Growing Up in Public

Discussion of the 100 fastest-growing small public companies in the U.S.
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The 100 fastest-growing small public companies of 1994 -- those most highly evolved growth companies -- paint a picture of an ever more finely niched U.S. economy that puts a premium on information exchange, value pricing, and as always, smart management

The late great Sam Walton, who revolutionized retailing by introducing everyday low pricing with his spectacularly successful Wal-Mart stores, has been one-upped. Ron Olson, CEO of Grow Biz International, has taken value pricing one step beyond the master from Bentonville, Ark.

The 339 Play It Again Sports stores that anchor Olson's retail company -- the number one company on the 1994 Inc. 100 -- buy and sell, sometimes on consignment, both new and used sporting goods. It's a simple though surprising twist that has fueled stunning growth for Olson's company. "We are able to provide the best value because our starting price points begin with used products," he explains.

Launched in 1988 with $100,000 of Olson's personal savings, Grow Biz now surpasses $51 million in sales annually. What's more, the company has expanded its franchising concept from sporting goods to children's clothing (with 46 Once Upon a Child stores and more planned) and is now rolling out the same concept with computers and musical instruments. "When we got involved with this, I didn't realize we would be on the cutting edge of a new trend in retailing," Olson says. He and his team simply took a new idea and went to work.

Grow Biz and Lone Star Steakhouse & Saloon (#2) show that whether a company's product is as high tech as data compressors or as meat-and-potatoes as, say, meat and potatoes, it succeeds only when it follows this maxim from the Lone Star annual report: "Find a need and fill it."

That could be the motto for the Inc. 100, which comprises the country's loudest, fastest, quickest-morphing public companies. Many are on the cutting edge of industries that have yet to be recognized as industries. Taken as a group, the Inc. 100 companies can bring nascent trends into focus:

Information is big business. The much-heralded convergence of information technologies is taking place with a vengeance. This year's list is swamped with companies that tie together different information technologies, apply them in new ways, or incorporate them to create novel products.

Networking companies -- hardware and software -- continue to dominate the list, as they did last year. Five of the top 10 fall into this category. Infrastructure builders include Wellfleet Communications (#16), a producer of equipment that links networks, which topped the list last year. CrossComm (#72) develops and sells local-area-network (LAN) products. Xircom (#4) produces products that connect personal computers to LANs. PairGain Technologies (#3) makes the equipment that connects fiber-optic lines to the end-user.

Networking applications abound. Two companies returning to the list, PictureTel (#98) and Vtel (#55; formerly VideoTelecom) supply videoconferencing equipment, enabling far-flung businesses to conduct group meetings, or universities to hold multisite seminars. Megahertz (#68) produces wireless modems enabling PCs to send information without being plugged into anything. Premiere Page (#38) is riding the crest of the personal-pager wave by servicing pagers and voice-mail products.

Many of the networking companies on the list enable productivity-driven customers to leverage their investment in existing technology. Wall Data (#33) makes software that links workstations and networks with other computers. And Avid Technology (#5), which claims to do for video what word processing does for text, enables film and video companies to cut, copy, and paste video text, saving huge amounts of time and money in the logistically complicated process of video editing.

Other companies are delivering productivity gains by applying information technology to traditional functions: PeopleSoft (#30), which produces human-resources software, enables businesses to computerize specific administrative functions such as employee benefits and payrolls.

Health-care entrepreneurs are also applying sophisticated business practices such as networking and supercomputing to save money for big customers like hospitals, drug companies, and governments. CliniCom (#90), for instance, has blossomed by creating bedside databases for patients (did we mention that they're networked?), giving doctors and nurses immediate access to information where they need it.

You can still make a lot of money selling good stuff cheap . . . Value pricing has wreaked havoc on many of the economy's best brand names and created opportunities for new companies with affordable consumer goods and without administrative baggage. Hence the success of number one company Grow Biz or number two Lone Star Steakhouse, which offers a reasonably priced high-quality steak dinner. Petsmart (#77), a "category killer" that's transforming pet stores, benefits from economies of scale that enable it to sell pet supplies at a low everyday price.

. . . or good stuff at a premium. Paradoxically, several companies are growing by finding consumers who will pay premium prices for "affordable luxuries," like the products of Monterey Pasta (#43) or Vermont Teddy Bear (#21).

