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What really happens to fast-growing companies in America? To find out, we went after every member of the Inc. 500 of 10 years ago -- including Microsoft.
Al Caperna is not a household name. Labels are not a sexy business. and Bowling Green, Ohio, is no one's idea of a glamorous location. But here in the Buckeye State, Caperna has been growing his label-making company for 15 years, part of a little-known force in the American economy: the former Inc. 500.
There are lots of Al Capernas out there, as it turns out -- successful graduates of the Inc. 500 class of 1985, whose long history of successful growth flies in the face of conventional thinking about the economic impact and the stability of small businesses.
We know that because, for the first time, we asked. This year we set out to track down the companies that were on the Inc. 500 list 10 years ago, in 1985. We wanted to find out what had happened to them since -- how many had failed, how many had been acquired, what percentage had gone public, which ones were still private. And if the companies hadn't been sold, we wanted to know sales and employment figures.
The results are heartening. If the class of '85 is any indicator, young fast-growth companies are much more durable than most observers realize. For a start, the failure rate of the 1985 Inc. 500 is surprisingly low, given the companies' hyperfast growth history. Then there's the dramatic expansion -- in the number of jobs as well as in sales -- of the bulk of the class of '85. As a group the 500 companies had sales in 1984 of $7.4 billion. Today it takes only two of the alumni -- computer-products distributor Merisel and software developer Microsoft -- to exceed that total; the two companies' combined 1994 sales reached $9.7 billion. What's more, the 233 alumni from which we successfully captured 1994 financial data now have almost four times the sales of the entire 1985 list. Put another way, those 233 had average revenue growth over the last decade of more than 23% each year -- even through times of recession. (See the data below for further growth statistics.)
These days it's easy to tell the difference between Al Caperna and Microsoft chairman Bill Gates. But 10 years ago the companies on the Inc. 500 looked very much alike. Since then, the individual enterprises have followed widely varying paths. Today, amid the din of big-company downsizings and takeovers, many of those businesses keep quietly doing what they do best: creating jobs and sustaining communities all across America. Here are their stories* * *
Look at the 1995 Inc. 500 and you may wonder, "Who are all these little companies, anyway?" Inc. 500 companies generally aren't household names when they start making the list. But rest assured: some of them will be. Most of the aggregrate job growth and much of the aggregate revenues of the 1985 alumni have been generated by a handful of companies that have grown to become superstars. Some of them are now among the biggest corporations in America.
A classic example is Microsoft, #163 in 1985. Ten years ago an entrepreneurial upstart, Bill Gates's company now strikes terror in the hearts of both federal regulators and competitors. In 1980, the base year for the 1985 list, the company employed 75 and reported sales of $6.9 million. By 1985, Microsoft's second year on the list, the company was reporting $97 million in sales. Today the statistics are off the chart: the software giant had 1994 sales of $4.7 billion, as well as 16,000 employees.
Microsoft is no anomaly. Other well-known large companies that grew from the 1985 Inc. 500 include Oracle, another multibillion-dollar software powerhouse, and Solectron, now a $1.5-billion contract electronics manufacturer, perhaps best known for winning the Malcolm Baldrige award for quality in 1991. If we arbitrarily define "superstar" as a company with $500 million or more in sales, the 1985 list has so far yielded nine such businesses that remain independent; others have been acquired by other companies. In addition to Microsoft, Oracle, and Solectron, the superstars include two of the nation's largest computer-products distributors, Merisel (whose predecessor, Softsel, was on the list) and Tech Data; a computer-leasing firm, El Camino Resources; a drugstore chain, Drug Emporium; an airline, Amtran; and, in the unlikeliest of growth fields, a chain that distributes roofing and construction materials, ABC Supply. A tenth company, SAS Institute, a privately held software manufacturer, has sales approaching $500 million.
Those companies' economic contributions -- and meteoric growth -- are nothing short of amazing. The 10 Inc. 500 companies from 1985 that today have the highest revenues accounted for $19.1 billion in 1994 sales -- almost two-thirds of the total revenues earned in 1994 by the 233 companies from the 1985 list for which we have sales figures. Those same 10 companies now account for 58,000 jobs -- nearly half the 233 companies' total.
