The Startling Truth About Growth Companies
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.* * *
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.* * *
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.* * *
The Conventional Wisdom: The kind of growth that lands a company on the Inc. 500 list is extremely difficult to manage. As a result, fast-growing small companies fail at an exceptionally high rate.
The Truth: It just ain't so. If anything, astronomical growth may increase a small business's chance of survival.* * *
You'd think most of those Inc. 500 companies would be gone by now. The typical business on our 1985 list grew 900% in revenues from 1980 to 1984. That kind of hair-raising growth severely strains cash flow, staff, and management capacity. In small, young, private companies, that strain can be fatal. So we'd expect former Inc. 500 companies to have an extremely high failure rate.
Makes sense -- except it's not what the research shows. If anything, the 1985 Inc. 500 alums, which all experienced hypergrowth, may have lower failure rates than other small companies. When we tracked down the 1985 list 10 years later, we could confirm only 57 failures out of 500. And that's using a very broad definition of failure. We counted as a failure any company that closed while under its original ownership -- even if there were no losses to creditors and the owner simply went on to other things. We also counted as a failure any company that was acquired by new owners after a Chapter 11 filing, even if the company is still in existence today. To be on the safe side, we also lumped in with the failures the 38 other businesses we couldn't locate -- though our company-tracking experience suggests we were being too cautious. A few of the companies missing in action probably quietly changed names or were sold. So using excessively inclusive guidelines, we came up with 95 presumed failures, a 10-year failure rate of 19%.
That begs an obvious question: How often do ordinary small companies fail? Well, that depends on whom you ask. The truth is that research on business-failure rates should be taken with a grain of salt because no one has yet found an ideal source of comprehensive data. Still, some of the data that are available suggest that the Inc. 500 failure rate is low. One way to show that is to look at survival rates -- sometimes defined by researchers as the number of companies that stay in business without changing owners or reorganizing. Of the 1985 Inc. 500, 238 companies, or 48%, survived 10 postlist years under the same ownership, without being acquired or going public.
The Office of Advocacy of the U.S. Small Business Administration publishes national statistics on business-formation and -termination rates. That series, which is based on data from unemployment insurance rolls, suggests a highly turbulent economy. The data suggest that every five years, half of all firms with employees disappear or reorganize. Meanwhile, the 1985 Inc. 500 is about half as volatile, with approximately half the companies changing ownership or failing in a 10-year period. (In case you're wondering why there are any businesses left in the United States, it's because new ones keep starting up.)
Of course, the SBA numbers include very young companies -- and we might expect them to expire at a higher rate than older ones. By the time the Inc. 500 alums made our list, they had already reached a median age of seven years, so they were likely to be more durable than brand-new start-ups. But even when compared with small businesses of a similar age, the 1985 Inc. 500 companies may be hardier.
In their landmark study of small-business survival rates, Bruce D. Phillips and Bruce A. Kirchhoff tracked 814,000 small companies started between 1977 and 1978 for a period of eight years. Those businesses are basically the peers of the 1985 Inc. 500, whose median launch year was 1978. Although Kirchhoff and Phillips were unable to follow their sample through to 1995, they had enough years of data to use economic models to estimate long-term survival rates. According to Kirchhoff's estimates, one would expect that about 120 of every 500 companies in his sample that had made it to 1985 would survive under the same ownership in 1995. By comparison, 238 of the 1985 Inc. 500 did so. In other words, Inc. 500 companies survived at about twice the rate Kirchhoff projected for ordinary small businesses -- while attaining remarkable average growth rates.
Kirchhoff now says, however, that he believes his original long-term survival estimates were too low. John E. Jackson, of the University of Michigan, has found somewhat higher survival rates by studying Michigan companies over a six-year period. Meanwhile, researchers like Paul D. Reynolds, Babson College's Paul T. Babson Professor in Entrepreneurial Studies, have found that four years after start-up, from 75% to 80% of entrepreneurs report that their companies are still in business. Other researchers report still different numbers, based on different samples and time periods. Kirchhoff and Phillips, however, studied a group particularly similar to the 1985 Inc. 500 in age and year of start-up; their sample also represented, like the Inc. 500, a wide variety of industries and regions.
