On behalf of the Bundesministerium für Wirtschaft und Technologie

June 2012

Study on Fast Growing Young Companies

(Gazelles) - Summary
STUDY ON FAST GROWING YOUNG COMPANIES (GAZELLES)

Contact:

Dr. Kirsti Dautzenberg

Business Manager
Rambøll Management

T 030 / 30 20 20-271
F 030 / 30 20 20-299
M 0151 / 44 006-271
kirsti.dautzenberg@r-m.com

Authors:
Dr. Kirsti Dautzenberg
Marius Ehrlinspiel
Dr. Hardy Gude, Creditreform
Judith Käser-Erdtracht
Philipp Till Schultz
Julian Tenorth
Michael Tscherntke
Prof. Dr. Frank Wallau, Fachhochschule der Wirtschaft Paderborn/Bielefeld
1. Introduction

The overall economic significance of fast growing young companies is estimated to be high. Various
studies find that young fast growing companies create a high increase in qualified employment in both
the short- and medium- term and in the long run. They further deploy strong positive effects on the
dynamics of the future economic development. In order to do justice to the significance of young fast
growing companies David Birch introduced the term “gazelle”. In light of this, the present research study
was conducted between 08/01/2011 and 02/29/2012.

2. Approach

In a first step of the study, the scientific literature on fast growing young companies (“gazelles”) is
reviewed and assessed (see chapter 3).
On the one hand the review focuses on the definitions of young fast growing companies used in the
literature. On the other hand an assessment of the empirical findings about the characteristics of young
fast growing companies is developed. Hypotheses for an empirical study on gazelle companies are
derived based on the assessment of the literature. These hypotheses are then integrated into the
questionnaires used for a telephone survey and the development of the interview guidelines used for case
studies with selected companies.

In the next step, the definition of a “gazelle company” used in this study is determined and elucidated
(see chapter 4.1). The definition takes into account the state of the art research, the comparability to
other studies as well as the specific features of the “Creditreform” data base. Thereupon, all young fast
growing companies in Germany established between 1995 - 2007 – therefore, all gazelle companies until
2011- are identified via the Creditreform data basis. The identified companies are then characterized and
assessed by applying the following criteria: Number of companies, number of employees, development of
the number of employees, sector and regional aspects. The results can be found in chapter 4.2.

In order to conduct a telephone survey among founders and /or managers, a randomized sample was
taken from the population of young fast growing companies in Germany. Furthermore, in- depth case
studies were carried out with selected companies. Both, the survey and the case-studies aimed at
analyzing the contribution of “gazelles” to the branch and structural change. While also stressing the
current and potential role of public authorities with regards to the support of young fast growing
companies, the survey and the case studies offer valuable clues to the growth drivers and - obstacles
with which young fast growing companies find themselves confronted.

3. State of the art

David Birch first coined the term “gazelle” in the 1980s. The term “gazelle” is used to describe companies
which exhibit high growth rates during a limited amount of time. Birch postulated that a major share of
new jobs is created in SME, particularly in new and highly innovative SME. Birch and his colleagues
empirically verified this hypothesis for the US. 1 According to his study, on average two thirds of all jobs
are created by SME. His results were confirmed for Europe2 and have proven to be particularly similar in
Germany.3 Moreover, studies find that the share of these companies measured against the overall number
of companies or the number of companies founded in a respective year is very small in any given
economy. However, these numbers vary between 2% and 15%, depending on the study.

1
Birch, D. L., Haggerty, A. und W. Parsons (1998): Who's creating jobs?. Cambridge, MA: Cognetics.
2
See: Kirchhoff, Bruce A. (1994): Entrepreneurship and Dynamic Capitalism. The Economics of Business Firm Formation and Growth. London:
Greenwood. S. 120ff. / Siebert, H. (1999): How can Europe solve its unemployment problem? Kieler Diskussionsbeiträge 342, Kiel: Institut für
Weltwirtschaft / OECD (1998): Technology, productivity and job creation. Best policy practices.Paris: OECD Publishing. / Schreyer, P. (2000):
High-growth-firms and employment. STI Working Papers 2000/3.
3
See: Brüderl, J., Preisendörfer, P. und R. Ziegler (1996): Der Erfolg neugegründeter Betriebe. Berlin: Duncker & Humblot. / Harhoff, D. und G.
Licht (1996): Innovationsaktivitäten kleiner und mittlerer Unternehmen. Baden-Baden: Nomos. / Almus, M. und E. A. Nerlinger (1999):
Wachstumsdeterminanten junger innovativer Unternehmen. Empirische Ergebnisse für Westdeutschland. Jahrbuch für Nationalökonomie und
Statistik, Heft 3/4, P. 257-273 / Kahmann, M. (2000): Schöpferische Zerstörung und Gründungsdynamik im marktwirtschaftlichen
Entwicklungsprozess. Berlin: Mensch & Buch / Rammer, Ch. et al. (2006): Unternehmensgründungen in der Biotechnologie in Deutschland 1991
bis 2004. ZEW Dokumentation Nr. 06-03. Mannheim. P. 47 ff. / UNICE (Union of Industrial and Employers' Conferation of Europe) (1999):
Fostering Entrepreneurship in Europe. The UNICE Benchmarking Report 1999. P. 11. Eventhough the share of gazelle companies is much higher
in the US than in Europe.
David Birch not only established the “gazelle” term but also was the first one to define what constitutes a
“gazelle” company.4 Subsequently, a multitude of different definitions emerged. The definitions can be
distinguished according to the following criteria: growth indicator, measuring method, considered time
period and the introduction of additional criteria. The two most frequently used indicators are the number
of employees and revenues. Also, the measuring method varies significantly depending on the applied
definition. Having said this, growth is determined using either relative or absolute growth as well as a mix
of the two. With respect to the considered time period definitions only vary insignificantly. The examined
growth period in research studies usually is three years. In general, the choice of the appropriate
definition highly depends on the data base. Due to the multitude of definitions a comparative analysis of
different countries or studies is not feasible. This conclusion stresses the inevitable necessity of a
common definition which would allow for comparative analyses of different countries. Further limitation
with regards to the comparability of results is owed to different data sources and methods of data
collection. Regardless of theses complicacies, there is a multiplicity of empirical studies on fast growing
young companies allowing for the derivation of some fundamental, abstracted findings on young fast
growing companies.

