What are high growth firms ?

In order to make Canada more innovative, competitive and productive, focus is being placed on giving high growth and highly innovative firms (HGFs) the tools to succeed. It is these companies that investors and government agencies, such as: the Business Development Bank of Canada (BDC) with its IP-backed financing program, Canada's Strategic Innovation Fund (SIF) amongst others, fund HGFs according to their investment thesis.

First of all, what does "high-growth" even mean?

According to Investopedia, "growth companies are considered to have a good chance for considerable expansion over the next few years, either because they have a product or line of products that are expected to sell well or because they appear to be run better than many of their competitors and are thus predicted to gain an edge on them in their market."

There is, however, a bit more "science" as to what a HGF is. Here’s a breakdown:

1. It is a company with a business model that is designed to be repeatable and scalable (Investopedia; Gartner);

2. It is a company that has or has access to intellectual property (IP) and/or IP strategies. In this regard, not only is it known that IP plays an important role in firm growth and success (EPO/EUIPO May 2019 Report; OECD Report; World Bank Report), but that HGFs also fare better in raising capital (see: 2023 EUIPO – EPO study). It is also known that firms with strong intellectual property strategies also fare better in raising capital (MIT News, 2010);

3. It is a company that is “...not only powerful engines of job and output growth but also create positive spillovers for other businesses along the value chain.” (Worldbank, 2018);

4. Other "classical" definitions of HGFs consist of:

   1. “...enterprises with average annualised growth greater than 20% per annum, over a three year period should be considered as high-growth enterprises. Growth can be measured by the number of employees or by turnover” (OECD, Chapter 8, European Commission Glossary); and

   2. “...other significant predictors of HGFs include: profitability, debt ratio, human capital and labour productivity. In addition, firms that spend on research and development and invest in machinery and equipment in the current period increase their probability of becoming HGFs in the future.” (Innovation, Science and Economic Development Canada’s Report titled High-Growth Firms Characteristics in Canada).

Why invest in HGFs?

The answer is simple: they are attractive, and lead to employment and wealth creation. According to the Key Small Business Statistics 2022:

“Firms that “achieve high growth in a short period of time tend to make a large contribution in terms of employment and wealth creation. Based upon a 2017 study, high-growth firms contributed to 41% of the total net employment change between 2009 and 2012. High-growth firms, as discussed below, are found across all industrial sectors.”

According the same Report:

“...there are high-growth firms in all industries. In the goods-producing sector, the largest share of high-growth firms based upon revenue is found in the following industries: mining, quarrying, and oil and gas extraction (16.5%); construction (11.5%); and manufacturing (8.7%). In the services-producing sector, industries with the largest share of high-growth firms are information and cultural industries (12.0%); professional, scientific and technical services (9.4%); and administrative and support, waste management and remediation services (9.1%). Overall, the share of high-growth firms based on revenue is just under double the share based on employment (6.2% versus 3.4%).”

As we move closer and closer to an intangibles economy (McKinsey, 2021) where intangible assets currently make up 90% of the S&P 500 (visualcapitalist.com, 2020), it can be posited that more HGFs will be derived from intangibles (i.e., intellectual property), which will need to be properly managed to maximize value, whilst knowing the risks.

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Need more information on HGFs, check out these reading resources:

• Eurostat-OECD Manual on Business Demography Statistics

• High-Growth Enterprises: What Governments Can Do to Make a Difference (OECD, 2010)

• David B. Audretsch, Determinants of High-Growth Entrepreneurship Report prepared for the OECD/DBA International Workshop on ―High-growth firms: local policies and local determinants, Copenhagen, 28 March 2012 (see: Audretsch_determinants of high-growth firms)

• The United Kingdom’s Data Science Campus Report on Understanding the characteristics of high growth companies using non-traditional data sources

• High-growth firms and cities in the US: An analysis of the Inc. 5000 (Brookings)

• Henrekson, Magnus and Johansson, Dan, Competencies and Institutions Fostering High-Growth Firms (2009). Foundations and Trends in Entrepreneurship Vol. 5, No. 1, pp. 1-80, 2009, available at SSRN: https://ssrn.com/abstract=1625361

• Monteiro, G.F.A. (2019), "High-growth firms and scale-ups: a review and research agenda", RAUSP Management Journal, Vol. 54 No. 1, pp. 96-111. https://doi.org/10.1108/RAUSP-03-2018-0004, available at: https://www.emerald.com/insight/content/doi/10.1108/RAUSP-03-2018-0004/full/html

• European Patent Office - Support for high-growth technology businesses;

• The Harvard Business Review: (i) scaling culture in fast-growing companies, and (ii) the five stages of small-business growth

• McKinsey’s Revenue growth: Ten rules for success (2022)