Opportunity begets opportunity. Of course, just as the list provides tea leaves for reading the future, it also embodies as much history as an archaeological dig does. There are links between this year's winners and companies on previous Inc. 100 lists. In some cases founders have reappeared with new companies. In others, savvy upstarts are capitalizing on opportunities created by their predecessors. Consider the ubiquity of home shopping today: the two pillars of the industry -- QVC and HSN -- were, respectively, gold and silver medalists on the 100 roster in years past. Today companies such as the Score Board (#76) attribute their success to being able to sell via those distribution channels, which in 1994 have already become conventional weapons in the marketing arsenal. Likewise, you can look at the networking companies as builders of the infrastructure on which future winners will thrive.

* * *

A close look at the Inc. 100 not only paints a picture of today's economy but also provides lessons for any company that would prosper within it. The companies on the list span the gamut, covering everything from the bioengineering of chicken eggs to the selling of roasted chickens, but if you talk to enough Inc. 100 CEOs, some rules of thumb emerge:

How counts more than wow. Though most of the 100 companies sell high-tech products, virtually every CEO would argue that his or her company's strategy -- and not the technology itself -- gives that company the competitive edge. "We are not so much technologically superior as technologically targeted," says BitWise Designs (#96) CEO John Botti, who describes "market intersections" as the source of his company's growth.

Naturally, the winning players do several things well. Avid Technology CEO Curt Rawley attributes the company's growth to "how well we balance all the different functions. We take a world-class technology and put it in the hands of people who know how to sell it."

Take what they give you. Many of the companies on the list are capitalizing on markets that have been created by the Big Boys -- be they IBM or the federal government or in some cases past members of the Inc. 100 list. They sell things that augment existing technology, that fill in the holes of the last great new market.

Wellfleet, last year's champion, survives by networking networks -- filling the needs that the networking market (which thrived on markets created by the last great surge) created. PairGain Technologies thrives because the new fiber-optic phone lines cannot be brought into all homes. The company capitalizes on that deficiency by providing the equipment that makes the final link.

Regulatory changes create as much opportunity as technological ones do. As states across the country legalize gambling, players like International Gaming Management (#15) and Sodak Gaming (#18) are booming by providing hardware and managerial skills to casinos and the like. In fact, Video Lottery Technologies (#97) combines high-tech know-how with a killer application: it builds the electronic slot machines dotting the new casinos.

Finally, the great coming regulatory change in health care is sure to propel many more companies onto the list. This year 16 serve the health-care industry; many are basing their strategy on resolving regulatory obstacles for others.

Manage for growth from day one. "Anybody who starts a company has some area of expertise -- whether it's management or technical expertise," says Jerry Fiddler, CEO of Wind River Systems (#58), who started as an engineer who knew how to write code, "and as you grow the business, you find it isn't enough. As a company grows, it needs to become balanced."

Some learned that more quickly than others. At age 23, Wall Data founder John Wall had the concept and the technology for a huge company; he just didn't have the skills. So he turned over the reins the day he started the company, in 1982, to someone else. But Wall Data really took off when Jim Simpson -- who had more than 20 years' experience and had been through growth mode before -- became CEO, in 1988. "Jim was the third CEO -- but in many ways he was the first," says Wall, who's now in charge of product development as part of a rotating set of responsibilities designed to one day give him enough managerial know-how to hold the top position.

On the other hand, long before Lone Star Steakhouse began growing at a five-year, 20,495% clip, CEO Jamie Coulter created the shell of a successful company by assembling a crack management team and bankrolling cash flow from the 100-plus Pizza Hut franchises he owned. "Most companies have a team, the systems, and a concept -- but no capital," Coulter says. "We had a team, systems and procedures, and the capital -- but no executable concept." The team analyzed 50 or 60 companies as possibilities that might be plugged into its pipeline but, Coulter says, "kept its powder dry until it found Lone Star." He attributes the company's sizzle -- and steak -- to its first-class managerial team, which is ready to manage hypergrowth.

How do you make a million dollars? Well, first you take a million dollars. . . For many of these companies, venture capital helped. Fifty-six percent were backed by it. Many, such as PictureTel and Vtel, still have venture capitalists on their board of directors. Monterey Pasta, in fact, took venture-capital backing a step further. Lance Mortensen discovered the company as a venture capitalist and stayed, as it were, for dinner: he helped expand the fresh-pasta mom-and-pop store into a chain of gourmet-pasta outlets by taking over first the chief financial officer's and then the CEO's roles. For such companies, the idea of value-adding venture capitalists is not an oxymoron. Xircom CEO Dirk Gates cites Roger Evans, a venture capitalist who has continued with the company as a board member, as his most important mentor. Vtel CEO Dick Moeller says his venture-capitalist board members help track down and deliver promising sales leads.

. . . or not. Doug Otto, CEO of Deckers Outdoor Corp. (#52), bootstrapped his $57-million venture from $2,000 he borrowed from his parents more than 20 years ago. CEO John Schnatter founded restaurant chain Papa John's International (#51) on $1,000 in savings during his college days. International Gaming Management was staked by a couple of guys with six gambling machines.

