Growth: How Fast Is Too Fast?
Well, it all depends. And, in fact, that may not be the issue at all
The base year for this year's crop of Inc. 500 companies, 1995, also happens to be the year in which a certain high-profile, high-growth company began operations. Since that time, Amazon.com has gone from zero to more than $1.6 billion in sales, which gives it a growth rate that makes the Inc. 500 look like a slow and slothful lot.
And yet the past five years have hardly been kind to Amazon, which, judging by some of its numbers, looks more like a nonprofit charity than a billion-dollar publicly owned business. Sure, Jeff Bezos and company have created more than $12 billion in market value, but that figure has melted down from a much loftier peak of $40 billion. Even more dubious, Amazon continues to float debt -- now $2.1 billion and counting -- to run its business ever deeper into the red. Go figure.
Amazon is not an isolated example of creative economics at work. The past year has seen the virtual implosion of many dot-com businesses, leading one to wonder whether what is truly novel about the much vaunted new economy is that making a profit might actually bar you from the club. Of course, being on the Inc. 500 list is no guarantee of profitability, either, but most of the companies seem to have their eyes on more than the top line. Of the 76 companies founded in 1995 on this year's list, 60 report that they are now profitable.
Building a company in today's overramped economy seems like a cruel twist on the classic tortoise-versus-the-hare tale. On one hand, it would be nice to move slowly in order to build a solid foundation. On the other hand, no one can really afford such a luxury. You have to grow fast. But when exactly does fast become too fast?
"Speed is a critical component of success," says Dan Weinfurter, founder of Parson Group, the #1 company on this year's list. "You have to grow quickly, or others will beat you at your game." But speed, Weinfurter adds, can quickly undermine quality and fiscal discipline. To solve that problem, the financial consulting firm, based in Chicago, opened offices not in the biggest markets but in places where it knew top-drawer people who could manage those offices. (See " Ready, Set, Grow.")
Another check on growth for the sake of growth was Parson's throttling back for a year to digest its gains. That disciplined the company to slow its burn rate, achieve profitability, and make sure things were running right before Parson revved itself back up again.
Weinfurter foresees that Parson will have 30% to 40% growth in each of the next few years but not simply because the business is there for the taking. The need for growth is more complicated than that. To begin with, people want to work at high-growth companies to further their careers, and if the growth isn't there, the talent will go elsewhere. Moreover, if a company is even contemplating going public, Wall Street expects at least 40% growth as a "benchmark minimum," says the Parson founder.
As for the public markets, Weinfurter comments on "the craziness that is going on today. I know people who have great companies, they hit their numbers, and the stock's one-quarter the price of what it was. All their people are leaving," he laments.
That sense of bewilderment is all but endemic, even among successful high-growth companies. Just ask Michael Hodges, the founder of Cherokee Information Services Inc., #76 on this year's list. "If I had it to do over again, I wouldn't have started this business," he says flatly. It's not because Hodges doesn't like what he's doing; it's because he feels too darned old to keep up with today's demands of growth. Hodges, who is 55, would like to spend more time with his grandchildren, yet he finds himself working seven days a week to sustain the business.
Hodges says that there used to be privately held companies with 25 employees or fewer that were steadily profitable. "But that paradigm doesn't work anymore," he says, because the market places such a premium on high growth. "There's too much money out there, too much consolidation, and there's an explosion in information technology. And all that is dragging a lot of traditional companies along." On top of that, employees want the "bragging rights" of working for high-growth companies.
Still, Hodges is determined to somehow make growth work for him -- by implementing a five-year exit plan that will transfer ownership of his Arlington, Va., company to his employees. "That's my measure of success," he says. It's not how fast he can grow the company but how successfully he can shepherd it before handing it over to others. Hodges says that maybe that's about the best you can do in an economy that often rewards growth at the expense of profitability -- and he is determined to keep his company profitable.
One company that fell into the growth trap was CyberTech Systems Inc. (formerly Cybertech International), a provider of information-technology services in Oak Brook, Ill. The company was riding high a year ago at #5 on the 1999 Inc. 500. Cofounder Prasad V. Rao had cranked up the business, taking it from $26 million in 1997 to $52 million in 1998. But then the company's momentum slowed. CyberTech had sales of only $60 million last year, far below its projected $85 million to $90 million. The company's dynamic technology markets shifted, and it was caught pushing a software solution that nobody wanted. It has taken the company a year and a half to regroup.
What Rao learned was that growth was literally worthless -- CyberTech reported a loss in 1999 -- if it came at the expense of understanding the market. "We have to look harder to see those waves coming," says Rao, who has since diversified the business, has put more effort into planning, and now trains his employees year-round so they're ready for the latest technologies. By 2001, CyberTech expects to be back in the black, and Rao believes it can comfortably grow at 30% to 40% a year.
Perhaps Rao's experience contains the answer to the riddle of how fast is fast enough when it comes to growth. It is not so much about hitting goals in record speed as how easily you can tame growth and convert it to a level of profitability that can sustain a business.
One thing seems clear in today's economy: growth seems more random and more unexpected than ever. So perhaps the fitting response to that reality is that companies must find a way to plan for that random growth. That, in essence, is what vaulted Keystone RV Co. to the #2 spot on this year's Inc. 500 roster.
You might think Keystone is another one of those software "solutions" companies that does inexplicable things with technology. It's not. Keystone is in the business of making recreational vehicles, an industry that even in these flush times is growing no faster than 7% a year. Keystone's five-year growth rate, on the other hand, is 17,117%. How did that happen?
To begin with, founder Cole Davis came from another company in the industry that had experienced high growth, and all along he planned for Keystone to follow a similar path. He designed a business model that would use manufacturing capacity more efficiently and target more niche markets than his past employer did. He was confident the model would foster growth.
"From my experience I was aware that a company could grow fast. A lot of people never had that opportunity," says Davis. "Our model from the get-go has been rapid growth."
He also tempers the effects of that growth by planning for it. "I start selling an idea to our entire staff up to a year before we want to implement it," he says. That has resulted in Keystone's actually exceeding its ambitious targets. In 1997, Davis projected 1999 sales of $120 million, and revenues came in at $134 million. This year Keystone is on course to exceed its $190-million target by $60 million. And Davis expects the company to surpass $550 million in 2001.
Keystone, based in Goshen, Ind., seems to be a curiosity, an old-line company in an economy that celebrates the new and wondrous. And, when Davis talks about the business, he sounds similarly old-fashioned. Keystone, he says, is "a relationship business. We have attracted people who have been in the industry for years, and their relationships give us entrée into the marketplace." It sounds like a throwback to the quaint idea that success in business is about who you know, not what you know.
In truth, success in business has come to be about surviving the best way you can in a volatile economy, and whatever strategy works best in achieving that aim is the right one. For now, companies like Keystone have mastered growth not so much by growing at the right pace but by growing in the right way.
Edward O. Welles is a senior feature writer at Inc.
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