Altogether three meta-studies and 22 empirical studies, conducted between 1994 and 2011, were found.
The number of empirical studies though has augmented significantly over the past years. The three
meta-studies collectively come to the conclusion that gazelle companies only account for a small share of
all companies. When measured against the number of job creating companies, however, gazelle
companies account for a substantial share. The 22 empirical studies largely rely on individual company
data, which was collected between the late 1970s and mid-2000. The bulk of company data stems from
the 1990s. Five out of 22 studies were conducted in the US, two in Canada and the rest in European
countries such as Germany (3), Finland (3), Sweden (1), UK (1), Spain (2) and the Netherlands (1).
Furthermore, four studies simultaneously scrutinized several European and North American countries.

Those studies largely sticking to the definition used by the OECD, come to the conclusion that 2% to 5%
of companies in a population can be labeled a gazelle company. However, 60%- 75% of all newly created
jobs can be allotted to gazelle companies. Thus, gazelle companies, despite their small share measured
against all companies, deploy above average employment effects. Based on David Birch´s work it was
long assumed that mainly the companies´ young age would drive growth. Recent works by Acs et al.
(2008), however, suggest that the average fast growing company is 25 years old. Bearing that in mind, it
seems helpful to reconsider what the term “young” company actually means. Also, this ought to be
included in the definition of a “gazelle” company. Hölzl (2008) finds that fast growth is rather a temporary
phenomenon. With regards to the sector in which “gazelle” companies operate, contradicting results can
be found. Works by Bos and Stam (2011) find that sectors such as education, sanitary services and
knowledge- and technology intensive branches generate an above-average number of “gazelle”
companies. Hölzl (2009), on the other hand, finds that gazelle companies are not over-represented in
high tech branches -even though, in highly- industrialized countries, “gazelle” companies are, in fact,
characterized by an affinity to technology, research and innovation. Nonetheless, “gazelle” companies do
exist in all branches. Current research on company growth has increasingly been discussing the
significance of knowledge as a main driver for innovation, growth and employment.

While research used to mainly focus on the circumstances which favor growth, these new approaches
also aim at explaining the influential drivers for economic growth. 5 Works by Bottazzi et al. (2001) and
Geroski et al. (1997) find no significant relationship between company growth and innovation activity. 6
Empirical studies that explicitly focus on fast growing companies, on the other hand, find a positive
relationship between innovation activity and growth.7

4
Birch, D. L. und Medoff, J. (1994): Gazelles. In: Solmon, L. C. und A. R. Levenson (Hrsg): Labor markets, employment policy and job creation.
Boulder, CO: Westview und Birch. P. 159–167.
5
Gablers Wirtschaftslexikon: Neue Wachstumstheorie: wirtschaftslexikon.gabler.de.
6
See: Bottazzi, G. et al. (2001): Innovation and Corporate Growth in the Evolution of the Drug Industry. International Journal of Industrial
Organization 19: S. 1161-1187 / Geroski, P. A., Machin, S. J. und C. F. Walters (1997): Corporate Growth and Profitability. Journal of Industrial
Economics 45(2): P. 171-189.
7
See: Coad, A. und R. Rao (2008): Innovation and Firm Growth in High-Tech Sectors: A Quantile Regression Approach. Research Policy 37(4): S.
633-648 / Hölzl, W. (2009): Is the R&D behaviour of fast-growing SMEs different? Evidence from CIS III data for 16 countries. Small Business
Economics 33(1): S. 59-75 / Stam, E. und K. Wennberg (2009): The roles of R&D in new firm growth. Small Business Economics 33(1): P. 77-
89.
4. Empirical results of the studies

The following outlines the definition of fast growing companies, the characteristics of gazelle companies in
Germany as well as the results of the telephone survey and case studies.

4.1. Definition of gazelle company

In the studies hitherto conducted, various definitions of fast growing companies have been used. Despite
the multitude of definitions there seems to be largely common ground with regards to the following
criteria: growth indicator, measuring method and considered time period. The subsequent definition takes
into account the frequency with which these criteria are incorporated in the definitions used in the
literature as well as the specific features of the data base.

Fast growing young companies (gazelles):

 On average increase employment by 20% over a time period of three years

(72, 8%)

 Have at least 10 employees in the base year

 Have upon completion of the growth period (t+3, t= base year+ 3 years) - a
level of employment which is 72,8% higher than at the time the company was
established.

The identification of gazelle companies is conducted separately for each year of foundation after 1995.
The definition consciously does not include company age since data showed that each year further
companies meet the defined selection criteria. Thus, late starters can also be included in the study.
However, the maximum age of a company is limited due to the fixed investigation period.

The definition and the identification approach of fast growing young companies used in this study entail
several advantages:

 The definition used is primarily based on the OECD definition.

 Increase in employment is the most commonly used growth indicator and is said to be robust.

 Using the relative growth as a cumulated measurement controls for potential small internal or
external fluctuations in growth.

 Introducing a minimum number of employees in the base year controls for the fact that very
small companies can achieve relative growth much easier. A large number of very small
businesses are thus eliminated from the population, for they are not relevant to the present
study.

 The assessment based on startup cohorts allows for a comparison of the cyclical effects on the
occurrence of fast growing companies.

 Companies in specific sectors achieve high growth at a later stage. Since there is no age
limitation the study controls for these sector- specific characteristics.

 The criteria “upon completion of the growth period (t+3) the companies must have a level of
employment at least 72,8% above the level it had at the time of establishment” allows that late
starters can be treated equally to those companies which generate growth at an early stage.
 4.2. Results of the characterization of gazelle companies in Germany

When applied to all businesses established between 1995- 2006 the definition used in this study yields an
overall number of 13.021 gazelle companies in Germany. Table 4-1 shows the number of gazelle
companies for each of the identified cohorts in the investigation period. The columns depict the respective
startup cohort and the rows show the respective “year of gazelle companies”. The “year of gazelle
companies” refers to the year in which a company of a certain startup cohort meets the defined growth
criteria.

