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The best places to build an Inc. 500 company. a look at the hottest cities, states, and regions. Some strategies for expansion. And a few entrepreneurial hideaways where business is done off the beaten track
Every few years, the economy changes its tune, as one region hits a high C and another struggles in the lower registers. If the Inc. 500 lists of the last five years are any kind of libretto, it's clear that the economy is singing "Dixie."
Growing a company posthaste has been a rather Southern preoccupation in the 1990s. Nearly one-third of this year's class -- 165 companies -- hail from the South, up from 145 five years ago. The South enjoyed this upswing even while a recession idled or stole growth in other regions. The West, which claims 123 growth companies this year, came in only 3 ahead of its 1989 tally. The Northeast rebounded from a count of only 97 companies last year to 110 this year, still carrying a 14-company deficit from 1989. Meanwhile, there has been scant year-to-year change in the Midwest, which has shown only pockets of entrepreneurial vitality. The heartland posted 102 companies to the current Inc. 500 list, the same number as last year but 9 fewer than in 1989.
Of course, the performance of each region was largely determined by economic conditions in the most populous states. As California goes, so goes the West. And although the Golden State, the perennial, albeit battered, single-state leader, fielded 73, or 6 more, companies this year than last, it remained 10 down from its total in 1989 and 13 off its high of 86 in 1984. Arizona continued its recent tumble, from 15 in 1992, to 11 in 1993, to a paltry 6 in 1994. Colorado and Washington picked up some of the slack. Colorado chalked up 13 and Washington 15, perpetuating five-year hot streaks, but those states may be losing steam: both finished slightly off last year's pace. Meanwhile, Utah stalled at 5. Idaho dropped to 3 from 5 last year. Montana rose from the dead to post 2 of its own.
In the Southland, Florida basked in growth. Compared with the 20 companies that headquartered their operations there in 1989, 35 companies from this year's list call the Sunshine State home. Their diversity testifies to the state's vibrant economy: Banyan Construction & Development and Tarheel Roofing rode the building boom, while Payroll 1 and Payroll Transfers, as well as temp service Sprint Staffing, paging service Network USA, and technical-services firm Maria Elena Torano & Associates, benefited from a bullish business climate in south and central Florida. Georgia, a breeding ground for Inc. 500 companies in recentyears, lapsed back to 13 companies, down nearly a third from a 1992 high of 19. But its neighbor to the west, Alabama, which had been holding steady for years at 4, more than doubled this year to 9, thanks to the rise of Huntsville and Birmingham as technology centers. Maryland pressed its upward march, from 12 two years ago and 16 last year to 19 this year. Meanwhile, Virginia took a nosedive and produced only 25, compared with 35 companies last year. Texas beat a sorry retreat with only 25 companies this year, down from 32 last year and 2 less than the 27 it counted in 1987, marking the bottom of the bust.
In the Northeast, only Massachusetts and New Jersey betrayed signs of an entrepreneurial revival. In its jump to 33 companies this year, Massachusetts increased its Inc. 500 ranks a whopping 50% in a single year. New Jersey continued its steady five-year climb, from 17 in 1989 to 21 in 1994. Pennsylvania tanked. After bounding up, it fell from 19 last year to 14 this year. Five years ago it boasted 23. New York fell by one to 24, continuing a bumpy five-year slide from 34.
In the relatively torpid Midwest, bright spots in Illinois, which nearly doubled its force from 12 last year to 23 companies this year, and Missouri, which jumped from 7 last year to 11 this year, helped offset sharp declines in Indiana and Michigan, the latter of which lost a third of its roster in one year and posted only 15 companies this year. And North Dakota continued its long sleep.
