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Inc. 500

Half-a-thousand reminders that business ingenuity and economic leadership still start with entrepreneurs.
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The size and condition of the rings testify as to whether a particular year was wet or dry or marked by frequent fires.

Someone examining this year's Inc. 500 for clues to the economic climate in 2008 would find less elucidation. Our annual ranking measures revenue growth from 2004 to 2007, a period before people automatically responded to the prompts energy, credit, and housing with one answer: crisis. Executive teams toasting their inclusion on this list will be celebrating past success. Given rising costs, tightness of capital, and the widespread slowdown in spending by consumers and businesses (nostalgically referred to as "customers"), are the companies on the list still thriving?

In most cases, probably yes. And that's not just because so many entrepreneurs have "Failure Is Not an Option" tattooed across the fingers of both hands.

Like most plagues, a bad economy takes its worst toll on the very young (start-ups) and the old and unhealthy (large corporations that over years or decades have grown inefficient and unwieldy). About 70 percent of the companies on this year's Inc. 500 launched from 2000 to 2003, which makes them sturdy youths. These companies "are more likely to be on the efficient frontier and to have hit the sweet spot in terms of high-demand growth," says Robert Litan, vice president of research and policy at the Kauffman Foundation, which studies and promotes entrepreneurship. "That's not to say they are not affected. But they will be relatively better off than most firms."

There are advantages to having started in years of technology-bust and terrorist-attack turmoil. Many Inc. 500 companies "arose in response to major changes in the economy, and now the economy is changing again," says William Dunkelberg, chief economist at the National Federation of Independent Business. Such businesses "are flexible and innovative, and that's why they do so well," says Dunkelberg. "Entrepreneurs are the R&D for the economy."

The R&D characterization is spot on, as a quick troll through the list makes evident. In industry after industry, companies are experimenting with new technologies and business models, from Alphaport, which supports the commercial exploration of space, to Zipcar, the pioneering car-sharing service. Nantero's carbon nanotubes are being incorporated into next-generation semiconductors, and Bridgepoint Education is reducing the cost of college by refashioning failing liberal arts schools into hybrid online and campus-based programs. Meanwhile, Edible Arrangements has rewired our gift-giving impulses by posing the question, Why say it with flowers when you can say it with kiwi?

Of course, many businesses still thrive by doing what will always need doing. DVS Group cleans airports, shopping malls, and parking lots. DesignerPlumbingOutlet.com sells faucets and sinks. The list also reflects the tension between old and new that is riving certain industries. The energy category, which is more than two times larger than in years past, is almost evenly split between companies like Stallion Oilfield Services and Latshaw Drilling & Exploration on the one hand and Borrego Solar Systems and Blue Sun Biodiesel on the other. The world's war over energy is being waged, by proxy, on the Inc. 500.

These Inc. 500 companies have plenty of reasons to be optimistic, including the fact that so many of them do business overseas, where markets are becoming more accessible and the customer's nondollar goes a long way. One factor behind the cross-border venturing is the proliferation of immigrant entrepreneurs, particularly in states like California, says Steve King, a research affiliate at the Institute for the Future, which is collaborating with software maker Intuit on a study of small business. Immigrant entrepreneurs "know how to make things happen in their home countries, so when they reach a certain mass, they spur trade increases between those countries and the U.S.," says King.

At the same time, because a majority of the 500 are service companies, foreign competition poses less of a threat. "For companies like these, competition isn't necessarily coming here," says Dunkelberg. "We are becoming the competition over there."

There's another reason to be cheerful, particularly for the significant percentage of this year's company leaders who indicated in a survey that they dream of finding a generous buyer. Turns out a generous buyer may be dreaming of them, too. "The big guys are actively prowling," says King. "Five or 10 years ago, big companies would learn about smaller, fast-growth firms in their industries anecdotally. Now, they have teams of people whose job it is to identify promising companies early." (Early, in this case, means from the R&D phase to several hundred million in revenue.) "What really hit me was when Coca-Cola (NASDAQ:COKE) laid out its acquisition criteria," says King. "Big companies have been very hesitant to go public with information like that in the past."

But perhaps the greatest cause for celebration is not the 500's likelihood of surviving a down economy. Rather, it is the contribution these companies and other fast growers make to the economy, whatever its condition. Recently, the Small Business Administration Office of Advocacy released an excellent report revisiting the seminal research by David Birch on the importance of gazelles. Gazelles, of course, are fast-growing companies that, in Birch's estimation, contribute disproportionately to innovation and job growth. The new study looks at companies at which sales and employment have at least doubled over four years -- a total of more than 376,000 companies from 2002 to 2006. (The report covers three four-year spans from 1994 to 2006.) The authors found that such businesses "account for almost all employment and revenue growth in the economy." Furthermore, "in the four years after a [gazelle] is classified as such, only about 3 percent die; most continue and exhibit at least some growth."

To that, the companies of the Inc. 500 should surely raise their glasses, which -- true to form -- they will see as half full.

Last updated: Sep 1, 2008

LEIGH BUCHANAN is an editor-at-large for Inc. magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture.
@LeighEBuchanan




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