When looking at table 4-1 horizontally the rows show how many companies of a specific year (year of
gazelle companies) became a gazelle accompany and from which startup cohort these companies have
emerged. For instance, in the year of gazelle companies 2002, 87 companies were established in 1995,
129 were established in 1996, 156 were established in 1997 and 734 were established in 1998. Thus, an
overall number 1.106 companies became gazelle companies in 2002.
Table 4-1: Number of gazelle companies according to start-up cohort und gazelle-age group

Gazelles- cohort cohort cohort cohort cohort cohort cohort cohort cohort cohort cohort cohort Total
age group 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1999 793 793

2000 174 898 1.072

2001 143 191 819 1.153

2002 87 129 156 734 1.106

2003 87 99 116 155 765 1.222

2004 66 81 99 92 135 580 1.053

2005 52 74 78 90 127 141 496 1.058

2006 53 62 69 55 101 95 100 498 1.033

2007 45 50 68 48 99 94 114 103 482 1.103

2008 41 51 42 54 73 82 96 81 118 521 1.159

2009 53 62 40 59 66 65 66 92 77 132 491 1.203

2010 37 44 60 33 63 52 53 62 75 89 120 378 1.066

Total 1.631 1.741 1.547 1.320 1.429 1.109 925 836 752 742 611 378 13.0218

Source: Own Calculations Rambøll, Data Creditreform

8
For the start-up cohort 2007, 427 gazelle companies were identified until the key date 12/31/2011. However, this startup-age group cannot be included any more in the analysis of this study. Still
it seems interesting that the number of the gazelle companies increases again.
The development of the number of gazelle companies depicted in table 4-1 allows for the identification of two
general trends. When looking at table 4-1 vertically, the number of gazelle companies per startup cohort
shows that most companies become gazelle companies immediately after they were established. As far as
the development of gazelle companies which belong to rather old start up cohorts is concerned, it can thus
be said that roughly 50% earned their status as a gazelle company directly after the company was set up.9
Therefore, the number of newly emerged gazelle companies from a respective start-up cohort decreases
gradually as time progresses.

In large part gazelle companies develop directly after foundation

The second trend shown in table 4-1 is that the start-up cohorts from 1995 - 1999 on average generate 800
gazelle companies right after the companies were established. As of the year 2000, however, this average
only adds up to 480 gazelle companies. Graph 4-1 illustrates this finding specifically for those companies that
accomplished their growth period four years after the company was established (“early starters”). It is shown
that the number of “early starters”, identified from any respective start-up cohort, declines continuously over
time. While in 1999 793 companies met the criteria of a gazelle company directly after the company was
founded this was only true for 378 companies in 2010.

In the foundation year 2000 the number of gazelle companies drops erratically

Graph 4-1: Number of gazelle companies per startup cohort which began their growth period one year after the
business was established and became a gazelle company 4 years after foundation (early starter gazelles)

1000
898
900
819
793
765
Number of gazelle companies

800 734
700
580
600
521
496 498 482 491
500 427
378
400
300
200
100
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year of gazelle companies

Source: Own Calculations Rambøll, Data Creditreform

As illustrated in graph 4-1 this decline does not occur gradually over time. The number of companies drops
drastically in 2000. While between 1995 and 1995 an admittedly volatile average of 800 early emerging
gazelle companies per start-up cohort was reached, graph 4-1 shows a significant decline in the number
early emerging gazelle companies as of 2000. The average number of early emerging gazelle companies as
of 2000 is 492 per start-up cohort. Possibly, this decrease can be attributed to the external crises in 2000/01
(dot com bubble, 9/11) which had a negative effect on the overall economic situation in Germany.
9
The statement about the proportional share refers only to the considered investigation period, because every year other fast-growing start-up
companies from a start-up cohort are added, however, a point about the proportional share cannot be made.
This seems natural for the negative impact of these crises not only affected the general entrepreneurial – and
growth activity but also impeded the development of fast growing companies. The lowest number of gazelle
companies (378) falls in the year 2006.10
Combined both trends lead to the conclusion that the general growth dynamic of newly founded companies
decelerated substantially between 1995 and 2006.

One in six jobs generated by startup companies is created by a gazelle company

As frequently stated in the literature, gazelle companies contribute disproportionately to the creation of new
jobs. Therefore, the following compares the number of jobs created by gazelle companies as opposed to the
number of jobs created by the overall number of startups in the investigated time period. This is depicted in
graph 4-2. It is shown that in the investigation period the share of jobs provided by gazelle companies varies
significantly. While gazelle companies of the startup cohort 1997 account for almost 27% of all jobs provided
by startup companies, this number drops to 10% for businesses of the startup cohort 2002. Disregarding
these fluctuations, a general tendency towards a decreasing share of jobs provided by gazelle companies
measured against all startups can be observed over the investigation period. The share drops from more
than 20% to below 15%.
Graph 4-2: Share of gazelle companies measured against the overall number of jobs provided by start-ups

30%

25%

20%
Share

15%
26,98%

22,91%
10% 20,57% 19,98%
16,58% 16,54%
14,71% 14,85%
10,99%
5% 10,16% 9,70%

0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
startup cohort
Source: Own Calculations Rambøll, Data Creditreform

This decline can be attributed to the fact that within the investigation period the number of gazelle
companies decreased substantially. In absolute terms 8.371.681 jobs were created by all startups in 2010,
1.347.482 of which account for jobs created by gazelle companies. Hence, one in six jobs of all newly
founded businesses as of 1995 was created by a gazelle company.