Based on the number of Inc. 500 companies per capita, the District of Columbia, Virginia, and Massachusetts led the pack, accounting for more than 60 companies among them. Slumping Indiana, sparsely populated Oregon and Nevada, as well as the usual laggards (Louisiana, Arkansas, West Virginia, and South Carolina), brought up the rear. Mississippi, Hawaii, Alaska, Wyoming, and North Dakota produced none.* * *
The perils of life in the city -- high costs, high crime, high tax rates -- have made urban entrepreneurship distinctly unfashionable. Consider the fate of New York City: five years ago it counted 13 Inc. 500 companies as its own. This year it claims only 8. In 1989 there were 7 Chicago-based growth companies on our list. This year: 3. Five years ago Los Angeles had 6, but for 1994 it shows only 5. The heart of a Gotham, it appears, is hardly the place to grow an Inc. 500 company. An exception is San Francisco, the only city with a population of more than half a million that has continued to be a popular habitat for growth companies. There are 8 Inc. 500 companies headquartered within San Francisco's city limits this year, the same number as in New York City, which has more than 10 times the population.
This year's growth companies are more likely to be doing business from a safe and affordable suburb or an emerging edge city than from the center of a metropolis. Don't pronounce downtown dead, however. Smaller cities and Southern cities of all sizes are alive with fast-growing upstarts, who don't mind hanging their shingles in the center city if the local economy (and the climate) is hot enough. Scan the list and you'll note a preponderance of companies with downtown addresses located in cities with fewer than half a million people. Six of the top 10 cities for growing Inc. 500 companies (on a per capita basis) are in the South.
The worst metro centers are Detroit and New Orleans, both with none, followed by Philadelphia and Milwaukee, with one apiece; Chicago, with 3; Los Angeles, with 5; and New York City, with just a slight fraction more than one company for every million residents.
If most growth companies were loath to set up shop in the big burgs, they didn't hesitate to camp just outside. Plotted on a map of the United States, the companies in this year's pack often fall in ringlike patterns around large and midsize cities. Call it the entrepreneurial-orbit effect. Its laws require growth companies to get out of the city to escape cost but to stay near enough to tap vendors and customers. The result: a radial colony of companies circling the cities they can't live in but can't live entirely without, either.
Take Washington, D.C., which posted only 4 companies to the list this year. Not a bad showing for a city of 600,000. But look 10 miles out in all directions and you'll find 29 more Inc. 500 companies ringing the district. Look 30 miles out and the count surges by another 7. Chicago, host to only 3 companies inside its borders, supports another 17 within a 30-mile radius. Los Angeles, with only 5 companies located within its 467 square miles, is orbited by another 12 growth fiends. Augmenting the 8 companies with a New York, N.Y., return address are another 30 within 40 miles of midtown Manhattan. There are four times as many businesses orbiting Boston as are docked there.
Big cities do, in fact, support entrepreneurial life. But only from a distance. Indeed, proximity to a large city is practically a prerequisite for truly explosive growth. Most of the fastest-growing companies on this list are located near the largest cities in the country. There are 217 companies doing business within 10 miles of the 100 largest cities in the United States, and 170 more within a 30-mile arc.* * *
The Edge Cities
These high-flying founders prefer living on the edge. Just look where they congregate: Of the top 10 companies on this year's list, 6 are doing business from edge cities, the border towns that have proliferated in the last decade on the outskirts of more congested metropolitan areas. Detroit might be a wasteland for growth companies, but Southfield, Mich., not even 10 miles away from the city limits, boasts 3, or one for every 25,000 residents. Job centers as well as residential communities, edge cities are expected to become the new economy's entrepreneurial frontier. Here's where the business builders on this list are sowing tomorrow's jobs:
The Top 10 Edge Cities: Sterling, Va.; Burlington, Mass.; Kirkland, Wash.; Chesterfield, Mo.; Rockville, Md.; Bethesda, Md.; Walnut Creek, Calif.; Alexandria, Va.; Arlington, Va.; Southfield, Mich.* * *
Best of Show
Welcome to Boulder, Colo., Rocky Mountain resort for the entrepreneurial elite. Granted, no tour guide would admit it, but with 6 Inc. 500 companies calling Boulder home, this scenic city of 93,000 holds the bragging rights to one of the densest concentrations of high-growth companies in the country. Since 1990 more than 1,300 businesses -- an average of about 25 a month -- have sprouted in or relocated to Boulder. Even as the city's largest employers have downsized, its job growth has run double the national average. So it's no anomaly that Boulder County has been rated best of show by bankers and economists tracking the Mountain Region's booming economy. Or that a cadre of Inc. 500 companies should camp there.