Interestingly, the superstars looked much like everybody else on the list back in 1985. Sure, many are in high-growth industries such as software publishing, computer distribution, and electronics manufacturing, but a disproportionate number of every year's Inc. 500 are in computer-related markets, and most don't become Microsoft or Merisel. There are the surprise superstars, too. Who'd have believed that roofing supplies would offer such opportunity? And there's Amtran, which thrived in one of the most failure-prone industries of the '80s -- airlines -- by specializing in charter vacation travel.
In short, history suggests that some of this year's companies will be on the Fortune 500 a decade from now and that some of these CEOs will be among the richest people in America. But we can't tell you which ones.
The superstars are far more likely than most '85 alumni to have gone public. Seven of the 10 largest 1985 Inc. 500 companies today are publicly traded, yet only 32 of the whole class of '85, or 6.4%, are public companies. (More actually went public; it's just that some have been acquired or have failed.) Not surprisingly, the public companies grew much faster than those that remained privately held. As a group, the 32 companies have created almost 60,000 new jobs since 1984; at the same time, they've increased revenues more than 10-fold.
The Silent Majority
As a rule, the public companies on the list have the highest profiles. But they're not typical: the Inc. 500 is really the domain of Main Street entrepreneurs rather than Wall Street types.
Today Al Caperna, the label maker, is a much more typical symbol of the Inc. 500 than Microsoft boss Bill Gates is. Sales at Caperna's company, Century Marketing, have more than tripled from $4.6 million in 1984; Caperna has spun off a related company, hired more employees, invested in another company that also made the Inc. 500, and, recently, launched yet another start-up. Century Marketing is still privately held, still in the same town, and still profitable. It grows steadily, employs 240, and keeps right on making labels for customers such as bicycle shops and florists.
What's remarkable about "the silent majority" is their numbers, their steady growth, and their stability. Ten years later, almost half the 1985 Inc. 500 companies are still privately held and still under the same ownership. Most of them are in the same business and in the same metropolitan area. The only difference is that, on average, they're now substantially larger. The 201 private companies for which we have statistics have increased sales an average of 15% each year over the decade. That's far less than the 30% average annual revenue growth of the '85 graduates that are now public, but it's still impressive over the long haul and as an average. As a group, those 201 enterprises have grown from $2.1 billion to $8.6 billion in sales, and from 27,700 to 59,800 employees.
These companies contradict the image of '80s entrepreneurs as high-flying, highly leveraged risk takers who perhaps took one risk too many. Instead it suggests that the single most likely outcome for a company on the Inc. 500 list is that it will grow to become the kind of business that forms our country's economic foundation: a substantial privately held company that provides steady jobs and growth opportunities for its employees and is a loyal contributor to the local economy. For example, 10 years after it made the 1985 Inc. 500, Peter Deyager's Foreign Candy is still based in Hull, Iowa, and Deyager still scours candy stores the world over in search of interesting confections to adapt to the U.S. market. Despite the 1993 sale of the company's brand of gummy candy, Foreign Candy still has more than triple the revenues it had in 1984. And Jana Yeates is still selling temporary-help services in Manassas, Va. Her business, Temporary Solutions, has grown and spun off an employee-leasing company. The two companies have combined sales of $29.5 million, compared with sales of $1.5 million in 1985. The list goes on, but you get the picture.
Of course, looking only at that big picture obscures the painful details. Not all those companies have grown or thrived; about 14% of the 201 private companies that reported back to us saw revenues shrink over the decade. Many had ups and downs, caused by everything from divorces to declining markets. That those companies still, on the whole, grew so steadily is testimony to their founders' tenacity.* * *
At least 135 companies on the list have been sold to new owners. The current status of those businesses is hard to gauge: it ranges from defunct to booming, from autonomous to completely subsumed. So we didn't attempt to get current statistics on their sales and employment. In most cases an acquisition represents a successful exit strategy for an entrepreneur and other stockholders. (We counted as failures companies that were acquired after they had filed for Chapter 11 protection.) And it's difficult to get good information about the sale of privately held companies. But we were easily able to determine that there is no dominant type of buyer: purchasers ranged from Fortune 500 corporations to other Inc. 500 companies to individuals. A surprising number of the 1985 Inc. 500 companies sold -- at least 14% -- were purchased by foreign buyers. The sale prices varied with company age and size. The most lucrative sale was probably the recent purchase of Legent (a company formed by a merger of equals involving #383 in 1985, Morino Associates) by Computer Associates International, for about $1.8 billion.