The largest growth effects are attributed to gazelle companies which meet the “gazelle”- criteria
directly after the companies were established

10
In 2011 427 companies from the start-up cohort fulfilled the defined growth criteria in 2007 (see remark table 4-1). Whether it becomes a new
upward trend or however, hardening at a new low level, cannot be predicted.
As mentioned above, a large part of gazelle companies emerges directly after the companies were
established. The following graph 4-3 depicts the development of early and later starters with respect to their
average number of employees.11 It can be discerned that early emerging gazelle companies grow
continuously in the investigated time period (from an average of 16 employees in the starting year to 43 at
the end of the growth period). However, gazelle companies which start their growth period at a later stage,
meaning after the first year post-startup, usually generate the defined increase in employment (72,8%)
within one year and stop growing after that. This holds true for all other gazelle companies and is depicted
exemplary in graph 4-3 for companies starting their growth period 4,7,10 and 15 years after the companies
were established.
Graph 4-3: Development of the number of the employees in early and late starters of gazelle companies
60

50
Employees (Median)

40

30

20

10

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year after foundation

gazelles 4 years after foundation gazelles 7 years after foundation

gazelles 10 years after foundation gazelles 15 years after foundation

Source: Own Calculations Rambøll, Data Creditreform

Partly due to the definition (a minimum number of 10 employees), the number of employees at the
beginning of the growth period is almost the same for all gazelle companies (15 employees). Remarkably
though, graph 4-3 illustrates that late starting gazelle companies – at the end of the defined growth period-
have created significantly fewer jobs than their early starting companions. Furthermore, early – and late
starters grow differently. Whereas late starters grow rather erratically, early starters grow relatively constant
within the three year growth period. Also, early- and late starting gazelle companies differ regarding their
development after the growth period. While early starters continue to grow, late starting gazelle companies
rather maintain their level of employment and seemingly consolidate. Having said this, 8 years after
completing the three year growth period, early starting gazelle companies have increased employment by yet
another 20%. Thus, companies which start growing at an early stage continue to grow even if at a
decelerated pace. On the other hand, late starting gazelle companies do not achieve further growth. With
respect to job creation, this finding underscores the significance of companies which grow at an early stage.

A quarter of gazelle companies starts growing with more than 50 employees and grows above 100
employees

The above already hints at the fact that gazelle companies are far from being a homogenous group in terms
of growth. Thus, the following looks at two different groups: the companies which grow over 100 employees
11
Technical remark: Because the values of the number of employees in the period under consideration are decreasing and during the late years dates
were not available, therefore the values were forecast. On this occasion, the growth rate of the employee's growth was determined for every year
and in another step this was calculated averaged for every year.
in the investigation period and those that do not. In order to distinguish the first group from the latter it will
hence be referred to as “super – gazelles”. One in four companies provides more than 100 jobs. Interestingly,
this number does not change in the investigated time period. Consequently, the potential to create jobs
remains stable, regardless of the decline of gazelle companies in absolute numbers after 2000. So even if
external crises do influence the likelihood with which companies become gazelle companies, they seemingly
do not affect the number of jobs gazelle companies create once this status is achieved. Hence, in
economically difficult times fewer companies generate fast growth. The growth which is generated, however,
is not influenced by this factor.

In this context it is interesting to find out whether the two groups (super- gazelles and gazelle companies)
already differ when establishing the company with regards to the number of employees. Do the companies
over 100 employees start out with the same number of employees as smaller companies? Graph 4-4
compares the median of people employed in the base year, after the 3 year growth period and at the point
with the highest number of employees for all gazelle companies and “super- gazelles”.

Graph 4-4: Comparison of number of employees and super-gazelles at different stages

250
Number of employees (Median)

200

150

Super-Gazelle
100
Gazelle
50

0
Employees in base-year Employees after Max. employees
growth period

Source: Own Calculations Rambøll, Data Creditreform

Super-gazelles start out with substantially more employees than other gazelle companies. Before the defined
growth period they employ 50 people; after this period they employ 150 people. Gazelle companies, on the
other hand, start out with 14 employees and have 34 employees after the growth period. Consequently, the
number of employees in super -gazelles is not only higher than in the control group but also the rate of
increase is superior. Despite higher absolute numbers of employees in the base year, super gazelles were
able to increase the number of employees by 200% in the 3 year growth period. The control group was able
to increase the number of employees by 143%. Hence, the rather small share of “super- gazelles”
contributes disproportionally high to the employment effect deployed by gazelle companies. This even holds
true for when the three year growth period is completed. Super-gazelles realized further growth of 33%,
whereas gazelle companies only reached 18%. Thus it can be concluded that the starting point of a company
determines the further growth path. Companies which start with a high number of employees hence generate
stronger growth than those which start out with fewer employees. If one only considers the companies which
realized the defined gazelle criteria as early as possible (4 years after foundation of the company), this
correlation is even stronger.

Gazelle companies emerge more frequently in knowledge intensive branches

On a detailed industry level, the study shows the development of gazelle companies in relation to the startup
cohorts from 1995 to 2006. It is examined how many gazelle companies emerged from different industries in
relation to the overall number of newly established businesses in a respective industry. The overall number of
startups between 1995 and 2006 is 2.159.543.12 Measured against the number of gazelles (13.021) this
yields a quota of 0,60%. Therefore, one in 165 companies founded between 1995 and 2006 became a fast
growing young company according to the definition used in this study.
Compared to the overall number of startups in an industry the share of gazelle companies is particularly high
in the branches “temporary employment agencies” (5,16%) and the social sector (4,67%). Among the 20
branches yielding the highest likelihood of gazelle companies are 14 branches concerned with the
manufacturing of products – inter alia the production of parts and accessories for trucks (4,51%), electronic
components (4,47%), machine tools (4,37%), chemical raw materials (4,35%) and plastic products (4,25%).
Also service sectors such as research and development in natural-, engineering and agricultural sciences and
medicine (2,34%) can be found. In summary it can, therefore, be said that gazelle companies mainly come
from branches in producing and processing sectors. The very opposite is true for those branches that
measured against the total number of startups generate the smallest share of gazelle companies.17 of these
branches are service branches, with a majority evolving around the sectors retail trade and specialized trade:
Inter alia real estate services (0,18%), travel agencies (0,33%), advertising (0,36%) and wholesaling on a
fee (0,21%). All in all, measured against the total number of startups, the largest share of gazelle companies
operates in manufacturing while the lowest share of gazelle companies operates in service sectors.