If there's any surprise in Boulder's good fortune, it's in how easily it's been won. "You don't have to sell too hard when you're Boulder," reports AndrÃ© Pettigrew, who until recently was vice-president of economic development for the Boulder Development Commission. The natural beauty that surrounds the place, long a magnet for outdoor enthusiasts and the granola set, is hardly a secret. But its less obvious assets -- a well-educated workforce, world-class research facilities, and a rich technology base -- have in recent years inspired as many entrepreneurs as triathletes.
With more than half a dozen venture-capital firms based there, and a wealth of technology spinning out of private as well as public labs, companies such as Marc Rochkind's $11.4-million XVT Software (#72) needn't make excuses to Silicon Valley. "Nobody asks why you are here," says Rochkind.
Recruiting, the eternal challenge for understaffed growth machines, just isn't a big deal when your offices overlook a glacier. Even though salaries are lower in Boulder than in Silicon Valley, Matt McConnell, CEO of Compatible Systems (#315), a networking business that grossed $3.5 million last year, reports a backlog of job candidates from California. "The flood of rÃ©sumÃ©s has been unbelievable," he says.
Then, of course, there's the karma of the place -- a very literal advantage for Tami Simon of Sounds True (#247), a publisher and marketer of audiotapes on psychology, spirituality, and meditation. Home to Naropa Institute, the first accredited Buddhist college in the country, Boulder is also a bastion of New Age thinkers and spiritual guides, just the sort of people Simon relies on to record and listen to her tapes. "We have an incredible base of authors and customers here," she says. Like Simon, Felix Magowan, president of Inside Communications (#388), benefits from the synergies of doing business in Boulder: he publishes sports magazines in a city that is a mecca for Olympic athletes and sports enthusiasts.
Of course, paradise isn't cheap. "If you're doing business in Boulder, you've got to be willing and able to pay for it," says Pettigrew. Labor costs are no longer the bargain they were five years ago. The city's restrictions on land use and development, which have spared it from urban sprawl and enticed nature-loving newcomers, are driving up real estate costs. In the past two years Boulder's property prices have escalated faster than those of almost any city in the country. The median price of a home is now more than $230,000. "Employees cannot afford to live within city limits," reports Rochkind, who bemoans what he calls the "Aspenization of Boulder."
Balancing growth against the strong conservation ethic in Boulder is difficult. A proposed referendum restricting building expansion to 1% "could be the death knell," says Pettigrew.
"This community has been built on local enterprise," he avers. "If this were the headquarters of six Fortune 500 companies instead of six Inc. 500 companies, this town would be in the dumps right now. A community of entrepreneurs: that's what's making it work in Boulder."* * *
On the walls of Drew Conway's office, in Newton, Mass., hangs a four-foot-by-three-foot map studded with navy blue flags and green pushpins. The flags mark territories already staked by 17 branch offices; the pushpins target 24 more markets yet to be conquered. Like a battered souvenir of the company's runaway ride to $61 million in sales last year, Conway's pocked map displays a classic expansion strategy at work: dominate a local market and then run like the devil to every other hot market you can find.
For growth companies, the search for the next market or the best new site is a never-ending quest. If they're not hastening to open international sales offices, or cross-country or even crosstown branches, they're desperately seeking a bigger warehouse, a better factory, more and ever more space. It is a rare company on this list that's doing business only in the humble place where it started.
Consider one 60-day period in the life of Conway's company, the Registry (#429). Last summer the Registry opened five new offices (in Denver; San Mateo, Calif.; Charlotte, N.C.; Greensboro, N.C.; and Manhattan) -- oh, and hatched plans for four more. Those were merely the latest assaults in Conway's Napoleonic campaign to become a national contender in the fragmented business of technical consulting.
"The opportunity is now," says Conway. "We're in a hot niche. We've hit a really good time in the market, so it's an ideal moment to expand."
