The Significance of Second Stage Companies

The Edward Lowe Foundation began to narrowly focus on second-stage entrepreneurs in the early 2000s due to the important role second-stagers play in economic prosperity — and misperceptions about entrepreneurship.

“People frequently use the term ‘entrepreneur’ to refer to small businesses,” says Mark Lange, the foundation’s executive director.  “But entrepreneurship encompasses a broad spectrum, and there’s a big difference between small-business entrepreneurs and growth-oriented entrepreneurs.”  For example, some individuals, often referred to as “lifestyle entrepreneurs,” may be self-employed because they like being their own boss, but creating jobs isn’t a priority for them.  Then there are small businesses that provide jobs in a community, however, the local trading area they serve often restricts their growth.

In contrast, growth entrepreneurs are significant job creators because of their appetite — and aptitude — for expansion. And because they often have national or global markets, they bring outside dollars into the community.

The foundation defines second-stage growth entrepreneurs as having 10 to 99 employees and annual revenue ranging between $1 million and $50 million.  These are soft boundaries and will fluctuate depending on industry,” Lange stresses. “The important distinction is that these companies are focused on growth, and they are powerhouses when it comes to job creation.”

Indeed, between 1993 and 2008, second-stage companies only represented 10.9 percent of U.S. resident establishments but represented 35.7 percent of jobs and 24.8 percent of positive job growth, according to YourEconomy.org, the foundation’s online research tool. (See chart)

Many people associate second stage with gazelles (companies that grow 20 percent or more each year), but that’s only part of the story. Second stage also includes companies with potential for high growth and those with steady growth that may be less dramatic than gazelles but is still impressive.  “Granted, growth entrepreneurs pass through a variety of stages, but second stage is a critical juncture,” Lange says. “In his book ‘No Man’s Land,’ author Doug Tatum calls this the adolescence phase in companies’ lifecycles where they are ‘too big to be small but too small to be big.’ ”

Although funding and resources exist for small businesses and startups, second-stage entrepreneurs have different needs to continue growing. For example, second-stagers wrestle with:

• Refining core strategy
• Adapting to industry changes.
• Expanding markets.
• Building a management team.
• Embracing new leadership roles.

“It’s important to treat these growth entrepreneurs differently than small businesses,” Lange says. “Communities need to identify their second-stage companies and make sure services and resources are in place to help them continue to grow.”

A perspective piece provided by the Edward Lowe Foundation