A senior Inc. editor tells why the companies that perform well on Main Street are as critical as any found on Wall St.
Enough already about Wall Street -- lots of America's hot entrepreneurial companies never go near it. And though that makes them less visible, it doesn't make them less important
Call it the Silicon Valley myth. It's the story of a young technology wizard with a bright new idea. With the backing of venture capitalists, he or she assembles a management team to launch a fast-growing high-tech start-up. If the new company prospers, it will grow at blinding speed and go public, making its founders rich. But the company also runs a substantial risk of being blindsided by technology changes and ending up a failure -- going from high growth to bankruptcy and obscurity.
That's the mythology about high-growth entrepreneurial companies. And in fact it provides a pretty apt description of the way many technology companies that go public get started. But the story is incomplete. Only a small portion of growing companies obtain venture capital and grow into public companies. Those that do create an extraordinary number of jobs and often turn into major corporations.
But there's another type of growth company, just as important and much less well known. The first story -- about the venture-backed company -- could be called that of the Wall Street growth company, whose founder from the start has his or her sights on a public offering or some other exit strategy. The second story is about the kind of company that most often makes our Inc. 500 list of the fastest-growing privately held companies. Let's call that one the Main Street growth company.
Like Wall Street growth companies, Main Street growth companies create jobs and innovate, often, not surprisingly, in growing industries. But fundamentally, the companies are two different types. Only a small minority move from one category to the other.
To give you a sense of how different the two types of companies are, consider just one statistic: their initial capitalization. At Inc. we track Wall Street growth companies through our Inc. 100 list of the fastest-growing small public companies. In 1995 the companies that made the Inc. 100 had raised a median of $800,000 as seed capital before ever starting business. That's 32 times more capital than the median $25,000 the private companies on the 1995 Inc. 500 were launched with. More than one-third of the Inc. 100 public companies surveyed were able to obtain venture capital before opening their doors; only 4% of the Inc. 500 private companies did so.
The typical founder of a growth company that later goes public, then, is part of a very elite group with exceptional connections to financing sources. The typical Inc. 500 CEO is more of an ordinary entrepreneur who subsequently does unusually well. While some Inc. 500 companies later go public, our research suggests that after making the list, Inc. 500 companies are far more likely to remain privately held under the same ownership.
It's not hard to keep track of the Wall Street growth companies; every newspaper chronicles their successes and failures, their stock prices' rise and decline. But the Main Street growth companies grow and change relatively unnoticed by the mainstream business press. They're often almost invisible. And that's too bad because they are the sort of companies our economy desperately needs more of. Last year we tracked down an entire Inc. 500 class from a decade before -- and we discovered a pretty hardy group with an impressive record of long-term sales and employment growth. (See "The Startling Truth About Growth Companies," in Inc.'s State of Small Business issue, 1996, [Article link].) Over the long haul, those Main Street growth companies had a relatively low failure rate and kept growing substantially faster than the U.S. economy.
Everywhere you turn today you hear about downsizing. As so many of our largest corporations engage in a frenzy of job cutting, now more than ever we need the small entrepreneurial companies that grow not just in technology hot spots but throughout America. Main Street growth companies often offer the average American an excellent chance to get ahead, precisely because they are growing and creating jobs right in his or her hometown. As a nation, we already know more than enough about huge dysfunctional corporations -- the kind whose managers seem to care more about what Wall Street thinks than about the long-term best interests of their companies. Let's start paying more attention to what works in our economy: the small, privately held growth companies.
If we understood them better, perhaps we'd have more of them.
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Martha E. Mangelsdorf (email@example.com) is a senior editor at Inc .