The 1985 Inc. 500 companies that are still led by their founders have generally remained stable, but that kind of stability doesn't always last after a sale. Once they were sold by their founder, some companies soon changed ownership again, perhaps because a corporate parent changed its objectives, fell on hard times, or was itself acquired. Relationships between a company's new owners and its founder weren't always cordial, either. "The culture of Dow is gone; there's nothing left of the company I built," Richard Willich, founder of Dow Industries, lamented to a local paper in 1986, the year after he sold his company, a maker of electromagnetic shielding for buildings, to Bairnco.* * *
We classified 95 companies as failures -- though only 57 are confirmed as such. The rest we simply couldn't locate. Most probably went out of business, but our company-tracking experience suggests that a number of them ended in small acquisitions that didn't make the news. However, to be on the conservative side, we included those "missing in action" in the failure category.
Look closely at that failure rate. That's an average of about 10 companies closing their doors each year, for a total 10-year failure rate of 19% -- over a decade that included a serious recession, a stock-market dive, and a credit crunch. Meanwhile, the losses in jobs and revenues from those failures were far surpassed by the economic contributions of the surviving members of the 1985 Inc. 500. In 1984 the 95 companies that later went out of business had combined sales of $1.92 billion and employed 10,083 people. Subtract those figures from the recorded gains since 1985 for the 233 companies described above, and the result is a net sales gain of $23.6 billion, as well as some 81,900 net new jobs. (Remember, those numbers understate the true contributions of the 1985 Inc. 500 because the statistics involve the changes in only 328 of the 500 companies. In the interest of practicality we did not try to estimate sales and employment statistics for the 135 companies that were sold or for the 37 privately held companies that exercised their right not to give us current sales figures.)
Like any list of fast-growing small companies, our list always includes a few sleazy operators. Happily, a number of those on the '85 list were eventually shut down by regulators. However, most Inc. 500 failures involved simple business misjudgment. For the most part, every failed company has its own story of a stock offering that didn't happen or a lawsuit that did.
But not all the failure stories are bleak. Some CEOs of failed companies are back in business. Tom Whatley looks back on the failure of ABO, his Inc. 500 company, without rancor. When ABO, an architectural-truss manufacturer in Mabank, Tex., fell victim to the turmoil at its bank and in the Texas construction industry, Whatley says he found himself, in the spring of 1987, "without a company and with $10,000 a month in real estate payments." Whatley quickly started a new business -- Eagle Metal Products, a metal-stamping shop that today employs 15. Whatley believes ABO's failure made him a better human being and a smarter businessperson. He's changed his strategies ("Not having debt cures a lot of ills," he says) and his personal priorities. He's learned to value his time with his wife and children more. "I've been really blessed," he says today.
In that sense, and even though his company failed, Whatley is like many other Inc. 500 CEOs. Too often, major American corporations have an attention span of about two minutes, hopping from management fad to management fad and acquisition to divestiture. But spend some time with Inc. 500 CEOs -- of any year -- and you can't help noticing how many of them love what they do. For many, their companies are their beloved creations.
No wonder they keep growing them so well.* * *
Research assistance provided by Tim Dailey and Nancy Maloof.* * *
A sampling of 1985 Inc. 500 alumni that now have at least $500 million in annual sales --
ABC Supply: Roofing- and construction-materials supplier
Amtran: Charter and scheduled airline
Drug Emporium: Drugstore chain
Merisel Corp.: Software and hardware distributor
Microsoft Corp.: Software developer
Oracle Corp.: Software developer
Solectron Corp.: Contract electronics manufacturer* * *
The Remarkably Durable Class of '85
1995 Breakdown of 1985 Inc. 500 Companies
Still held by the original owners: 238
Publicly owned: 32
Cannot be found, assumed failed: 38
Belong to new owners (many are private): 135* * *
In 10 years most of the independent Inc. 500 companies . . .
. . . have grown dramatically . . .
1984: $3.5 billion
. . . and created many jobs.
Aggregate number of employees:
Note: Based on financial data available from 233 companies. n* * *