Indian-born Rama Rao came to the United States as a graduate student with $100 in his pocket 10 years ago. With the help of a $1-million Small Business Innovation Research grant, he founded Excel Technology (#6), a manufacturer of solid-state laser products and systems, and now has a personal wealth of more than $6 million.

In addition to Rao, several other founders of this year's Inc. 100 companies are foreign-born. MRV Communications (#59), which makes high-tech connectors, was founded by Israeli-born Noam Lotan with two of his professors from the Israeli Technicon. CrossComm was founded by Polish-born Tadeusz Witkowicz, who moved to the United States when he was 16 (and who has halved his company's research-and-development costs by establishing a Polish subsidiary that employs otherwise out-of-work local engineers). Salim Bhatia, CEO of BroadBand Technologies (#9), is an Indian who was born and raised in Kenya.

Watch your back. You would think that as these companies rise from the farm leagues to the AAA level, they would start staying up nights, worrying about the major leaguers. No way. Most CEOs say they're less afraid of IBM and other dinosaurs than they are of the members of the Inc. 100 list -- of 1999.

CEO Enzo Torresi of NetFrame Systems (#28) describes the process of growing a start-up into a wildly successful public company like his as a transformation from predator to prey. Whereas Torresi once attacked the technological and marketing barriers of competitors, now NetFrame is beginning to build its own. "My biggest fear is not Digital or Hewlett-Packard. Those companies have so much to protect that they are slaves to their own religion," says Torresi. "What we fear is the guy without luggage -- without religion. Without anything to lose."


THE INC. 100 AT A GLANCE

Male CEOs 98

Female CEOs 2

CEOs who founded the company 62

CEOs who had founded other companies previously 13

Average company sales in 1993 $62,779,050

Average company sales in 1989 $3,439,360

Average number of employees in 1993 441

Average number of employees in 1989 69

Number of companies with venture backing 56

Seed Capital Raised
Average seed capital raised: $2,288,000

Percentage of
companies Average amount
Source using source* raised per source
Bank loan
8% $561,000

Personal savings 38% $336,000

Friends and family 20% $570,000

Venture capital 26% $4,936,000

Government grants 2% $522,000

Angels 4% $1,938,000

Other 8% $4,164,000

*Total is greater than 100% because of multiple responses.

How The IPO Money Was Used
Average IPO money raised: $73,257,000

Percentage of Average

Use companies* amount used

Capital equipment 23% $7,625,000

Acquisitions 13% $13,548,000

Growth by other means 14% $8,203,000

Investor buyouts 13% $11,145,000

Sales and marketing 13% $11,023,000

Still in bank 33% $32,487,000

Cash to owners 7% $10,513,000

Cash to employees 0% 0

Other 31% $14,685,000

*Total is greater than 100% because of multiple responses.


INVESTING IN GROWTH: HOW THE INC. 100 STOCKS PERFORMED

They say an army travels on its stomach. That maxim might also apply to the 15th annual Inc. 100 trek down to Wall Street. An investor willing to put his money where his mouth is could have chosen from among 10 fast-growing companies dealing in provisioning and serving food. And a wise decision it would have been. Of the 10 stocks that more than doubled, no fewer than 3 were food marketers -- packager Monterey Pasta (up 183%), and restaurateurs Boston Chicken (up 119%) and Papa John's International (up 117%). It should be noted that the same investor could have hedged his or her bet and still made a profit by buying into the list's two companies that treat heart disease.

In our make-believe exercise, our researchers determine the price that the common stock of each Inc. 100 company was selling at 52 weeks back (or fewer, if the issue came out as an initial offering during the period). Then we "buy" 100 shares, "sell" them a year later, and tote the monetary gain or loss for each. On that basis, the stocks of 56 corporations advanced, those of 42 declined, and those of 2 broke even. The median performance was a gain of 13%.

No doubt fueled by a flow of new money from individual investors who, disheartened by the low yields of fixed-income securities, turned to equities in 1993, the group collectively gained 22.1%. That was about on par with small-capitalization stocks in general, as represented by the NASDAQ Industrial Average. The increment was substantially ahead of mid-capitalization companies as reflected by the Standard and Poor's Industrials and outstripped the blue-chip Dow Jones Industrials as well. (See table.)

