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Where the Growth Is
 

Highlights of the Inc. 100 list and of the hottest growth sectors revealed by the list.
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It's where number-one-ranked Wellfleet Communications Inc. is doing business, for starters. But this year's list is an insider's guide to other hot opportunities, too

Paul J. Severino has a tough job. That's because Wellfleet Communications Inc., the company Severino cofounded in 1986, grew 26,497% during the past five years, from sales of $320,000 in 1988 to more than $85 million in 1992. With that kind of growth, it's hard to imagine how CEO Severino keeps track of hiring and paper clips, let alone profits.

But he does. While Wellfleet's explosive growth secured the number one spot on Inc.'s annual list of the fastest-growing small public companies, profits didn't suffer. In fact, net income rose in 1992 to an impressive 16.8% of sales.

Wellfleet's growth strategy? Like many Inc. 100 companies, it sells a product that didn't exist 10 years ago to a market now coming into its own. Wellfleet produces internetworking equipment that, to quote its marketing literature, supports "mission-critical, enterprise-wide networks."

Translation: During the 1980s companies began linking their desktop computers, first in local-area networks (LANs) and then gradually in wide-area networks (WANs), which include computers at more than one site. But just as computers differ in their operating systems, so, too, do LANs and WANs vary. Enter companies such as Wellfleet, with equipment that lets LANs of different stripes communicate. Now large companies can link all their networks together into one huge, companywide network -- and ship data from continent to continent as readily as they can send it across the hall.

How hot is this market? Worldwide sales of products like Wellfleet's, called routers, totaled $949 million in 1991, up from $128 million in 1989, according to market researcher International Data Corp. (IDC). Furthermore, sales will reach $2 billion by 1994, IDC projects.

For a more vivid measure of computer networking and internetworking growth, take a look at the rest of the Inc. 100. Wellfleet's chief competitor -- and the market leader -- is Cisco Systems, in Menlo Park, Calif. (#11; last year #6). CrossComm (#40) is another, smaller competitor specializing in the IBM internetworking market. Chipcom (#96) builds the hubs that serve as the central switchboards of the networks, while Netrix (#3) makes products that allow a single network to carry voice, data, and video. Artisoft (#29) provides network operating systems, and Cabletron Systems (#80) has evolved into a full-service LAN vendor, selling and installing a wide range of networking products.

Sybase (#83) and PeopleSoft (#2) are also riding the wave of the networked-computing environment; they specialize in software for large networks. Naturally, network repair and maintenance is another growth industry. Network General (#81) provides tools for diagnosing network glitches, and Microtest (#31) makes equipment that locates problems with LAN cabling. American Power Conversion's (#94) products, which protect computers from power surges or failures, sell briskly under the slogan LAN's Best Friend.

All of those entrepreneurial companies have what it usually takes to make the Inc. 100: a new market growing so fast that they need lots of outside capital, and growth prospects good enough to persuade the public markets to provide it. Sure, a few make the list by developing a new twist on an old industry. This year's list includes everything from a manufacturer of golf clubs, Callaway Golf (#41), to a chain of restaurants, Outback Steakhouse (#18). But those are the exceptions. Three-quarters of Inc. 100 CEOs surveyed describe their industries as high growth, and more than half say they are high tech.

View this list, then, not as a list of the best-managed companies or the best stocks. What this list measures is where the growth is and which new sectors of the economy are attracting capital and sales. Internetworking is only one example this year. This year's Inc. 100 contains an unprecedented 35 companies in health-related industries. Over the past decade the computer industry has dominated the list, but this year it's definitely in second place. What does it augur for the economy if health care replaces the computer industry as the next growth sector?

It's another sure sign that a market is worth watching when two or more companies in the same field appear on our list. Besides internetworking companies, the 100 includes several such pairings: PictureTel (#48) and VideoTelecom (#21) supply videoconferencing equipment. VISX (#25) and Summit Technology (#38) pioneer the use of lasers to correct nearsightedness. Cirrus Logic (#67) and Trident Microsystems (#13) design the integrated circuits that help give PCs their graphics capabilities. A trio -- Curaflex Health Services (#14), Quantum Health Resources (#16), and T2 Medical (#90) -- all provide infusion therapy, treating outpatients with intravenous drugs.

Beyond the macroeconomic implications, however, the Inc. 100 is just plain fun. This is capitalism at its most rambunctious, entrepreneurs seizing opportunities and opening markets. The 100 is a peek at the brave new economy of tomorrow: DNX (#68) develops genetically altered pigs, and Amtech (#35) hopes to plaster the world's trucks and cars with electronic tags -- so tolls can be collected by radio signals from moving vehicles as easily as groceries pass through a scanner.

Then there are the entrepreneurs who spot silver linings in life's clouds: Education Alternatives (#91) sells business management to the country's troubled public-school systems, and Curaflex has grown its infusion-therapy business in part by targeting the growing number of AIDS patients. The Inc. 100 also includes the why-didn't-I-think-of-that? variety of hypergrowth company. Look closely, and you'll see that much of the growth of Charter Golf (#6) stems from the recognition that there are people who like golf but not fluorescent polyester. The company made a name for itself with a line of 100% cotton golf apparel in subdued tones. Finally, don't forget the time-honored tradition of growing a company by annoying the U.S. public: Regal Communications (#10) specializes in "infomercials," and Electronic Information Systems (#47) provides technology that enables telemarketers to bother more consumers at home, faster.

What all those companies have in common is that they are thriving on change; it fuels their extraordinary growth. That's a risky way to grow a business since, in rapidly shifting markets, each successive surge produces losers as well as winners. But to the smart CEO, change is a constant like payroll and taxes, to be managed continuously.

