Spotting potential 'gazelles' for affirmative action

Complexity science helps by taking into account non-financial indicators

The term "gazelle" is meant to identify with small and medium enterprises (SME), which are usually not venture capital-funded and are not lifestyle ventures as well but exhibit a significantly superior growth than other SMEs in an economy. The definition of an SME has varied across different studies conducted over the past three decades. However, many of these studies have considered SMEs to be firms that have undergone a venturing process and have reached a certain size and scale.

The different studies on gazelles so far in different economies seem to suggest that gazelles represent less than 10 per cent of private businesses in the US, Finland and other parts of Europe wherever such studies were conducted, but create 70 per cent or more of net new jobs depending on the period of the study. In some cases, gazelles seemed to have created more than 50 per cent of employment in an economy.

Studies outside North America and Europe also point favourably towards the contribution of gazelles to job creation. A Brazilian study shows that more than 57 per cent of the net new jobs were created by gazelles during 2005-2008. The percentage of gazelles seem to vary across economies, while countries such as the US, Germany, Finland, Belgium and Norway have less than 10 per cent of their private sector identified as gazelles, transition economies such as Lithuania, Bulgaria, and Romania amongst others seem to have close to 20 per cent of their private sector identified as gazelles.

The above studies suggest that gazelles are important to an economy; however, the challenge is to identify them early to create an ecosystem that both benefits them and also feeds off the gazelles. One of the measures used by different studies on gazelles is to look for SMEs that have shown 20 per cent growth over a period of four years to be bracketed in the category. However, such an approach ignores the start-up and early growth stage of a venture before it turns into an SME.

Is there a way gazelles could be identified even during their early venturing stage? A study of the Indian information technology services sector showed that ventures that are founded in a certain window of time exhibit superior growth than do others of the same sector. This optimum window of founding known as "founding time" refers to the time taken by a start-up to exhibit stable and consistent growth from its inception, defined by certain organisational parameters.

A complexity science-based approach should help us understand the founding time concept even better as a venture courses from a pre-start-up stage to an early growth stage before becoming an SME. The early venture dynamics are complex, nebulous, not always recorded, and are subject to morphing of venture identities. An econometric approach is likely to consider financial data, which may not always be appropriate for assessing new venture growth, whereas a complexity-based approach would allow us to consider non-financial indicators as well to develop an understanding of early venture growth and in that sense help us identify potential gazelles for affirmative action.

The prime minister's start-up action plan announced recently is a good augury for the venture ecosystem in India. However, the start-up India action plan does not seem to address the issue of identifying potential gazelles in India, amongst other shortcomings. A dashboard identifying not only gazelles but also the venture ecosystem dynamics in India would considerably enhance the proposed start-up action plan.

GR Chandrashekhar
Associate professor, Complexity Research Group, Institute for Financial Management and Research