Although the pace is furious, the Registry's expansion is not haphazard, says Conway. There's a regimen behind his urgent push: the company's five regions are governed by detailed expansion plans. And managers in each territory are judged by their ability to train the next generation. "They know they've got to produce a crop of people to open the next round of offices," he says. Few decisions are divorced from the company's ambitious expansion, reports Conway, who hires people willing to move, pursues customers with multiple locations, and electronically wires his organization so that staff around the country can communicate instantly.
"This is a portable organization," he says. "It's been built to move."
Tom Hoshko's Computer Professionals (#162), in Lake Wylie, S.C., operates out of eight offices, most of which are in the Southeast, yet he takes a more conservative (and less itinerant) approach to expansion than Conway, his sometime competitor. Rather than build a national company at breakneck speed (and lower margins), Hoshko opts to grow regionally. He's more discriminating in choosing sites, he says, even though he lets someone else do the picking. "We follow our customers," Hoshko states. When he insists that his company, a purveyor of technical services to the Fortune 500, is "customer driven," he means it quite literally: He has set up shop in Richmond, Va., in pursuit of Philip Morris; in Atlanta for the sake of Coca-Cola; and in Boca Raton, Fla., to cater to IBM. What's more, he recently crossed the Mississippi to serve American Express in Phoenix. "If we don't have a premium customer in town, we don't go," says Hoshko, who prefers to see a volume of business billed to the same address before he will commit to a new office. Expansion doesn't drain as much cash, Hoshko argues, when every office finances itself out of sales. "It's not what you make but what you keep," he says.
Marvin Kramer of Friendship Manor Homes, in Madison, Wis., is another incurable follower. But he doesn't trail his aging customers. They're everywhere, and increasing every year. He is guided, instead, by a different lodestar: "Wal-Mart," he says, quite reluctantly. "I hate to let the secret out, but we follow Wal-Mart around."
For the last four years Kramer has decided where to site most of his 52 homes for the elderly by shadowing the business-that-Sam-built. "It hasn't failed us yet," he claims. This year the company took number 65 on the Inc. 500 list, and it expects to top $10 million in revenues in 1994.
After 20 years as a commercial real estate broker and developer, Kramer knew firsthand how costly feasibility and site-selection studies could be. "I was going from place to place, doing it the hard way, and I kept bumping into the Wal-Mart team," recalls Kramer, who, like the place pickers from Bentonville, Ark., has an appetite for small semirural towns. "I thought, 'Why not take a shortcut? Let them pick the spots and we'd just meet them there later." It didn't matter how many old folks lived there, Kramer figured. If there were enough for Wal-Mart, then there'd be enough to fill a residential home with 15 beds.
When he read that the category killer was heading to Eau Claire, Wis., he followed suit. When Wal-Mart arrived in Plover, Wis., where Friendship Manor already operated one home, Kramer built two more. "It has made a huge difference in the time and money we have to spend on expansion decisions," he says of the strategy. "We do less homework ourselves now because we know they've done theirs."
Of course, more than a few entrepreneurs quite rightly see competition, not coattails, when they study the category killers. If they're like Tom Flink of Office Stop (#74), in Butte, Mont., they stay well out of the way, playing only where the big boys don't. What Flink and his two brothers have done is take the discount office superstore to places (such as Missoula, Mont.) where Office Depot and other national chains fear to tread. It's a hit-'em-where-they-ain't strategy. And it has boosted Office Stop sales nearly 3,000% in the company's last five years, to $7 million in 1993.
With locations in four Montana cities, Office Stop employs the same marketing and discounting that superstores do in large metro areas -- counting on volume to compensate for razor-thin margins -- but throws in enough service to draw business away from the mail-order office suppliers it must compete with in a rural market. "We're bringing big-city distribution and pricing to small cities and rural areas, places most national chains either overlook or can't afford to go to," says Flink.
