Inc.'s latest research shows that fast-growing small companies are not 'here today, gone tomorrow.'
Think fast-growing small companies are here today and gone tomorrow? Inc.'s latest research may surprise you
What happens to a small company after it's gone through a period of dizzying growth? Since 1982 we've been identifying each year's fastest-growing, privately held small companies and publishing a list of them, the Inc. 500. But what happens to companies after they make that list? Last year, for the first time, we checked back on an entire Inc. 500 group -- the class of 1985.
In 1984 the 500 companies had aggregate sales of $7.4 billion and employed 64,000 full-time workers. By 1995 the 233 businesses that were still independent and releasing 1994 revenue figures were much larger than the entire list had been a decade earlier. Those 233 companies alone had grown to $29 billion in revenues and 127,000 employees. (See "My, How They've Grown," below.)
Only 19% of the class of 1985 was no longer in business or could not be located. (See "The Failures: Outweighed by the Successes," below.) Another 27% had been sold to new owners. Six percent had gone public, in the process creating a large number of jobs and several multibillion-dollar companies. However, the largest percentage of companies -- 48% -- were still privately held under the same ownership. And 10 years later that group of companies was still growing, many quietly and many under the same CEO.
Inc. 500 companies, which are frequently little known but vital contributors to our country's economic well-being, don't fit the stereotyped notions people hold about fast-growing small companies. In fact, you may want to change your thinking about privately held growth companies. On the pages that follow, we'll tell you what we discovered.
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The Conventional Wisdom: Private companies that grow as fast as the Inc. 500 often go public to raise money.
The Truth: Only a small fraction of the 1985 Inc. 500 companies went public, although those that did include some of America's great success stories.
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Only 32, or 6%, of the 1985 inc. 500 are publicly traded today. That fact contradicts one piece of conventional wisdom about high-growth entrepreneurial companies: namely, that they frequently end up selling stock to the public to raise money. Even if we include those companies that went public and later were acquired or failed, we estimate that no more than 10% ever sold stock to the public.
It's true that the Inc. 500 companies were far more likely than the average small business to go public. In fact, by our rough calculations they were about 100 times more likely than the average small company in 1984 to have since had an initial public offering (IPO). But according to IPO data provided by Securities Data Corp., those same Inc. companies make up only about 1% of U.S.-based companies that have had IPOs since 1984.
The publicly traded Inc. 500 companies may be few in number, but they make up for that in growth. The 32 public companies from the 1985 list grew by $18.9 billion in revenues from 1984 to 1994, and they created 59,900 new full-time jobs. That's an average of 30% revenue growth every year and an average of 1,872 new jobs created by each company over the period. As a group, the public companies include some of the top entrepreneurial performers in our economy.
The most famous of those star performers is Microsoft Corp., a 1985 Inc. 500 alum that exemplifies the rapid transformation of a small-growth company into a corporate giant. (See "Microsoft: From the Inc. 500 to the Fortune 500 in a Decade," below.) Microsoft, however, isn't the only such story from the 1985 Inc. 500 ranks: Oracle Corp. rivals Microsoft as a leading software vendor, while Solectron, a contract electronics-systems manufacturer, had 1994 sales of $1.5 billion. Two of the nation's largest computer software and hardware distributors, Tech Data Corp. and Merisel Inc. (formerly Softsel), were in the 1985 Inc. 500 and today are multibillion-dollar public companies. And it isn't just high-tech Inc. 500 companies that have grown so large: Amtran Inc. -- an airline holding company -- is another now-public Inc. 500 alum that had reached more than $500 million in sales by 1994.
In only a decade some of those Inc. 500 companies came from virtually nowhere to the upper echelons of corporate America. Last year Fortune magazine revised its Fortune 500 list, making it even more exclusive by merging the industrial and service lists. Still, the resulting 1995 ranking of the 500 largest companies in America included three of the 1985 Inc. 500 companies: Microsoft, Merisel, and Tech Data. In 1984 those three companies together had sales of less than $285 million; by 1994 the three companies were generating more than $12 billion in combined sales.
That's astonishing. What's even more amazing is the longevity of the entrepreneurial management of the seven public 1985 Inc. 500 companies that had sales of more than $500 million in 1994. In all but one case, the CEO who ran the company back in 1984 was involved in management until at least 1994. (In four cases the original CEO was also the founder of the company.)
The fact that relatively few Inc. 500 companies went public suggests that we shouldn't think of a public offering as a natural outcome for an Inc. 500 company. Some of the Inc. 500 companies that went public performed exceptionally well, but that doesn't mean that a company that goes public is destined for fame -- or that its CEO is destined for longevity. Our list of 1985 Inc. 500 failed companies includes several that went public. But if the experience of the class of 1985 proves typical, going public signifies that an Inc. 500 company has entered a small, select group -- and that that group, in turn, will yield some extraordinary performers.