Graph 4-5: 20 industries with the highest share in all gazelle companies and the highest gazelle-share (WZ-3-Level)
measured by all start-up companies 1995-2006

Structural and civil engineering

Other services activities predominantly for companies

Placement and transfer of workers

Social affairs

Other surface transport

Architecture and engeneering offices

Software houses

Cleaning of buildings, inventory and means of transportation

Forwarding, other transport agencies

Surface finishing, heat treatment and mechanics

Production of plasticware

Other food industry (without beverage industry)

Steel and light metal construction

Research and development in the field of nature-, engineer-,…

Production of machines for generating and use of mechanical energy …

Detective agencies and protective services

Production of machines for other branches of industry

Production of hardware, sheet metal and metal goods

Production of machine tools

Production of electronic components

0% 1% 2% 3% 4% 5% 6%
Gazelle-share in all companies
Gazelle-share in all gazelles of the industry

Source: Own Calculations Rambøll, Data Creditreform

12
The number of the start-ups, which is taken as a comparative size in the database of the Creditreform deviates from the calculated start-ups by the
ZEW. Nevertheless, it is calculated at this point on the dates of the Creditreform, because these are available at an industry level and in addition
the comparison to the gazelle companies at this level is conducted.
A detailed consideration of the branches which generate a large share of gazelle companies measured against
both the total number of gazelle companies and the number of startups in a respective branch is shown in
graph 4-5. For they fulfill both criteria, these branches are assumed to have the greatest potential for young
fast growing companies. Among these branches are mainly knowledge intensive services such as the
provision of corporate services, architecture - and engineering firms, software companies and research and
development in natural-, engineering and agricultural sciences and medicine. Also the branches
manufacturing of electronic components and machine tools can be found among the top 20 branches.In
conclusion, the branch specific consideration of fast growing young companies shows that when compared to
the size of the branches, gazelle companies are most likely generated in knowledge intensive branches.

Gazelle companies emerge depending on their branch in regional clusters

The regional distribution of all identified gazelle companies in Germany reveals that, in line with the economic
structure in Germany, most gazelle companies are located in North Rhine Westphalia (22%), Bavaria (15%)
and Baden Württemberg (12%). Also, 4% of all gazelle companies in Germany are located in Berlin and 3%
Hamburg. In relation to the overall number of startups the share of gazelle companies varies from 0,35% to
1%. The largest share can be found in the state of Saarland followed by the East German states of Saxony,
Thuringia and Saxony-Anhalt. Having said this, the share of gazelle companies is particularly high in regions
in which both the overall number of companies and the entrepreneurial activity are low.

In the following, 8 branches which entail the greatest potential to generate gazelle companies will be
analyzed with regard to region specific aspects. This aims at identifying whether there are regional foci or
clusters where certain branches predominantly operate. Graph 4-6 depicts the regional distribution of 4
branches of the manufacturing sector and graph 4-7 shows the distribution of 4 branches in the service
sector. Graph 4-6 illustrates that there is a notable regional focus in terms of companies which operate in the
branch of manufacturing machine tools in Baden-Württemberg and Bavaria. 54% of all companies are located
in those two regions. Moreover, the city-states Berlin, Bremen and Hamburg have hardly any companies in
the 4 examined branches. With regards to the manufacturing of electronic components there is a cluster in
Saxony and Thuringia (27% of all companies are located in these two states).

Graph 4-6: Regional distribution of the four main industries of the manufacturing industry in gazelle companies
40%

35%

30%

25%

20%

15%

10%

5%

0%

Production of machines for specific branches Production of machine tools

Manufacturing of electronic components Manufacturing of other iron- metal sheet and metal

Source: Own Calculations, Data Creditreform

The picture changes when looking at the service sector (see graph 4-7). In the branches corporate services,
architecture - and engineering firms, software companies and research and development in natural-,
engineering and agricultural sciences and medicine a regional cluster can be found in North Rhine
Westphalia, Bavaria and Baden Württemberg. The city states show a focus in the service sector, too. Berlin,
for instance clusters companies in the field of research and development in natural-, engineering and
agricultural sciences and medicine (10% of all companies). Also, the rather small state of Saxony has a
relatively large share of knowledge intensive services.

Graph 4-7: Regional distribution of the four main industries of the service industry in gazelle companies

30%

25%

20%

15%

10%

5%

0%

Software houses Archtiecture - and engineering offices

R&D in natural- engineering-agricultural sciences and medicine Provision of other (business-) services

Source: Own Calculations, Data Creditreform

4.3 Results of the survey of gazelle companies and case studies

From the total number of 13.021 identified gazelle companies a randomized sample was taken, in order to
conduct a telephone survey. 3.602 companies were asked to participate in the survey. In between
10.10.2011 and 28.10.2011 211 surveys were completed successfully. The return rate thus was at 5,86%. A
unit- non response analysis revealed no significant differences between non respondents and participants,
the exception being the company size. Having said this, the interpretation of the results is to be seen in the
context of an overrepresentation of small companies. Moreover, in- depth interviews / case studies were
conducted with 8 selected companies.

The main purpose of the case studies and the telephone survey was to find detailed information on gazelle
companies, and the identification of decisive growth-obstacles and drivers in particular. Also, the hypotheses
suggested by the literature were put to a test. The primary aim of the case studies was to conduct a detailed,
in depth and exemplary consideration of these companies which allows tracing their growth strategies. The
results of both empirical investigations will be presented jointly.

Founders of gazelle companies have many years of professional- and branch specific experience.
Besides, one in three founders has previously founded a business

The literature analysis showed that the degree of formal education and branch specific experience – a
company´s human capital- have an effect on growth.13 The result on the age of the surveyed founders shows
that almost half of the people were between 30-39 years old when founding the company. Another 28% even
13
See: KfW, ZEW (2010): Aufbruch nach dem Sturm. Junge Unternehmen zwischen Investitionsschwäche und Innovationsstrategie. KfW ZEW
Gründungspanel 2010.
were between 40-49 years old. The age groups 20-29 years and 50-59 years are equally big and amount to
12% each.

Approximately half of the businesses were set up in a team, the average team size being 3 people. With
regards to prior experience in setting up a business almost one in three surveyed founders (29%) indicates
that he/she had set up a business before. Among the surveyed CEOs 41% had worked in leading
management positions before. In terms of educational background, 54% of founders indicate to have a
completed an apprenticeship – equally distributed among technical- and commerce related apprenticeships.
Another 38% possess an academic degree either in the field of Economics and Social Sciences (67%) or in
natural sciences and technology (24%). One in ten founders, CEOs respectively, has a doctorate. The
majority (more than 60%) of both founders and CEOs had more than 10 years of professional experience.
When setting up the business or starting work in the company almost half of the founders and CEOs already
had more than 10 years of experience in the respective industry.
All companies investigated in the case studies were founded by a team. Much like the surveyed
entrepreneurs the majority had extensive professional and industry specific experience. Moreover, 3 founders
of companies investigated in the case studies state to have set up a business before. Thus, when setting up
their business they already had experience in starting a business as well as managerial skills. Among the
founders six come from a family of entrepreneurs. When asked about their initial motives the majority stated
that they had always wanted to start a business and that they had already acquired experience in leading a
business.