Some, of course, build growth companies without ever leaving home. Take Paul Argall of PCBM Management (#286). Let others strike out for new economic frontiers in far-flung places; Argall has found his in his own backyard, in Ishpeming, Mich. A small mining town in upper Michigan, Ishpeming is home to some 7,000 souls as well as one motel, two bars, a restaurant, a bowling alley, a convenience store, a gas station, a car wash, a quick lube, a construction company, and a real estate developer, all owned by Argall's PCBM Management. Argall even sells the dirt in Ishpeming -- sand and topsoil from the land he clears to develop properties. "I own a lot of Ishpeming," avows Argall, who reckons he's now the largest property-tax payer in town. His varied ventures, built from scratch and "pure stubbornness," would never have been started if he hadn't been such a willful local boy, Argall reports. "Ishpeming was not going anywhere," he recalls. "But there was so much opportunity."
Argall recognizes the risks of tying his fortunes to one very local economy, but he hedges his bets by diversifying the businesses he owns, he says, and financing them largely out of cash. "We carry very little debt and watch the balance sheet very carefully," says Argall, who claims he has no ambitions to expand beyond the bounds of Ishpeming. "Who knows why?" he says. "Maybe because I'm from Ishpeming, maybe because I want to prove something to somebody. But I'm happy making something out of nothing right here at home."* * *
Off the Beaten Track
It may not be easy to find Cave City, Ky., or Sandpoint, Idaho, on a map, but you'll find them on this year's Inc. 500 list, along with Poulsbo, Wash., and Madill, Okla., the last of which is just a hop, skip, and 3,000-mile jump from Silicon Valley. Unlikely as it may sound to those struggling to grow businesses in suburban office parks or pricey downtown quarters, you don't have to set up shop in Santa Clara, Calif., or Norcross, Ga., or Arlington, Va., to stand a chance of building a growth company. A handful of resourceful business builders gracing this year's list demonstrate that Inc. 500 companies can, in fact, be grown in the outback. Yes, Virginia, you can get there. From just about anywhere.
"This is the last place you'd look to start a business," says Ron Jackson, CEO of Contract Manufacturer (#58), a $17-million maker of livestock trailers. Set in the sparse and rolling hills of southeast Oklahoma, Madill is a town of 5,000 built in the settlement days and, "like every other place around, is just hanging on," according to Jackson, a native son. But the town's grip may be getting a little firmer, at least for the 46 locals whose checks are signed by Jackson, thanks in part to the growth of Contract Manufacturer to more than $12 million in sales last year.
While Jackson's company has benefited from the relatively low costs of labor and real estate in his rural outpost (and boyhood home), it has not relied on Madill for customers. "Not enough people drive by here in a day to buy the trailers I could make in my backyard, never mind in my factory," he says. Instead, Jackson, who has never employed a single salesperson, draws on the contacts he's accumulated over 20 years in his niche to sell his trailers nationally, with little more than a few phones and a fax machine to aid him. There are, after all, only a couple hundred livestock-trailer dealers in the nation. And they're not on Madison Avenue, either.
Dennis Pence, who fled New York City 10 years ago in search of a new Eden, couldn't give a damn about Madison Avenue now. That's how good life has been in Sandpoint, Idaho. By virtue of his company's rapid growth and burgeoning payroll, Pence has become a big man in the mountains: one of the largest employers in the wilds of northern Idaho and a power broker in the state.
Pence's company, a mail-order marketer of nature gifts called Coldwater Creek (#279), posted sales of $29 million last year, nearly 10 times its revenues in 1989. Set on the shores of the pristine Lake Pend Oreille, minutes from the mountains but an hour and a half from the nearest airport, Coldwater's remote location has proved to be a distinct, if quirky, advantage, according to Pence. He had decided while on the Pennsylvania Turnpike, bound for Sandpoint, to start a company with his wife, Ann, that could trade on such an outback location. "Our address charms customers," says the 44-year-old CEO. "People are always impressed that they're not talking to some phone bank in Chicago when they call us." And because a mail-order company can operate from anywhere a phone line and a UPS truck can reach, it hardly matters that Pence is often thousands of miles from big-city customers.
