Hug gazelles, market leading companies

Tim KaneTim Kane is the researcher who revealed that young companies create all the net new jobs in the country, about three million a year, and it was a startling revelation indeed.
He brought his insights to the Wisconsin Entrepreneur Conference in Milwaukee last week. His corollary is that large companies actually reduce about a million jobs a year. So far, so good.

But a deeper dig on his findings leads to a strategy puzzle.

Kane did his research for the Kauffman Foundation of Kansas City, the $2 billion think tank that pushes entrepreneurship. So, he would agree with the Wisconsin Prosperity Strategy that calls for Wisconsin to be the best state in the union for starting a venture.
But how to do that? Kane refined his numbers to say that most of job growth actually comes from companies in their first year or two of operation, and most are very small. Thousands of small firms create jobs one or two at a time, aggregating to millions.

Asked about strategy to get that growth, he goes to lower tax rates, good schools, reliable infrastructure, economic freedom in terms of less regulation – all the general stuff that adds up to a positive business climate.

He would not target specific industries, which is in direct contrast to the cluster theory put forward by Michael Porter of Harvard.

He would not do cross-border subsidies for recruiting companies, calling it a “zero sum game.” Most states still do that.

He would not promote “gazelles,” high growth startups.

Asked about the strategy of Israel, which decidedly supports gazelles through private-public partnerships and funds, Kane demurred. Israel has ridden that strategy from a poor, desert country to one of the most prosperous.

So, while Kane’s insights are useful, I don’t see much pragmatic strategic guidance in his work. I agree on recruiting being a zero sum game and an expensive one to boot. I agree that targeting too narrowly can be a mistake.

What Kane fails to acknowledge, though, is that small companies, his heroes, need someone to sell to. They need a supply chain to be part of.

Those supply chains could be viewed as the Porter clusters, with a market leading company at the top. The Wisconsin strategy says: “Hug a market leading company.” That would be the likes of MillerCoors, NML, QuadGraphics, GE Healthcare, Bucyrus and Joy Global. Make sure they are happy campers in your state.

They create wealth by exporting and they create a market for smaller companies. Put another way, they maintain the job base, even if they are net job reducers themselves.
The other bet for state’s strategy, one that Ohio is following aggressively, is to promote gazelles. The winners among them create explosive job growth in their first generation of existence and some become market leading companies.

Examples in Wisconsin are Trek in bicycles, now an $800 million company; Quad in printing, with more than 25,000 employees; and Epic in health care IT.

In less than a generation, Epic has grown from zero to 4300 jobs in the Madison area and more than $800 million in sales. It will hire 1000 more workers this year. It is building a giant campus in Verona. Just as importantly, and to Kane’s point, hundreds of small companies will be selling goods and services to Epic.

Direct Supply, a distribution company for assisted living facilities, in the Milwaukee area has grown to 1000 employees in less than a generation and can see 5000 down the road. They buy products and services from lots of small firms.

To help policy makers understand how the new economy works, think about a city like Hartford. If its market leading companies – Broan-NuTone, QuadGraphics and Signicast – pulled out, what would happen to the small shops in town?

Obviously, many would suffer and some would fail. They need the big companies as buyers of their wares. The small shops don’t drive the economy; the market leaders do. In that reality lies the direction for economic strategy.

Most entrepreneurs jump out of the clusters they have worked in to start their ventures. Harry Quadracci, for example, had been a general manager of another printing company before founding his gazelle, QuadGraphics.

So the Wisconsin “hug” strategy needs to go in two directions: to market leading companies and to gazelles.

Wisconsin is executing the gazelle piece with capital gains breaks for investments in Wisconsin companies, with Act 255 tax credits for venture and angel investors and with a proposed fund of funds to match private investment dollars in high growth startups.
When this strategy is successful, Kane’s small shops will do well as a byproduct.

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  • Bill Kraus

    Another bullseye. It occurs to me that by not doing any of the things you recommend Wisconsin, which has always been a flyover state, had increasingly become a branch office state. We have no major banks. We have no major VC firms. We lose startups at the next stage to buyouts or to VCs or to mergers located elsewhere. I would hope that the decimation of Milwaukee’s heavy industries is about over inasmuch as there aren’t many biggies left. Does anybody with the power to do anything about it have any ideas about making Wisconsin industry anew?  

    Bill Kraus

    • Anonymous

      The best answer is to give the gazelles a big boost. They can make the difference. Spaulding Clinical has more than 100 jobs in the old hospital in West Bend, as one example. He’ll be 500 jobs in a couple of years. For me, tht’s tehe best strategy for the state.

  • The old model of helping entrepreneurs – of all types in all industries and disciplines – is rooted in what they do, how they might do it and where. Since the ancient greeks we have also relied on one model of human behavior, we are rational beings. The only problem with that model is that it is wrong. We now know we are emotional beings and new discoveries in neuroscience allow us to look inside the brain to better understand things like risk, loss aversion, tolerating ambiguity, resisting the framing effect and hedonic adaptation.

    Our public, private, social and academic spaces are biased toward theory over practice. We are hung-up on and rooted in the what, where and how, which is important but not the whole picture. Third, the case study methodology pioneered by Harvard and used widely today, with some increments coming from the new simulation models, still revolve around decisions and outcomes – and trying to look back to better understand them, and hopefully begin making better ones. The exploding field of neuroscience in tandem with leaders from sociology, biology, lateral thinking, gamers, computer science, communications and economics are beginning down a new frontier defined by the thinking and emotion which drive the decisions, and that result in outcomes. A new era of personal-analytics will create vast new opportunities to boost people where they need it, instead of putting them in a room, delivering a lecture and hoping they can convert a fraction of the knowledge-transfer into something practical.

    I believe there is a great deal we can do to speed things up. I also believe we only need a small cluster of doers to open some minds that will open more doors.

    • Anonymous

      There is no question that we can use such learnings to accelerate the movement of innovations to real world use. We can accelerate the entrepreneurial process. One example is how the accelerator shops are going for customer interaction very early in the conceptual process of framing out a new business. It’s an iterative process in developing a business plan. Done right, there is a customers or customers at the launch of the company. There’s a top line from the get-go.

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