Rajeev Agarwal is an Entrepreneurs' Organization (EO) member in Seattle and founder and CEO of MAQ Software, a data management and analytics software developer that has made the Inc. 5000 list of America's fastest-growing privately owned companies nine out of 11 times since Inc. began publishing the list in 2007?a feat only 1 percent of listed companies has achieved. Rajeev shared his thoughts sparked by analyzing the 11 Inc. 5000 lists and the companies that are named to them:
It's that time of year: Applications for the 2018 Inc. 5000 list of the fastest-growing private companies in America are due on 30 April 2018.
As a student of business, I am always seeking insights from the Inc. 5000 rankings: Where are the most successful companies located? Which industries are growing the fastest? Which companies provide services similar to ours in other markets?
To find answers, I analyzed the 11 Inc. 5000 lists published since 2007. Only 23,673 companies occupied 55,000 potential spots. Despite all the chaos in the world, some companies were repeatedly named to the Inc. list. I analyzed these companies to understand why some thrive while others disappear.
In my analysis, four insights emerged that were not immediately obvious from reading the individual lists:
1. Growing a company takes time.
Most companies on the Inc. 5000 are not startups. In fact, 80 percent of companies (18,863) were at least seven years old when they first made the list. The median revenue of companies on first appearance was under US$6.9 million. By Inc. 5000 standards, "overnight success" requires about seven years of hard work.
Figure 1. Age of companies when they first appeared on the Inc. 5000 list.
Why are most companies seven years or older when they first appear? As most entrepreneurs know, revenue growth requires more than a great idea: It takes skilled team members, customer relationships, operational excellence and cash flow. Seven years is not a long time for growth elements to fall in place.
2. Economic booms and recessions directly affect business growth.
A review of growth rates for the fastest-growing companies on the Inc. 5000 shows that, on average, a three-year growth of 30 to 40 percent is needed to qualify for the list. But this isn't true every year. A clear economic lesson from the list is how severely the recession of 2008 through 2011 affected company growth. In 2009 (based on revenue figures from 2008), a significant number of companies qualified for the Inc. 5000 even though their revenue shrank by 33 percent in the previous three years.
Figure 2. Minimum and maximum company growth rates each year.
In 2010 and 2011--the aftermath of the recession--companies only needed one to two percent growth to appear on the list.
3. Industry and location create luck.
Companies on the Inc. 5000 are categorized into 33 industries. IT Services is the largest industry on the list with 11 percent (2,642) of total companies. This is not surprising, given that yearly global IT spending is US$3.5 trillion. The second-largest category, Advertising and Marketing, benefited from a boom in online advertising. Some industries offer more opportunities than others.
Figure 3. Breakdown of industries on the Inc. 5000.
Some locations also offer better opportunities than others. The highly populous states of California and Texas produced the highest number of companies on the list (3,389 and 1,848, respectively). The data supports the idea that it's easier to grow a business in a state with lots of customers.
4. Sustained growth is the key to long-term success.
When it comes to headlines, startups with spectacular growth get the glory. But a lesson from Inc. 5000 companies is that business success is a marathon, not a sprint.
In 2011, five-year-old ideeli (currently named "Ideel"), a fashion retailer known for flash sales, topped the Inc. 5000 list. The company reported a three-year revenue growth rate of 40,882 percent; its 2010 revenue was US$77.7 million. In 2014, Groupon purchased the company for US$43 million. According to reports, although ideeli's 2013 revenue was US$115 million, the operating loss was US$30 million. ideeli's investors, who had sunk US$107 million into the company, suffered substantial losses.
Figure 4. Average growth of companies each year a company makes the list.
In 2013 and 2014, Fuhu, a manufacturer of tablet computers for children, earned the top spot on the list. The company was founded in 2008. Fuhu's revenue growth rate during the three years prior to 2013 was an astounding 158,957 percent. But the rankings didn't show that Fuhu was in debt by an estimated US$60 to US$110 million, according to an Inc. article detailing the company's history. In 2015, strapped for cash, the failed company was sold to Mattel for US$21.5 million.
In contrast, among all the glamour, only three companies?Total Quality Logistics, G&A Partners and Skoda Minotti?appeared on Inc. lists 13 times (including multiple appearances on the Inc. 500). Sustained growth companies such as these rarely achieve top ten spots on Inc. lists. Many sustained growth companies occupy the bottom 40 percent of the list year after year without much glory. For many of these companies, the law of large numbers comes into play: Their base revenue is high, so percentage sales growth is not as high.
My takeaways from this longitudinal study of the most productive and successful Inc. 5000 businesses echo the adages pounded into first-year business students:
- Revenue growth takes time. It may take 1,000 days or more to earn a profit.
- Be prepared for economic conditions that are out of your control.
- Despite the economy, business opportunities are always out there.
- Go where the customers are.
- Cash flow is king.
These adages are classic lessons for a reason. If we, as entrepreneurs, forget to constantly remind ourselves of them--especially in the early days--we may set ourselves up for failure.
It's all too easy to succumb to the pressure of our ambitions, investor demands and friends' or families' expectations. It's easy to get caught up in the race to win at any cost. It's easy to forget that a great idea is useless without proper effort and implementation. But the Inc. 5000 list provides thousands of concrete examples of what works in the long term and what does not. Sometimes we need a reminder to be patient and remember the fundamentals.
For additional insights, complete Inc. 5000 analytics are available at https://maqsoftware.com/analysis/inc5000