So much for the companies that survived. Are there lessons to learn from the failures of the Inc. 500 class of 1985? Two trends are immediately identifiable from the failures. The first is hardly surprising: companies that were just breaking even or losing money in 1984 were more likely to fail than others. The second is downright heartening: the group of ex-businesses includes a small number of companies that got into trouble with regulators for questionable business practices. Our Inc. 500 list screens only for growth, not for ethics, and as a result it always includes a few companies we'd rather not be associated with. The good news is that those companies may have a higher-than-average failure rate.
The survival lessons from the 1985 Inc. 500? If you want to build a company that both grows and lasts, make money and be honest.* * *
The Conventional Wisdom: Small private companies that grow as fast as the Inc. 500 can't keep it up. They're really transitory, fly-by-night operations.
The Truth: If only the rest of our economy generated jobs and growth as steadily as former Inc. 500 companies do!* * *
Surely, privately held fast-growing companies would be full of turbulence. True enough, the individual stories of the 1985 Inc. 500 are filled with dramatic successes and failures. But when you look at the privately held companies as a group, the picture gets much duller because the successes far outweigh the failures.
The 238 companies that are still privately held under the same ownership should make local economic-development officials salivate. Of those 238 companies, 201 completed updated surveys for us in 1995. It turns out that 68% of them still have their headquarters in the same town. Not only that, the majority of the companies that relocated moved less than 20 miles away. Only about 4% of the 201 had moved their headquarters across state lines.
That stability in ownership and location hasn't come at the expense of growth. (See "The Inc. 500: Far Outpacing the Economy," below.) Over 10 years, the 201 privately held companies showed sales growth averaging 15% per year. (That's during a time when the nation's gross domestic product was growing at about 6% a year, not adjusted for inflation.) Although some companies in the group experienced sharp downturns, the trend toward growth has been overwhelming. From 1984 to 1994, collectively the group has grown from $2.1 billion to $8.6 billion in sales, and from 27,700 to 59,800 full-time employees.
To put a face on those statistics, picture George Kappler. In 1976 Kappler founded what was then called Kappler Development Co., in Guntersville, Ala., with six sewing machines and eight employees, just one of many small contract sewing establishments scattered throughout the South.
Within a few years, the company had begun selling its own products: disposable clothing for people working with hazardous materials. In 1985 Kappler made the Inc. 500, with 1984 sales of $10.4 million and 150 employees. Ten years later Kappler Safety Group is still in the same business, privately held, based in the same town, and run by the same owner, who is still the CEO. But Kappler now employs 450 people in the United States and close to 1,400 people worldwide. It does business around the globe and reported 1995 sales of $95.6 million. This once low-tech sewing business also has diversified into higher-tech operations, with an emphasis on new-product development.
And that's the good news about the 1985 Inc. 500 list. While bad economic news dominates the headlines, those businesses continue to grow and prosper. We don't know as much about what makes them thrive as we do about large corporations or entrepreneurial public companies because private companies make less news. But one thing is clear: instead of causing instability, the early years of hypergrowth set the stage for steady expansion. As a group, the 1985 Inc. 500 have generated wealth and jobs over the long haul.* * *
Martha E. Mangelsdorf, a senior editor at Inc., can be reached via E-mail at firstname.lastname@example.org.* * *
My, How They've Grown
Revenues generated by the 1985 Inc. 500 in 1984 and 1994
Aggregate sales (in $ billions)
All 500 companies
233 companies for which we have 1994 data
Full-time jobs generated by the 1985 Inc. 500 in 1984 and 1994
Aggregate number of full-time employees (in thousands)
All 500 companies
233 companies for which we have 1994 data
Microsoft: From the Inc. 500 to the Fortune 500 in a Decade
Annual sales (in $ billions)
Number of employees (in thousands)
The Failures: Outweighed by the Successes
By 1994, 95 (19%) of the 1985 Inc. 500 had gone out of business or couldn't be located. But the number of jobs lost at those companies was dwarfed by the gains at the 233 companies that not only survived but also remained independent and released data to us.
Number of jobs (in thousands)
Job losses 10.1
Job gains 92
Net job gain for 328 of the 1985 Inc. 500, 1984Ñ1994: 81,900
The Inc. 500: Far Outpacing the Economy
The companies that are now public grew faster, but even the privately held 1985 Inc. 500 companies greatly outpaced the U.S. economy.
Average annual percentage growth, not adjusted for inflation, 1984Ñ1994
U.S. economy, gross domestic product 6%
All surviving 1985 Inc. 500 companies revealing sales data 23%
1985 Inc. 500 companies now publicly owned 30%
1985 Inc. 500 companies still privately held 15%