The mouse that roared: the true story of small business - includes definitions of what a small business is by the SBA, Dun & Bradstreet, SRI Consulting, and Cognetics Inc

Entrepreneur, Sept, 1996 by Janean Chun, Cynthia E. Griffin

ONCE UPON A TIME, in a kingdom called American Business, there lived three animals. One animal, the elephant, had ruled the kingdom for many years, using its mighty size to intimidate the citizens of the land into submission. However, when a nasty drought plagued the kingdom, the elephant became considerably weakened and was forced to give up the throne.

To determine who would inherit the kingdom, the citizens set up a race between the two remaining animals: the gazelle and the mouse. The cup at the race to cheer on the mouse, who had become a familiar sight around town, always willing to help others in times of crisis. But when the gazelle, a newcomer to the kingdom, showed up at the starting gates, the citizens were awed by its beauty and dazzling speed.

With the race moments away, the people began to fervently chant the gazelle's name. Meanwhile, the mouse, trying its hardest not to be dismayed by the fickleness of the crowd, began to warm up . . .

This '90s-style parable began not once upon a time, but about 10 years ago, when business researcher David Birch stumbled across a pattern in his data. While word was spreading that small businesses were creating all the jobs in America, Birch discovered a relatively minuscule subset of companies wedged between the large companies that were declining and the small companies that he claimed were stagnant. This group contained both large and small businesses. all of which had one thing in common: at least 20 percent increases in annual revenues over a period of four or five years. Voila, Birch's pet project was born--the large businesses he named elephants, the fast-movers he called gazelles, and the smallest companies he dubbed mice.

Since then, whether by studies or merely by virtue of the name "mice," small businesses have fallen prey to veiled disrespect, even among professed advocates of small business. The contradictions, meanwhile, intensify, as illustrated by the mixed messages typically sent out by statisticians and the media. Are small businesses really the heroes of the economy, the ones creating the jobs in America? Or are they in fact merely overhyped, pesky little creatures content to hide in the shadow of the gazelles that go before them? Do gazelles alone truly deserve the glory being heaped upon small businesses in general?

* THE STARTING LINE

No matter how complete the data or how seamless the methodologies, all statisticians are more or less infants when it comes to studying small business. "Old myths die hard," says Bruce D. Phillips, director of economic research for the Small Business Administration's (SBA) Office of Advocacy. "To chief economists who were raised in business schools back m the '40s and '50s, large corporations were the be-all and end-all of growth. That [gospel] was still being preached in this country until about 1960. The data to prove otherwise wasn't available until the late '70s and early '80s. So it's really only in the past 15 years or so that we've had the information to be able to study this in a scientific way."

Even in the face of recent statistical revelations, some people just can't seem to let go of old ways. "The biggest problem I see is academicians who refuse to recognize that small firms are creating virtually all the jobs," says Phillips. "Even when the data, whether it's from Dun & Bradstreet or the Census Bureau, indicates that large firms play a declining role in fob creation. the [academics] still [try to] create theories that would argue that's not happening.

We've done everything you can imagine to look at every theory to see if there's any way some of these [skeptics] have a basis for what they're saying, and they very clearly don't."

The race track gets even muddier when you explore the supposed discrepancy between gazelles and mice. However, with gazelle fever seizing the country, Birch's data has unfortunately been twisted to meet certain agendas and is sometimes misinterpreted to suggest that any small business other than a gazelle is worthless to society.

A recent issue of Inc. magazine, for instance, quotes a Birch calculation that gazelles created 5 million jobs in the economy between 1990 and 1994, and compares that performance to the nation's total job creation of 4.2 million, implying that all other companies besides gazelles were responsible for a loss of 0.8 million jobs. A more complete breakdown of Birch's data tells the real story: Large businesses lost 3.8 million jobs from 1990 to 1994, while companies with fewer than 100 employees actually created 7.7 million jobs.

"The [Inc.] article really only gives part of the picture," says Phillips. "It doesn't say that in this country, about 16 percent of our businesses are new every year, and that when that rate declines, the economy goes into recession. Looking back at the past couple of business cycles, the statistics bear this out."

Though Phillips acknowledges that "looking at gazelles is important, and the relatively small percentage of rapidly growing small firms that generate lots of jobs is obviously important, what's more important is to keep a healthy supply of new small firms [overall]. To do that, we need to maintain a healthy economic growth and access to capital as the areas of major importance."