Innovators and job creators: Montana's second-stage businesses are thriving in a down economy.

• Author: Henderson, Christina

THE PROSPECTS FOR A QUICK RECOVERY from this recession may be bleak, but dotting Montana's economic landscape are businesses that are thriving despite challenging times. As the downturn leads large corporations to freeze hiring and forces many morn-and-pop shops to close their doors, some growing companies are adding employees, expanding facilities, and raking in revenues at an impressive pace. These high-growth businesses are referred to by some researchers as "second-stage" companies, and a number of public and nonprofit leaders who serve Montana businesses are recognizing the importance of the businesses of this sector and developing programs to meet their needs.

The Edward Lowe Foundation, a nonprofit research and training center dedicated to supporting entrepreneurship, defines second-stage companies as privately held businesses that have between 10 and 99 employees, revenue greater than $1 million, and a desire to grow. The foundation divides businesses into stages based on the number of employees. Relative to their numbers, second-stage businesses pack the biggest economic punch in terms of job creation.

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In Montana, second-stage businesses made up less than 8 percent of business establishments between 2006 and 2008 but were responsible for the largest number of jobs--nearly 40 percent (Figure 1). Smaller Stage 1 businesses with between two and nine employees were also big employers in the state, with about 37 percent of jobs during the same period. Self-employed individuals made up around 40 percent of establishments, with just under 9 percent of jobs. Stage 3 businesses with between 100 and 499 employees and Stage 4 businesses with more than 500 employees are much less common in Montana, representing less than 1 percent of establishments combined and creating around 9 percent and 6 percent of jobs, respectively.

Altogether, businesses with fewer than 100 employees represented more than 85 percent of the jobs in Montana from 2006-2008. Small businesses have a bigger impact on employment in Montana than in the U.S. as a whole, where companies with fewer than 100 employees were responsible for around 73 percent of jobs (Figure 2).

To Grow or Not to Grow?

Why do second-stage companies have an outsized impact on job creation? A key answer lies in their desire and capacity to grow. Though a common assumption is that most startup founders launch businesses in their garages with aspirations of building giant corporations, this is not usually the case.

Many people start businesses because they want to be self-employed, and creating jobs for other people isn't a priority. Some small businesses provide jobs in the community, but their growth is limited because of the trade areas they serve. One of every two new businesses in America is home-based, and almost half (46 percent) of new businesses that are founded and manage to stay alive for five years are started as and remain home-based businesses (Shane, 2008). In contrast, second-stage companies are engaged in sustained, profitable expansion.

Higros

The idea that a handful of high-growth companies generate the largest percentage of jobs was first advanced by MIT economist David Birch in the 1980s and '90s. Birch found that rapidly growing firms, which he termed "gazelles," represented roughly 4 percent of all firms and accounted for 70 percent of all new jobs. Gazelles were better job creators than "elephants" like Wal-Mart or "mice" like the morn-and-pop store. Birch's work prompted extensive international research that confirmed many of his findings (Zumbrun, 2009).

A 2010 survey conducted in Pennsylvania of more than a half a million firms over a multi-year period--along with interviews of CEOs at 600 high-growth firms--also illustrated the outsized economic impact of high-growth businesses. The survey findings...