When starting their business, gazelle companies already incorporate growth in their strategy

When asked about their motives to grow all entrepreneurs said that growth had been strategically planned or
had been inherent in the business model. The market is also assumed to be a key driver of the largely
continuous growth of the case study companies. So in other words the market in which the companies
operate forces them to either grow or vanish. Thus, from the entrepreneurs´ perspective, a strategy which is
not aimed a growth causes the company to fail. Also, entrepreneurs state that the market demands a certain
company size which is necessary in order to operate successfully. This suggests that for gazelle companies
growth can be viewed as a constituent feature. Consequently, the motives to grow are a combination of the
founders’ intrinsic motivation and external market circumstances.

The gazelle companies strongest in growth are especially innovative

76% of all gazelle companies have produced an innovation. According to “The Mannheim Innovation Panel”
43% of all SME in Germany consider themselves innovators 14. This suggests that the innovation activity of
gazelle companies is far above- average. Among the surveyed companies 80% have created a product- or
service innovation and 37% have created an innovative method or process. While 41% state to have created
an incremental innovation which has led to a slight improvement of the product/service, 59% of all surveyed
companies consider their innovation a radical improvement of a product/service.

Empirical studies which exclusively focus on fast growing companies find a correlation between innovation
and growth.15 The present study investigates this hypothesis by dividing the surveyed gazelle companies into
two groups (1) companies which grow above- average and companies which grow below average. This
categorization is based on a growth coefficient which was calculated for each of the surveyed companies. The
growth coefficient relates individual companies to all companies from their respective foundation cohort with
regard to their growth. It shows that the group of companies growing above average more often indicates to

14
Aschhoff/Doherr/Köhler/Peters/Rammer/Schubert und Schwiebacher (MIP 2008), Innovationsverhalten der deutschen Wirtschaft – Indikatorenbericht
zur Innovationserhebung 2008, ZEW, infas, FhG ISI, Januar 2009.
15
See: Coad, A. und R. Rao (2008): Innovation and Firm Growth in High-Tech Sectors: A Quantile Regression Approach. Research Policy 37(4):633-648
/ Hölzl, W. (2009): Is the R&D behaviour of fast-growing SMEs different? Evidence from CIS III data for 16 countries. Small Business Economics
33(1):59-75 / Stam, E. und K. Wennberg (2009): The roles of R&D in new firm growth. Small Business Economics 33(1):77-89.
have created an innovation (53%) than the group of companies growing below average (47%). Furthermore,
it can be shown that companies which grow above average are more likely in to create radical innovations
than companies which grow below average. In addition, the study shows that gazelle companies mostly
operate in young, emerging and growing markets (77%).
Especially technology oriented case study companies considered continuous innovation a key driver for
growth. The ability to successfully create and position innovation can, however, not be dissociated from a
certain company size. Having said this, there is an interrelationship between the necessity to grow and the
ability to successfully create and position innovation.

Gazelle companies operate internationally more often and at a very early stage

Current research finds integrating foreign markets and/or economic activity in foreign countries opens new
growth perspectives to companies. Consequently, the present study also looks at the degree of
internationalization of the surveyed companies. 31% of all companies indicate that they operate
internationally. A study conducted in 2004 suggests that 24% of all SME in Germany show economic activity
beyond national borders16. Thus it can be derived that gazelle companies in Germany rather tend to operate
internationally than other SME. The study also investigates at which stage companies started to operate
internationally. It can be shown that a majority of internationally operating gazelle companies indicates that
they started expanding their markets at a relatively early stage. On average the surveyed companies launch
their exports 2,6 years after the company was set up. This suggests that the decision to operate
internationally is, from a very early stage, a crucial element of the business model.

The financing strategy of gazelle companies varies greatly

Approximately one in four surveyed companies started off with less than 20.000 Euro startup capital. 28%
state that they had between 40.001 and 60.000 Euro startup capital. The largest group of companies (29%)
had 100.000 Euro startup capital. The amount of startup capital varies significantly. While the median is at
25.000 Euro, the arithmetic mean is at 649.530 Euro. Thus, with regards to the financing strategy when
setting up the business gazelle companies differ substantially.

73% of the startup capital come from own funds and 27% come from outside equity. 64% stated that they
used own savings and 10% used savings from friends and family. While 17% received public or institutional
funding only 2% used venture capital. None of the surveyed companies used financing through Business
Angels. These findings link up well with a study on the access to capital of SME, especially gazelle companies,
conducted in 201117. Outside equity is primarily raised in the form of bank loans (58%) and start-up loans
(39%). Subordinated loans were used by 7% of all surveyed companies. Almost one in three companies did
not take up any outside equity at all.

Besides looking at early stage financing it is interesting to investigate with which means gazelle companies
finance their growth. 76% of all companies indicate that the ability of capital necessary to realize the planned
growth steps was satisfactory. On the other hand 24% state that they were unable to realize the planned
growth steps due to the insufficient availability of capital. Graph 4-8 depicts the relevance companies assign
to different capital sources. In the further course of the companies retained earnings become a relevant
financial instrument. 42% of the surveyed companies consider retained earnings very important and another
34% consider them important. Thus, when financing growth retained earnings are considered the most
important source of capital.

