The Truth About Start-Ups

Every year hundreds of thousands of companies start up. Many will fizzle. Most will muddle along. And a few -- a very few -- will thrive. Which ones? And why? Here are the eight habits of highly effective companies

Start-ups don't succeed by accident. But -- to judge by statistics and facts instead of anecdotes and myths -- neither do they succeed for the reasons we're often told.

The reason some companies balloon with spectacular sales and job growth isn't that they have a lot of money when they start. (Though some do begin with more than others.) It isn't that their founders really, really wanted to be successful. (Though a willingness to trade free time for work time is probably a prerequisite.) It isn't even that the products and services they offer are fourfold better than those of their competitors. (Though that's sometimes the case.)

The real predictors of fast growth -- more than money, more than will, more than product even -- are the ways a company is put together. Everything from who gets involved in the venture to who owns it determines its chances of success. If you strip away all the folklore about what we think we know about start-up companies and pay attention only to the indisputable facts, certain patterns appear -- companies that grow begin differently from the ones that don't, in a handful of starkly identifiable ways.

The distinguishing traits of a successful start-up have to do with the kind of experience and knowledge its founders possess. (And that's most definitely founders, plural.) They have to do with a start-up's ability to seek and nurture alliances, whether for financing or product development. And they have to do with the market ambitions a company adopts right at the outset.

Are successful company builders aware of those patterns? Can you learn the truth about start-ups by asking those founders what separates their ventures from the rest of the pack? Usually not. Often successful company builders don't know they're doing things that are exceptional, or they answer in platitudes. ("We focus on the customer; we pay attention to quality.")

One thing they do know is that they're the exception to the rule. Depending on who's doing the counting and how broadly one defines business, there are more than 20 million enterprises in the United States today. (That number includes even ventures that filed tax returns with income less than $500.) Narrow it down to companies that had at least one employee (other than the owner), and there are still more than 5 million businesses. And most of them are not advancing at fantastic speeds: the majority took in less than $100,000 in 1987, and only 7% took in more than $500,000.

Fortunately, there are data that provide a straightforward look at how the truly exceptional companies are different from the regular performers. Government agencies, university researchers, independent firms, and we at Inc. have compiled databases and cranked out facts and figures about the start-up world.

Now is a good time to take a look at the results. The mid-1980s were a particularly fertile period for start-up activity. Today the successes and failures of that business-launch wave are playing out. And while about 75% of those companies are likely to have survived the five-year mark, and half probably have made it to eight years, only a small fraction blossomed quickly into Great American Growth Companies.

They are thriving because they came up with intelligent responses to a changing business environment. They are thriving because they were organized in a way that enabled them, once they were under way, to be smarter than other companies. The patterns that emerge to describe how they were put together aren't random. They are the patterns of success.

The Eight Habits of Highly Effective Companies
1. They rely on team efforts. Each year this magazine compiles the Inc. 500, our list of the fastest-growing companies in the country. (Companies are ranked by absolute percentage growth of sales over five years and must have a minimum of $100,000 in sales for the base year.) Typically, we credit the success of each company to the chief executive, a founder depicted as a solo artist who struggled alone to get the business off the ground -- and many of the companies extolled in these pages do have single-founder roots. But the reality is that wildly successful start-ups are more likely to be team efforts, made up of interdependent and multitalented people. Of the youngest of the 1992 Inc. 500 companies -- the 306 founded in 1985, 1986, and 1987 -- almost two-thirds were started by partnerships.

Academic studies of growth companies show the same pattern. Paul Reynolds, a researcher at the Center for the Study of Entrepreneurship at Marquette University, in Milwaukee, found that only 6% of the "hypergrowth" companies (the top one-fiftieth by revenue growth) in his study of 1,709 businesses in Minnesota and Pennsylvania were founded by a single person; 54% had two founders, and 40% had three or more. That contrasted dramatically with the more plentiful low-growth companies in his sample: a full 42% of them were solo ventures, and just 15% had three or more founders.

In fact, teams of some sort are found throughout successful start-ups. A third of the Inc. 500 group have formal boards of directors, and another third maintain informal advisory panels. Almost half take a "partnership" stance toward employees by sharing profit-and-loss information with them.

That this characteristic has emerged as fundamental reflects the increasing business savvy of today's founders. The smartest among them recognize not only the demands made by an increasingly complex and competitive environment but the limitations of confronting those demands alone. Teams can cope with a range of challenges no individual could satisfactorily meet. Little wonder, then, that launching with a team seems to give start-ups a better chance not only to survive but to thrive.

2. They're headed by people who know their line of work. Successful entrepreneurs aren't just sharing the work -- they know the work, coming to it with professional experience in their fields. Reynolds found that the majority of CEOs of hypergrowth start-ups had more than 10 years' experience in the industries in which they founded their companies. By contrast, the majority of CEOs at low- to no-growth companies had no experience or had spent just a few years learning their industries from the inside.

That coincides with a broader trend: increasing numbers of corporate careerists are entering the world of entrepreneurship. As the stability equation (which is more secure, a corporate job or self-employment?) shifts for the white-collar elite, more people with seasoned skills are capitalizing on their knowledge through ventures of their own. Almost 20% of laid-off managers started or bought their own businesses and consulting firms in 1990, according to international outplacement firm Challenger, Gray, & Christmas, based in Chicago; that's up from just 6% to 8% in the early 1980s.