argue that too many research papers have been focused on the venture capital funded high-growth “Gazelles” and the even more elusive “Unicorns”. This has been at the expense of studying the every day or “ordinary” entrepreneurial venture in what they suggest is:

“…scholars’ misplaced attention to the extreme and their corresponding neglect of the mundane”.

This is placed against longitudinal data from the United States that shows that since the 1990s the majority (98%) of new business ventures launched did not seek outside equity. Further, only a small proportion of start-ups created jobs and about half of the newly created ventures were set up by existing firms rather than “green fields” entrepreneurs. The typical start-up in the United States employs an average of less than half a full-time employee.

Entrepreneurship scholarship in an age of declining entrepreneurs

Aldrich and Ruef suggest that the academic community, which has grown to dominate the field of entrepreneurship, is a scientific, intellectual movement (SIM) that has struggled since the 1990s to establish itself as a legitimate field of study. They suggest that this was driven at the expense of research into small business management, and the entrepreneurial activity within large corporations.

According to Aldrich and Ruef, the number of publicly listed firms in the United States reached a peak in 1996 and has been declining ever since. Even at the peak, fewer than 700 initial public offerings (IPOs) took place. Venture Capital deals also reached a peak in 2000 with just over 6,400 deals recorded.

Despite this trend, academics continue to focus on the VC funded, IPO business venture as a key area of research. Further, these studies are readily published by the leading academic journals in the entrepreneurship field, even though the reality of the actual business world is trending away from this type of enterprise. As the authors note in their paper:

“These trends in scholarship might appear sensible if they were positively correlated with the occurrence of high capitalization events for new businesses. They are not. IPOs have suffered several waves of setbacks, including ones that coincided with the bursting of the dot-com bubble after 2000, the Great Recession after 2007, and the global uncertainty of recent years. Since 2001, venture capital deals have been flat, averaging roughly half their 2000 level. Many entrepreneurship scholars haven’t blinked. The infatuation with high capitalization startups persists, despite their uncertain fate at the hands of the people doing the actual investing.”

A more realistic perspective is needed

In their address to the academic academy specialising in entrepreneurship, Aldrich and Ruef, suggest that a revision of the current approach to how research in this field is undertaken is needed. This includes a better understanding of what a “high-growth” firm is, how innovation is managed, and how opportunities are identified and screened.

For those of us who have a firm foundation in the small business management field, this call for change to the present approach to entrepreneurship research and teaching comes as no surprise. In short, there has been far too much hype and obsession with high-growth, venture capital fuelled tech-centric start-ups.

Further, the paucity of definition and attention given to what are essentially atypical “Black Swan” ventures, raises some significant questions about the overall relevance of the entrepreneurship domain. How relevant can the example of a “Unicorn” be for the vast majority of everyday business ventures?

In another analysis published in the Journal of Entrepreneurship and Regional Development this year, Ross Brown, Suzan Mawson and Colin Mason debunk many of the myths of the high-growth “Gazelle” firm. They point to at least seven myths:

Myth 1 – That all high-growth firms are young and small

This is not correct, the average high-growth firm is more likely to be around 25 years old and employs >10 people, with the average age of their owners around 40 years.

Myth 2 – That most high-growth firms are high-tech

In fact, high-growth firms can be found in all industries. They can be low-tech, mid-tech as well as high-tech.

Myth 3 – Universities are a key source of high-growth firms

Actually, very few high-growth firms emerge from university spin-outs. The role of universities is more indirect than direct.

Myth 4 – Most high-growth firms are VC backed

Venture capital backs only 2% to 4% of high-growth firms. Most firms rely in traditional debt financing and retained profits.

Myth 5 – High-growth firms experience linear growth

Growth is rarely straight line and is usually ‘lumpy’. Many experience long periods of little or no growth.

Myth 6 – High-growth firms grow organically

Most high-growth firms grow via acquisition or alliances.

Myth 7 – High-growth firms are the same wherever they are located

Not true, significant differences can be found across regions. Regional and industry differences therefore do matter to high-growth firms.

If these issues were contained in the closeted world of the entrepreneurship academies as an esoteric subject for tenured professors to debate, the matter would most likely be of little consequence. However, globally many governments have embraced entrepreneurship as a potential panacea for flagging economic and employment growth.

Small business policy, which is largely ignored within the academic community, has been placed on a backburner in favour of policies designed to spark “entrepreneurial revolutions”. This has led to significant investments in start-up programs, accelerator programs and specialist centres, schools and programs within universities seeking to help graduates find sustainable jobs through self-employment.

Sadly, the data seems to suggest that while a few individuals succeed in establishing viable and high growth businesses, the majority – if they survive their first three years – might have been better off remaining in full-time employment.