All of the list's 34 IPOs made their debut on NASDAQ, a freewheeling arena in which it's not unusual to see a company's market valuation double during its first day in public. But as an inspiration to undercapitalized companies desultorily trading on out-of-the-way regional exchanges, one new Inc. 100 entrant demonstrates that you don't have to soar like a Boston Chicken (#26) to catch the public eye. Telecommunications-hardware manufacturer Applied Innovation (#41), which made the biggest gain on the list with a 200% rise in stock value, was admitted to the NASDAQ National Market only last December. During the intervening months, its formerly thinly traded stock emerged from the obscurity of the over-the-counter "pink sheets" -- by dint of which the company had been banished from the 1993 Inc. 100.

Let the record show again that fast-growth companies are tightwads when it comes to paying dividends, preferring to parlay earnings back into operations. While 16 of the Inc. 100 were generous enough at least to declare stock splits, only one, golf-club maker Callaway Golf (#35), boldly rewarded its shareholders with both a stock and a cash dividend. (Callaway is distinguished also by the fact that it's the only listee whose stock symbol -- ELY -- is the founder's name, not the company's.)

Judging from those results, what criteria are investors applying here? An acceptable price-earnings multiple? Hardly. The list's biggest gainer, Applied Innovation, consistently sold at a P/E well over 50 -- as did the biggest loser, Premier Anesthesia (#89), off by 66.2%. The rate of sales growth? Unlikely. While the number one sales grower, Grow Biz International, placed a respectable 18th in stock appreciation, with a 62.5% gain, number two in sales growth, Lone Star Steakhouse & Saloon, came in at 91st place in stock-value growth, with a 41% loss. To confuse matters further, the company that came in 97th in sales growth, Video Lottery Technologies, finished in a credible 12th place as a stock, up by 84.1%. Are investors seeking glamorous industry sectors? Not really. Information-highway plays are up and down the list. And the two restaurant chains in the hot fast-food sector that are among the top 10 in stock gains are countervailed by two restaurant chains among the top 10 losers.

But one conclusion is sure. For all the country's capital woes, it has to be an economy of plenty to house such diverse products as teddy bears, gambling machines, health services, telecommunication links, golf clothes, recreational footwear, biotech research, alcohol detectors, pet supplies, baked goods, and computers -- and then generate enough confidence in the entire lot to boost its stock value by 22% in a year. -- Robert A. Mamis

Relative Market Performance
Industrial Average February '93 February '94 % Gain
Dow Jones
3,343 3,928 17.5%

Standard and Poor's 498 553 11.0

NASDAQ 676 829 22.6

Inc. 100 100 121 22.1*

*Gain based on the annual appreciation of a hypothetical purchase of $100 worth of each of the Inc. 100 stocks in February 1993.


THE YEAR IN IPOS

The 1993 environment for equities, fashioned by low interest rates, created history's hottest IPO market. But successfully going public was the easy part

Nobody knows anything.

Those three simple words may be the most famous ones of screenwriter William Goldman, who wrote Butch Cassidy and the Sundance Kid and The Princess Bride but is best known in Hollywood for his summary of how producers bet on the success of prospective films: Nobody knows anything.

You could say the same thing about last year's market for initial public offerings, whose performances were as unpredictable as the box-office performance of Hollywood films. Who could have known that Boston Chicken would have done as well as Jurassic Park, while MathSoft turned out to be The Last Action Hero? Both seemed proven commodities with an eager audience, yet one was boffo while the other ended up trading further south than the emerging market in Antarctica.

The year 1993 was the granddaddy of IPO years, generating the largest number of deals for the highest total dollar volume ever. It was a time when the window of opportunity blew wide open and gusts of money blew in. According to Securities Data Corp., 627 companies went public last year, raising a record $40.8 billion; that figure is nearly twice as high as the amount for 1992 -- the second-highest year -- in which 453 companies raised $23.8 billion.

"The entire IPO market is being driven by low interest rates and investors abandoning CDs as they search for higher-yield investments," says David Gleba, president of VentureOne, a San Francisco investment-research firm.

How crazy was it? Vermont Teddy Bear, which graduated from the Inc. 500 to the Inc. 100 list this year, sold 20% of the company to the public for $10 million at $10 per share, giving the company a valuation of roughly $50 million ($75 million after day one) -- and this is a business that, despite doubling its revenues every year, had only $10 million in sales in its last fiscal year. Likewise with Boston Chicken, whose numbers are not so much fair as they are fairyland: the $20-per-share price at which the stock went out valued it at 40 times projected earnings. And that's forgetting that the stock ended the day at $48.50.

Here's an example of how untethered the market was: On February 3, 1993, MathSoft and Powersoft went public on NASDAQ. Both Massachusetts software companies enjoyed wild upward swings during that first day: Powersoft surged from $20 to $38 a share, MathSoft from $13 to $21.25. Yet since then the two prices have radically diverged. Recently, Powersoft traded at $60, while MathSoft was scraping along at around $5.