Consider Ultra Pac (#46), in Rogers, Minn. When Cal Krupa founded the company, in 1987, he was taking advantage of a niche in an emerging new market -- plastic packages for compact discs. Today that niche has all but disappeared. Recording companies have switched to cheaper, less bulky packaging.

Early on, though, Krupa had figured out that his business depended on his machines, efficiency, and design expertise, not on any particular product. So within a year of its founding, Ultra Pac branched out into plastic containers for bakery products. Now bakery packaging is the company's mainstay.

A nice stable market, right? There was certainly a time when the bakery-packaging niche would have lasted Krupa a lifetime. Not anymore. When Minneapolis passed an ordinance banning nonrecyclable plastic packaging, Ultra Pac caught a glimpse of a future that didn't look good. "We knew that either at a national or at least at the state level there was going to be mandatory recycling legislation," Ultra Pac manager Robert Parish says. "We didn't fight it. We knew it was inevitable."

Today Parish's title is director of recycling. In addition to working with the city on a recycling program for its products, Ultra Pac began to use recycled plastics in its products. Postconsumer plastics, which weren't part of the company's product mix two years ago, will make up 30% to 40% of this year's output. The company has even expanded into reprocessing recycled plastic to control the quality of its supply.

Through all that marketplace turmoil, Ultra Pac has grown from revenues of $741,000 in 1988 to $18.3 million in 1992 and has been profitable since 1989. Still, for Krupa -- and for most Inc. 100 CEOs -- there's no guarantee that today's gambles will pay off as well as yesterday's.

Maybe that's why the head of our number one company sounds so humble. Shouldn't Paul Severino be on top of the world? Wellfleet Communications has seen not just growth, but highly profitable growth in a significant emerging marketplace. But Severino is no fool. Located in the backyard of floundering Massachusetts minicomputer makers like Digital Equipment Corp., he knows that a company is only as good as its latest product release. "We are here today because of a major shift in technology in the way you connect computers," Severino says. Yet he acknowledges, "We're not fully tested."

That test, Severino says, will come with the next big technology shift -- to networks that carry not just data, but voice and video as well. A wise Inc. 100 CEO, he's already studying it.


INC. 100 PROFILE

The Inc. 100 Company

1992 1988

Average sales $73,989,770 $4,255,190

Average no. of employees 505 77

Average productivity* $146,514 $55,262

Profitability?

16%+ 20 7

11%-15% 9 3

6%-10% 22 3

1%-5% 19 14

Break-even 5 3

Loss 25 70

*sales per employee

?no. of companies

The Inc. 100 by Sector

Manufacturing 55

Service 35

Retail 7

Distribution 3

The Inc. 100 by Industry

Health related 35

Computer related 30

Consumer goods 15

Telecommunications 11

Construction 2

Environmental 1

Miscellaneous 6

The CEOs

Female 2

Male 98

Founders 61

Compensation Equity

Average $268,169 10%

Highest $843,000 57%

Lowest $0 0%


UPS AND DOWNS ON WALL STREET

Hardly had Inc. celebrated the rare stock-market ascendancy of the small corporation last year (see "Small Is, Finally, Beautiful,' May 1992, [Article link]) than its allure came to an end. In our annual exercise that measures the investment performance of Inc. 100 companies alongside popular market averages (see chart), the two indices that best represent companies with relatively low capitalizations -- the Inc. 100 Index and the NASDAQ Industrials -- finish dead last.

Well, considering the likewise-pallid postings of the rival big-cap averages, not that dead. A Wall Street adage holds that to achieve success in the market, timing is everything, and the rest is luck. For 1993's Inc. 100, that lore was right on. Unlike other yearly market roundups, Inc.'s 12-month window stays open from March 1 through the following February, allowing unseasoned initial public offerings -- there were 23 IPOs in the current crop -- an extra couple of months of price exposure. Had we closed it three weeks sooner, small-cap stocks would have likely maintained their lead.

As it was, the NASDAQ market -- where the stocks of no fewer than 91 of this year's 100 fastest growers are traded -- registered an all-time high on February 4. Then that market turned on a dime, dropping 6% in three weeks, losing about one-third of the gains of the past 12 months and then some. Ironically, the sudden reversal was led by the same then-hot sectors Inc. acclaimed last year: biotechnology, health care and delivery, software, and mail-order computers among them.

For better or worse, hot items scattered among the Inc. 100's 33 stock-trading gainers -- one entry broke even, and 66 suffered losses -- include issues in computer internetworking, telecommunications, restaurant franchising, and sporting-goods manufacturing and marketing. But at this juncture of the economy, market prowess isn't the sole benchmark of reward for small-business investment. If investors in anything are to profit over the long run, there has to be a bottom line for job creation as well as for income creation.

In the 12 months that the Inc. 100 Index was going nowhere, its five top gainers -- Regal Communications (#10) at 338%, Callaway Golf (#41) at 203%, CliniCom (#44) at 132%, CrossComm (#40) at 120%, and Wellfleet Communications (#1) at 118% -- were collectively generating new jobs at the rate of 81% a year. Indeed, you'd have to go a long way to find a company among the Inc. 100 that wasn't hiring. The worst market performer, beleaguered Quarterdeck Office Systems (#71), down 85%, increased its employment by nearly 20% over the year. You wouldn't have to go far to find job losers among the Dow Jones 30, however: IBM dropped employment by 12.4% in 1992. -- Robert A. Mamis

Relative Market Performance
Industrial Average 2/28/92 2/26/93 % CHANGE

S&P 500 491 509 3.7%

Dow Jones 30 3,268 3,371 3.2%

AMEX 416 407 -2.2%

Inc. 100 100 97 -2.7%

NASDAQ 722 697 -3.4%

Last updated: May 1, 1993




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