16
EU- Kommission (2003/4): Internationalisierung von KMU
17
See: Söller, Rene (2011): Der Zugang kleiner und mittlerer Unternehmen zu Finanzmitteln, Destatis.
www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Publikationen/Querschnittsveroeffentlichungen/WirtschaftStatistik/Unternehm
enGewerbeanzeigen/MittlereUnternehmenFinanzmittel,property=file.pdf.
Graph 4-8: Evaluation of the relevance of financial sources for growth financing

Retained earnings
42% 34% 11% 2% 11%
Gewinne (N=202)

Own savings/
friends / family 44% 16% 11% 7% 22%
(N=206)

Bank loans (N=203) 24% 33% 11% 7% 26%

Public funding programs

14% 21% 14% 9% 42%
(N=203)

Venture Capital
10% 15% 8% 14% 52%
(N=202)

0% 20% 40% 60% 80% 100%

Source: Own Calculations, Rambøll

Much like in early stage financing, the relevance of own saving/friends/family continues to be high. As far as
outside equity is concerned, more than half of the companies surveyed assign “very high” (24%) or “high”
relevance to bank loans. Surprisingly though 26% of the surveyed companies consider traditional bank laons
not relevant at all when financing growth. While 35% view public funding as important, 42% consider public
funding not important at all. One in four surveyed companies is of the opinion that Venture capital is very
important/important. More than half of the surveyed companies, however, regard Venture Capital as not
impornat at all.

Focussing on quality, clients and distribution is a crucial driver for growth

The present study also aims at identifying growth drivers and growth obstacles of gazelle companies in
Germany. Therefore, the surveyed companies were asked to list the most important drivers and obstacles for
growth by means of an open question in the questionnaire. The literature distinguishes between internal and
external growth determinants.

According to the surveyed companies the focus on quality, clients and distribution is by far most important
growth driver. Within this context marketing plays a crucial role. The interviews conducted in the framework
of case studies echo these results. The quality of the product/service and a focus on distribution were thus
identified as the main growth drivers. In addition, the surveyed companies attribute growth to an appropriate
market dynamic (a growing market). Essentially, the combination of a young dynamic market and a strong
focus on clients, a qualitatively high product and/or service are key drivers for a successful company and
growth respectively. The surveyed companies largely locate external growth drivers on the market. According
to one entrepreneur “the market and ultimately the client are the decisive growth drivers”. In this regard it is
interesting that all case study companies were exclusively founded in growing or even new markets. Besides
the market, actions taken by the government also have a positive effect on growth. This is especially true for
legal regulations and public funding.

The surveyed companies consider the creation of innovations and employees further growth drivers. The
importance of employees is also emphasized in all conducted case study interviews. Entrepreneurs consider
their employees the most significant resource, also with regard to growth.
Interestingly, the analysis shows that entrepreneurs attribute very little stimulation for growth to external
circumstance; generally growth drivers are assumed to be of internal nature. Having said this, company
growth is largely triggered by the company itself – respectively management and employees. The above
suggests that there is limited room for support options regarding growth drivers from external sources.

Skills shortage is the main growth obstacle for gazelle companies

Unlike growth drivers, growth obstacles are largely seen outside the company.
The most frequently indicated growth obstacle is skills shortage. According to the case study interviews SME
and startups face skills shortage due to a lack of “branding”, whose inhibitory effects are twofold. One the
one hand employees would rather not work for unknown, small or recently launched businesses. This is
particularly true for highly skilled personnel, who often prefer working in a big corporation since the
likelihood of job loss is assumed to be lower. Also, big corporations are mostly able to pay better. One the
other hand employees highly value a company´s reputation. Furthermore, the unwillingness to work in
startups is traced back to the generally negative picture of entrepreneurs in Germany. Nonetheless this
phenomenon is also discussed from a positive perspective. Employees who choose to work in startups often
do so consciously for they appreciate the flat hierarchies, flexibility, dynamic and high responsibility offered in
startups. Having said this, a positive selection of employees takes place which tends to result in the hiring of
particularly highly motivated personnel. However, a certain company size is considered crucial in order to
perform successfully on the market. This applies to both B2B and B2C businesses. According to the surveyed
entrepreneurs startup companies have a hard time establishing trust on the market. The lack of branding
thus not only inhibits the acquisition of qualified personnel but also impedes the customers´ trust on the
market. Both facts have a negative effect on growth. On the other hand both aspects also encourage
companies to realize fast growth.

Internal growth obstacles occur if employees cannot be motivated sufficiently. In general though, employee
motivation in startups is very high, which is mainly due to flat hierarchies, good opportunities for promotion
and a high level of responsibility. According to the surveyed entrepreneurs, problems in motivating
employees may occur once the company is established and the dynamic slows down and structures solidify.
However, through trainings companies counter this trend. Since fast growth leads to continuously changing
company structures and often causes restructuring measures, there are always times in which the company
structures are not optimal. The surveyed entrepreneurs refer to these times as “critical moments” which
always bear risks for the company. A lack in structure, therefore, is also regarded a growth obstacle.
However, it is argued that such “critical moments” are part of the business and is, therefore, considered a
challenge rather than a problem.

“Skills shortage impedes growth.” The majority of case study companies confirm this statement. Skills
shortage has a various reasons, one of which is the lack of branding which is pivotal in the acquisition of
skilled personnel. Startups are often in need of excellent staff they are, however, unable to measure up to
the salaries big corporations offer. Moreover, one entrepreneur reports that some customers are reluctant to
work with foreign employees. Nonetheless, the surveyed entrepreneurs criticize the limited access for foreign
employees to the German job market.

One entrepreneur in the interview states: “The opening of the job markets, also in the EU, occurred too late.
The best brains are already somewhere else.”

The call for a reduction of formal requirements when wanting to enter the German job market, therefore, not
only applies to EU citizens but also to highly qualified, experienced employees from outside the EU. The
surveyed entrepreneurs further state that more incentives for those employees should be created since
Germany has a language related disadvantage vis–á-vis Anglo-Saxon countries. Moreover, it was mentioned
that especially fast growing companies are targeted by international job-hoppers. In this context the current
German social system ought to be called into question. While all of the entrepreneurs of the case study
companies indicate that securing skilled personnel is a major challenge none of the companies actually
suffers from an acute lack of qualified employees. The challenge was tackled as a strategic matter from an
early stage on coped with through intensive recruiting: ways to recruit qualified personnel range from
directly approaching universities and universities of applied science to making use of headhunters and the
implementation of dual study programs in which part of the degree is completed in a company. Also,
employees are awarded bonuses if they successfully recruit personnel. In this context the importance of
motivating and keeping employees was stressed. As far as the education system in Germany in concerned
entrepreneurs encourage policy makers to increase the quality as well as social mobility. More precisely it is
suggested that academic fields in which Germany currently succeeds such as mathematics, engineering and
natural sciences should be further strengthened. Among the surveyed entrepreneurs skills shortage is
generally viewed as a future issue which needs to be tackled strategically today.