"There is nothing the company did to make the stock go from $13 to $21 that first day," says CEO Allen Razdow of MathSoft. "That is a function of how IPOs are viewed and used by the investment community."

Razdow learned that through bitter experience. Later that year, when MathSoft announced poor earnings, it was punished as excessively as it had been rewarded that first day. Razdow, however, is unfazed about events over which he has no control. "When you get past the first 30 days, there is a much more reasonable correlation between the performance of the stock and the performance of the company," says Razdow, who acknowledges that his company was burned by its mistakes but is sanguine about its long-term future: "In the end the investment community is pretty smart, and it knows how to evaluate companies on a rational basis."

Razdow's experience shows that there's a world of difference between the important number -- the price at which the company goes out -- and the uncontrollable number, the price at which it ends up after a day. Companies should be more concerned about the ease of going public than about the velocity a hot market gives to their share price. The important fact about last year's market is not how well the stocks performed after they were issued but how many companies simply had the opportunity to go public at all.

Some companies, in fact, say they seized the opportunity to go public not for the capital but for the validation. "We raised in the neighborhood of $40 million, and all of it is still in the bank," says Mitchell Kertzman, CEO of Powersoft. "The main reason we went public was to establish greater credibility and visibility with our corporate customers." Likewise with Gymboree, a chain of children's clothing stores that raised $20 million and still has it sitting in the bank. CEO Nancy Pedot says the company went public to liquidate its debt to the venture capitalists and because in the retail industry the visibility is priceless.

Will the market's appetite for IPOs continue unabated? "The fashions of the IPO market will continue to rotate as the IPO window continues to remain open," notes VentureOne's Gleba, adding, "There seems to be an appetite among investors for high-risk-concept or development-stage companies." Last year's winner was technology stocks, whereas in 1992 health care was the fall season's best-seller. Gleba predicts the next big thing will be multimedia companies or hybrid companies that link information technology with health care.

Whichever sector heats up, ultimately, reason must return to the market. Take Boston Chicken. Please. Says Harvard Business School professor William Sahlman: "I can't disprove that they will end up justifying the price." But at 48 bucks per share, he says, "that's when they begin losing sight of what the natural possibilities are for the market."

Sahlman argues that companies should not make the same mistake investors do: confuse price with value. If you add up the price of all the food and restaurant chains that went out last year and run basic multiples on the group, "you can work out mathematically that they can't collectively get there from here, because the Achilles' heel is good locations," Sahlman says, which are a limited resource.

So although Boston Chicken may be the one of 20 to succeed, "where I go short is a portfolio of them all," Sahlman says. "To assume that this whole sector will continue to live up to the implicit assumptions is just crazy," he continues, comparing the food-and-restaurant sector with disk-drive companies in the 1980s or bowling-lane makers in the 1960s and 1970s. "Five years from now," he predicts, "we're going to write about the fallout from the class of '91 to '94."

Try telling that to John Schnatter, the brash 31-year-old CEO of Papa John's International, a hypergrowth pizza-delivery company that went public at $13 a share in June and closed the year at $27.25 (and climbing). "We had a $100-million capitalization last year, and people said, 'That's ludicrous,' " he says, noting that since then the company has doubled in size. "Now we have a $250-million cap -- and they're saying the same thing." -- T. E.


HOW THE INC. 100 ARE SELECTED

The 1994 Inc. 100 is the 15th ranking of the 100 fastest-growing small public U.S. companies.

The companies on the list are ranked by the growth rate in their total revenues (or net sales) from fiscal year 1989 to fiscal year 1993.

To be eligible for the Inc. 100, companies must be publicly held, independent corporations; they may not be subsidiaries or divisions of other companies. They must have gone public no later than December 31, 1993, and there must be an active market in their stock.

Each company must have reported 1989 revenues of no less than $100,000 and no greater than $25 million. Companies with 1993 revenues that were lower than 1992 revenues were disqualified.

Utilities, oil- and gas-exploration companies, and capital-enhancement companies -- such as banks, insurance carriers, real estate developers, holding companies, and other investment offices -- are excluded from consideration.

Researchers reviewed the financial results of some 3,575 companies and interviewed the chief executive officers and chief financial officers of several hundred finalists. Inc. 500/100 research manager Stephanie Gruner directed the Inc. 100 research team, which included Marc Johnson, Albert Kim, Louise Leavitt, Joshua Macht, Elizabeth McCullough, Florian Padberg, Sarah Schafer, and Richard Selph.

Last updated: May 1, 1994




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