Growing Nervous

For Inc. 500 CEOs, the bottom line is growing -- but so is the anxiety. How long can successful companies fight a troubled economy?

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You could call Bill Oesterle a member of the worried well. And he's got company: many of the 270 other chief executives of Inc 500 companies who answered a recent survey about the entrepreneurial economy. Most of this crew have seen healthy growth at their businesses this year. They expect to do even better next year. But their outlook hardly counts as blind entrepreneurial optimism; indeed, most seem to be watching today's economic and political news and nervously shuddering. In what could be a summation of the group's ambivalent sentiments, Oesterle, CEO of the Indianapolis company Angie's List, wrote, "Things are going very well for us, but we are very cautious with expenses and very conscious of the companies around us that are not as fortunate. There but for the grace of God go we.... "

On the face of things, Oesterle and most of his fellow Inc 500 CEOs would seem to have little to worry about. Sales at Angie's List -- Oesterle describes it as a Consumer Reports about service companies -- should grow more than 68% this year, to $4.2 million. Profits are up, too, and Oesterle thinks that next year will be just as good. So it is with other survey respondents. About 7 out of 10 say that this year's revenues will be up over last year's, with many foreseeing a better-than-20% boost. Nearly as many expect this year's profits to grow, too, and almost 9 out of 10 expect both sales and profits to rise next year. As for job cuts, the worst in this sector may be over. Although about one-third of respondents said they had laid off employees this year, only a few plan layoffs for the first quarter of next year. The vast majority expect to expand their payrolls.

Nor is it just the Inc 500 companies that are doing well; the positive picture seems to extend into the rest of the entrepreneurial economy. CEOs of 402 fast-growing companies surveyed by PricewaterhouseCoopers (PWC) in September said they remained confident that their own companies' sales would continue to grow -- by 13% this year, about the same annual growth rate that they had predicted in a second-quarter survey. Add to that some good news from Arc Analytics president David Birch, the researcher who created and maintains the "gazelle" database, which consists of entrepreneurial companies that grow at least 20% annually for four straight years. Last December, Inc reported that the population of gazelles had for the first time declined. Birch was both surprised and alarmed; he had never seen a decline in that group, he pointed out, and maybe we couldn't expect gazelles to help pull us out of the recession this time around. But today the decline has reversed itself, and the gazelle population is up by 23%.

Though the numbers look good, few of the CEOs surveyed by Inc or PWC act as if they've just received a clean bill of health. Greatly concerned about ongoing weak demand for their products and services, the CEOs surveyed by PWC are only cautiously hiring and spending. (PWC notes that, not surprisingly, that very caution is likely to prolong the economic slowdown.) The skittish Oesterle, for instance, has created cost-cutting contingency plans, even putting his $2-million advertising budget into the mix of items that could be trimmed. And this year -- his seventh in business and his best yet -- is the first in which Angie's List won't open any new markets. (The company operates in 13 cities, and its business is local to each metropolitan area.) "We just do not want to get hung out with extra burn in case something were to go wrong," Oesterle says. "Maybe we're being too afraid of our own shadow here, but it just seems like things are going well, so let's not muck it up."

Other survey respondents sound a similarly conservative note. Some say they'll operate with leaner staffs than in years past. Others are postponing capital expenses or cutting overhead. Jeff Stephenson, CEO of Bennett & Curran Inc., a $2.5-million wholesale distributor of books in Englewood, Colo., says, "I don't want anything purchased by anyone in our company unless it has to do with driving our business forward." Stephenson, whose sales were flat this year, has shrunk spending on everything from magazine subscriptions to Internet costs to shipping. He has even reduced his own compensation and that of his two management- level employees by 15%.

Look more deeply at the survey responses and other data, and you can see some of what's behind the worries: Although 7 out of 10 CEOs in the most recent survey forecasted revenue growth this year, that's slightly fewer than the previous quarterly survey showed. If a true recovery had taken hold, that number would have increased.

The macroeconomic signs look threatening. After indications of an impending recovery midyear, the economy "hit an air pocket" in September, says Mark Zandi, chief economist at the research company Economy.com Inc. That didn't go unnoticed by Inc 500 CEOs: 61% feel that we're still in a recession, and 78% fear a looming slowdown in consumer spending. What's more, three-quarters of those who feel we're in a recession call it moderate to severe -- up from about half in our last survey.

Moreover, the microeconomic signs seem portentous. Insurance costs are rising. (See " Cost Cutting II" section.) It's hard to find new customers and new capital. Smart CEOs keep an eye on their own markets -- and many aren't liking what they see. Oesterle, for instance, watches the sales at Lowe's and Wal-Mart stores; when their sales are up, so are his, and both had been doing exceptionally well for the past two years. But "watching Wal-Mart miss their sales expectations this quarter makes me uneasy," he says. He also tracks the economy by following the activity of 100,000 service providers -- plumbers, carpenters, and so forth -- who advertise with his company. "All of a sudden in June these independent guys who have had 13-week backlogs for 10 years said, 'We're looking for work," says Oesterle, revealing yet another sign of an impending consumer-spending downturn.

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