Even though he sees more moose than traffic on the open roads of Sandpoint, "we get a wonderful workforce up here," he asserts, estimating a turnover rate below 5%. "Once you hire people, they stay." The challenge, of course, lies in finding enough of them. The paucity of top management and marketing talent in this northern finger of Idaho forces Pence to retain headhunters and recruit nationally. "Job candidates either love it here or hate it here," says Pence. "And they know it as soon as they get off the plane."
Still, the company carries clout on its own unspoiled terrain. When Pence considered leaving Sandpoint because the company's growth was straining the local infrastructure's ability to support it, the state of Idaho rushed to Coldwater's aid. One hundred seventy-five full-time jobs make for a big stack of chips in northern Idaho. To keep the company headquartered there (Pence was being wooed by West Virginia), the state legislature appropriated $100,000 to subsidize job training at Coldwater Creek. State officials lobbied for a federal grant to improve water pressure for a sprinkler system in the company's warehouse, and then persuaded the phone company to run 45 miles of fiber-optic cable up to Sandpoint so that calls could be processed more quickly. "I guess you could say they cared," says Pence, who won't say what he might have been told in New York.
Like Pence, Tom Clopton, CEO of $5.5-million Tekno (#169), in Cave City, Ky., enjoys the perks of being a big fish in a small creek. "This is just a little ol' speck of a place with a couple of grocery stores, a filling station or two, a few churches, and a funeral home," reports Clopton, who lives on the farm that his grandfather's grandfather cleared back when Kentucky was considered the Western frontier. "It's not much, but it's got just about all we need."
Declaring the company, which builds automated manufacturing systems, little more than "a bunch of country boys trying to make a living," Clopton doesn't boast about how sales bolted from less than $350,000 in 1989 to $5.5 million last year. Maybe he doesn't have to.
The biggest employer in Cave City, with a payroll of 46, Clopton's business sits quite handsomely on a street newly paved by the solicitous city fathers, who also see to it that Tekno's grass gets mowed and its trash gets picked up on time. "The police come around real often to make sure everything's OK," Clopton explains. His best friend is the deputy sheriff. "It's a personal situation here. They look out for us."
While Clopton's distance from major suppliers can pose problems (if a part comes in damaged or something in the shop breaks, it can take days to get a replacement), his distance from large corporate customers does not. "Once upon a time I worried about customers' not wanting to come out here, but I found out they liked it," he says. The drive from the Louisville airport takes 90 minutes. "You can spend the same time trying to get from O'Hare to the Loop, in Chicago. So what's the difference?" A stretch of pretty green hills, perhaps, and a lot of sky.
THE 10 BEST CITIES
THE 10 WORST CITIES
New York City
NUMBER OF INC. 500 COMPANIES
STATES '84 '89 '94
Alabama 4 4 9
Alaska 3 0 0
Arizona 10 7 6
Arkansas 2 1 1
California 86 83 73
Colorado 4 7 13
Connecticut 8 7 6
Delaware 0 2 1
District of Columbia 4 1 4
Florida 26 20 35
Georgia 9 14 13
Hawaii 3 1 0
Iowa 4 2 3
Idaho 3 1 3
Illinois 19 22 23
Indiana 11 5 5
Kansas 7 4 6
STATES '84 '89 '94
Kentucky 5 3 4
Louisiana 2 3 2
Maine 0 3 0
Massachusetts 22 29 33
Maryland 12 16 19
Michigan 10 28 15
Minnesota 10 5 9
Mississippi 0 0 0
Missouri 6 6 11
Montana 1 0 2
Nebraska 1 3 4
North Carolina 14 11 12
North Dakota 0 1 0
Nevada 1 0 1
New Hampshire 5 5 6
New Jersey 17 17 21
New Mexico 1 4 3
STATES '84 '89 '94
New York 31 34 24
Ohio 26 23 16
Oklahoma 3 6 4
Oregon 6 3 2
Pennsylvania 23 23 14
Rhode Island 2 4 3
South Carolina 0 2 3
South Dakota 0 1 1
Tennessee 6 8 7
Texas 38 27 25
Utah 2 4 5
Vermont 0 2 3
Virginia 32 26 25
Washington 11 9 15
West Virginia 0 1 1
Wisconsin 9 11 9
Wyoming 0 1 0