Gazelle Companies: What Is So Special About the 20% Threshold?

In business analysis, a special emphasis is placed on “gazelles”, companies that grow by at least 20% per year for several years (usually four). While this 20% threshold is somewhat supported by empirical research, from the theoretical viewpoint, it is not clear what is so special about this value. In this paper, we provide a possible explanation for this empirical fact. 1 Formulation of the Problem Empirical fact. In the late 1970s, an MIT economist David Birch noticed that most jobs are created by fast-growing small companies [1], see also [2, 4, 5, 6]. His empirical analysis showed that most of these companies grow by at least 20% per year for a certain number of years. To describe such companies, he coined a special term “gazelle”: a company that grows by at least 20% per year for 4 years, from a certain sufficiently large initial revenue base (usually $1,000,000). This term is now widely used in business, and further studies confirmed that such fast-growing companies deserve special attention and special analysis. Problem. While the 20% threshold seem to be supported by empirical data, there is no good theoretical explanation of why 20% (and not 15 or 25) is a threshold separating fast-growing companies from all others. What we do in this paper. In this paper, we propose a possible explanation for the above empirical threshold.