Darryl L. DePriest is the seventh presidentially appointed and Senate-confirmed Chief Counsel for the Office of Advocacy.
Prior to joining the Small Business Administration Office of...
May 2013 No. 412
by Martin Kenney and Donald Patton, Davis, CA 95616. 61 pages.
Under contract number SBAHQ-10-M-0221.
Considerable research has shown that “gazelles,”
small companies that undergo rapid growth, are
a significant source of employment creation both
in the United States and abroad. As job creators,
gazelles are the focus of continued research interest.
The authors sought to explore the network of
support for gazelles that take their companies from
early growth to public through initial public offerings
(IPOs). This entrepreneurial support network,
or ESN, is comprised of law firms, venture capitalists
(VCs), and lead investment bankers, the core
of the team needed to launch an IPO. The authors
examine when and under what conditions specific
legal, finance, and banking that support successful
entrepreneurship are in close physical proximity to
gazelles. Of the various possible business growth
measures, the authors chose to examine the overall
impact of these networks on gazelles’ employment
Building a new firm, and particularly a fast-growing
gazelle, requires the recruitment of various resources
including skilled labor, capital, customers, and suppliers.
The entrepreneur must bring together a network
that will provide them with tangible resources
(such as finance) and less tangible ones (such as
legitimacy). These make up the entrepreneurial support
network or ESN. The study of ESNs is most
advanced in the case of biotechnology, where venture
capital connections, downstream contracts with
corporations interested in licensing, and upstream
relationships with research institutions have been
mapped and studied in-depth.
While research exists on biotechnology and the
general location of venture capitalists, little research
has been conducted on the location of other members
of the ESN, such as the focal firm’s outside counsel,
and investment bankers. A number of scholars have
noticed a marked tendency for close spatial proximity
of firms to other networks, such as VCs. While
academic research on fast-growing firms has concentrated
on the role of venture capital, there are a number
of gazelles that have grown significantly large to
undertake an IPO while never having received VC
investment—bootstrapped firms relying on financing
other than VC have often been omitted. However,
most U.S. regions either have small VC communities
or none at all. For these reasons, encouraging startup
sectors that do not require VC should be considered.
In addition, at this time, there is little data to indicate
which industries these may be.
The most salient outcome of this research is the
extraordinary concentration in California of firms
capable of undertaking an IPO. Despite California’s
absolute dominance, it was Massachusetts that had
the highest per capita number of IPOs. While these
two states stood out, Florida, New York, and Texas
also were very active. Equally eye-opening was the
very small number of firms from important states
such as Ohio, Michigan, Indiana, and Wisconsin,
which has a sizable technology cluster in Madison.
Specific findings include:
• U.S. public equity markets are providing capital
to small firms (under 200 employees), but their
willingness to do so is strongly affected by stock
market cycles. When the stock market is stagnant or
dropping, far fewer firms undertake IPOs and those
that do, grow more slowly. Despite their slower
growth, they also appear to have superior survival
• The ESNs are also concentrated in California
particularly in the case of VC firms, though nearly
every state has at least some VC or has access to
VCs from other states. New York was found to be a
leading exporter of venture capital, as well as legal
services. California was largely self-contained but
did export legal services to other states, particularly
• Washington, D.C., provided legal services to
IPO firms in Virginia and Maryland.
• In terms of the gazelles (top quartile performers),
as expected, the employment growth rate of the
gazelles decreases over time.
• Of the super-gazelles (the top ten performers
in each cohort), California firms not only out-performed
those in other states, but the performance gap
grew as the firms matured. In contrast, VC-financed
firms underperformed the market of all IPOs by the
third and fifth year, but by the tenth year, those that
survived dramatically outperformed their peers.
These findings suggest policies that would:
• Reduce state and local emphasis on “smoke
stack chasing,” i.e., the practice of recruiting businesses
through financial incentives. Evidence has
shown that this is not the best economic development
policy. Rather, efforts should be made to
encourage entrepreneurship and cluster formation.
• Focus on successful firms that can be created
despite an absence of network support. Not all
regions have strong ESNs.
• Emphasize extra-local ESNs who may overcome
the lack of local networks. In addition, there
are industries and fields, e.g., biotechnology, within
which successful firms can be created despite the
scarcity of ESNs.
• Increase the strength of university linkages to
potentially high growth startups. Linkages are very
important for areas not considered an entrepreneurial
hot spot, e.g., Minneapolis-St. Paul, with its numerous
medical instrument startups.
Scope and Methodology
The database is comprised of all de novo initial
public offerings (IPOs) on American stock exchanges
and filed with the Securities and Exchange
Commission (SEC) from June 1996 through
December 2006. The original count of firms included
in the study was 2,123. Each firm was examined
as to whether it was a true de novo startup. In
assembling the set of firms the authors relied upon
Thomson Financial to generate a list of all IPOs over
this time period. From this list the following types
of firms and filings were excluded: mutual funds,
real estate investment trusts, asset acquisition or
blank check companies, all small businesses (SB-2)
IPOs with the exception of Internet firms, and all
spin offs and other firms that were not true de novo
firms. Other guidelines were also used to determine
de novo firm status including partnership status and
merged companies. Firms formed before 1970 were
excluded as were firms with indeterminate founding
The SEC documents used for the database were
found in the SEC EDGAR website. EDGAR has a
complete record of all IPO documents going public
from June 1996 onward. Over 25 database variables
were available including industrial sector, employment
size, and mean time in IPO. The data allowed
detailed analysis of IPO activity by state and industry
sector. In addition, perhaps the most important
question is the fate of firms making a public offering,
i.e., is it still operating at the end of the period,
merged or acquired, or not surviving and bankrupt?
Each of these outcomes was established for each
firm through an examination of the SEC filings.
This report was peer-reviewed consistent with
Advocacy’s data quality guidelines. More information
on this process can be obtained by contacting
the director of economic research at firstname.lastname@example.org
or (202) 205-6533.
This report is available on the Office of Advocacy’s
website at www.sba.gov/advocacy/7540. To receive
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This document is a summary of the report identified above,
developed under contract for the Small Business Administration,
Office of Advocacy. As stated in the report, the final conclusions of
the full report do not necessarily reflect the views of the Office of
Advocacy. This summary may contain additional information,
analysis, and policy recommendations from the Office of Advocacy.