Economic- and financial crises mostly impede growth of innovative technology businesses

Besides the above, the financial and economic crisis is considered a growth obstacle. This is in line with the
empirical evidence which suggests that the dropping number of fast growing companies was mainly caused
by external crises. All case study companies express that external crises have impeded company growth.
However, the extent to which a deteriorating economy negatively affects business varies greatly due to
branch specific characterizations. While those who consider the branch in which they operate largely crisis
resistant have not really suffered any losses, others claim the crisis caused “a massive slump in orders”
which substantially slowed down growth with respect to both employees and revenue. This is particularly felt
by technology-oriented businesses with high funding needs, because in economically difficult times both the
demand for new technology and the general financing situation deteriorate. Consequently, these businesses
had to reduce the employment level shortly after a crisis. However, they were able to recover quickly. In this
context the introduction of the exceptional regulation on “short-time work” in 200918 was mentioned
positively. It allowed companies to hold on to employees and thus assured immediate reaction once the
economy started improving again instead of having to hire new personnel.

Startup financing is the biggest challenge

Among those who were surveyed by phone a lack in financing possibilities was perceived a key growth
obstacle. In this context the lack of financing opportunities through banks and the difficult access to loans
were criticized. The case study companies echo this result by stating that the acquisition of financing in the
startup phase as well as to realize growth is a key challenge. Especially, the rigid loan conditions applied by
banks are regarded as a growth obstacle.

“The lack of startups is primarily due to the fact that the risk aversion of banks has increased over the past
years. If you´re lucky enough to get a loan, then only if you pay extremely high interest rates.”

The surveyed entrepreneurs largely agree upon “the unwillingness of conventional banks to provide loans.”
With respect to the relevance of Venture capital on the other hand there is a wide range of different views.
Especially at an early stage some entrepreneurs are critical towards VC because they fear “loss of control”.
Others think the bad reputation of the VC market is not justified. Among the surveyed companies some used
VC for both startup and growth financing. These companies mainly operate in software, IT and technology
branches. This suggests that the acceptance and use of VC highly depends on the branch. Those that did use
VC consistently said that their business model was thus inherently growth oriented. Despite the fact that the
majority consider financing a major concern in the process of setting up a business and realizing growth, only
very few actually have had too little capital. Nonetheless, it is assumed that given a better financing situation
even further growth could have been achieved. In general the above suggests that the financing situation is
in fact a major challenge for startups and may impede growth.

A clear legal framework is the basis for growth

18
See: http://statistik.arbeitsagentur.de/Statischer-Content/Arbeitsmarktberichte/Berichte-Broschueren/Arbeitsmarkt/Generische-
Publikationen/Arbeitsmarkt-Deutschland-Kurzarbeit-Aktuelle-Entwicklungen.pdf, P. 6.
Current legislation and bureaucracy were also identified as an obstacle for fast growth. In this context it is
mainly the planning uncertainty caused by the government which impedes growth. Besides, opening the
German job market for foreign employees, other legal conditions are considered as growth obstacles, too. It
is stressed that “many regulatory decisions are motivated politically”, rather than focused on the necessities
of business. Also, many legal decisions must be clarified by the Federal Constitutional Court. This causes a
legal uncertainty which can last for years and has clearly a negative effect on businesses. Having said this,
the surveyed entrepreneurs jointly call for clear legal conditions.

The securing of the competitive environment by breaking up cartels and forcing monopolies to open, the
market for competition is considered one of the main tasks of the legislation. In this field, entrepreneurs
desire intensified efforts. Furthermore the tax legislation for retained profits is criticized, because of its large
contributions towards liquidity shortage and thus to one of the main problems for companies. “This should be
managed by taxation, as for example in the Netherlands or Switzerland, which has to be paid only, if capital
is deducted from the company or in general its capital stock is reduced”. A general demand to reduce
administrative costs is often mentioned and is directed towards the organization of public funding programs.

“Considering the huge funding scene in Germany, the effort to examine and combine all
existing programs in order to obtain the desired funding is too high”.

Costly application procedures are evaluated negatively as administrative barriers

Particularly, the huge number of funding possibilities has a negative impact, because focusing on the optimal
funding strategy is a very time-consuming procedure. In addition, the obligation to disclose all relevant
information and schemes deters a o lot of persons to make use of a funding. Although the opinion was
expressed to abandon all funding programs, the majority of the sample evaluates funding programs as a
driver for their growth. . This is especially true for business concepts that entail a high risk factor.

Particularly companies which develop basic technologies attach high importance to the funding through
subsidies. According to the respondents within the overall financing framework the funding has a significant
influence on growth of the company. Nevertheless, the opinion was expressed that public funding programs
were neither efficient nor effective. But it is feared, that public funding may offer incentives apart from the
logic of the market and companies survive artificially.

Some respondents even demanded general restructuring. The restructuring is discussed at two levels.
Besides, the already mentioned changes within the modalities, it is mainly a question for whom and in which
industries funding programs make sense. Young founders, who have neither capital nor other securities, are
in particular considered to be suitable recipients of funding programs. This coincides with the image that
above all, funding should support the foundation of companies, while other growth steps should be financed
by the market. Another proposal is to promote funding of clusters and concentrate on specific industries.
Therefore, the expressed criticism of funding by public authorities contains criticism of the formalities and the
arrangement of contents. Taken all together, it can be said, that pro and contra of public funding is discussed
extremely controversially by the respondents.

A positive image of entrepreneurs strengthens foundation activity and growth

Another aspect mentioned several times by the entrepreneurs was the negative image of entrepreneurs in
Germany. From their point of view the entrepreneur´s negative public image and the general risk aversion in
Germany are jointly responsible for a decreasing number of gazelle companies. Through initiatives at schools
and universities –and therefore, a stronger presence of entrepreneurship in educational institutions, it is
possible to improve the ailing image of an entrepreneur in a lasting way. As a consequence, more young
graduates could be attracted to the idea of self-employment and realize it.