What are the Growth Patterns for Startups?

Most founders we talk to have a little glaze in their eyes as they share their vision. You can tell that in their mind’s eye, they see their startup as a Unicorn[1]. At a minimum, they can see revenues of $100 million. And that’s great – they should have a lofty and bold vision of what they can accomplish. Without that vision, they are guaranteed not to get there. 

We wondered, just how likely is this kind of an outcome? As academics, we know this is a researchable topic. In 2013, we were given access to a proprietary database, built from Dun & Bradstreet data, of more than 5 million for-profit firms with fewer than 500 employees. They were all small to medium-sized firms. The database included year founded, governance structure, number of employees from 2000 to 2005 and sales revenue for the same time period. We were surprised at some of the details of these firms:

  • 2 million of them were single-person firms (we eliminated them from additional analysis)

  • Mean Number of Employees = 7.9 employees

  • Average Sales Revenue = $937,339or approximately $118,65 0 per employee

  • Average Company Age = 17.8 years

  • Average Annual Employee Growth = 10.7% (from 2000 to 2005)

  • Average Annual Sales Growth = 13.9% (from 2000 to 2005)

We used some statistical analysis to look for patterns of age, employee growth and sales growth. And remember, these are just among the survivors! Research consistently shows that 70% plus of ventures fail within 5 to 7 years. But within these survivors, we discovered there are six patterns (see the graph below): 

1.     High Achievers– This is the smallest group at 2%. They are the largest with an average 138 employees and $19 million in sales. They are growing well. They seem to have proven out a business model over their average 25 years. Of course as companies get larger, it is harder to sustain high growth rates.

2.     Strong Potential– At 23% of firms they are growing the fastest, but they are still fairly small with an average 10 employees and $1.5 million in sales. Think of them as adolescents, with an average of 16 years. 

3.    Promising– They are the largest group at 30% of firms. They are younger (13 years) and smaller (7 employees and <$1 million). Sales are starting to grow, but the number of employees is flat.

4.    Transitional– This is another large group at 26%. They have inconsistent and negative patterns of growth – sales are decreasing but employees are increasing. This is not sustainable. They either need to figure out what’s going on or they will become the next group.

5.    Downward Spiral– Luckily, they are one of the smaller groups at 10%. They are in trouble as sales are declining and employees are decreasing. They are still small (average 6 employees and $800K in sales) and probably just haven’t worked out a sustainable business model. They need to reverse course or they are in jeopardy.

6.     Simply Stable– The last group is the oldest, averaging 50 years in age. With an average 13 employees and $1.5 million in sales, they are in a steady state. They aren’t growing, but seem happy to just maintain the status quo. 

Types of Small and Medium Firms.jpg

So, the news is generally positive as 55% of these firms show the pattern investors are looking for – growing sales and employees. Only 10% are in jeopardy. And, another 26% are still sorting their business model out. But, notice that it took the High Achievers, at an average age of 25 years, some time to get the business finely-honed for growth. There are very few “overnight success stories,” even in an 8 to 10 year period. 

So, where are the Unicorns hiding? If they exist, they are in the High Achievers. Look for Gazelles (firms growing >20% annually for 5 years) in the Strong Potential group. And be patient – the data is clear, it takes time to get all parts of the business tuned. Every choice has the potential to create a hidden debt. Over time, these debts get mitigated to propel future success – or they can sink you. Find out more about these hidden debts when the The Titanic Effect comes out in 2019. 

 [1]In case you don’t know what a Unicorn is, it’s a company (usually a startup) with a valuation over $1 billion. As of 2017, there were more than 220 of these firms in the world. Check out the details at CB Insights  https://www.cbinsights.com/research/unicorn-startup-market-map/or PitchBook https://www.recode.net/2017/12/20/16761708/2017-startups-funding-billion-valuation-company