Innovation
Many high growth firms either fail or fade - Part 1
By Michael Hennigan, Finfacts founder and editor
Jul 23, 2014 - 7:35 AM

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UK employment and high growth firms

Startups and young companies are responsible for the majority of net annual job creation in the US and other data shows that while high-growth firms in advanced economies make up a small percentage of total firms, they generate up to half of all new jobs and are able to maintain growth during a recession. Because a small number of firms create a huge number of jobs, it is important that policymakers understand more about them. It is also important to note that many of the high growth firms either fail or fade - -  what is key is that new ones replace them.

The Organisation for Economic Co-operation and Development (OECD) defines high growth firms as having more than 10 employees at the outset and having at least 50% growth in sales over 3 years, with at least 22% growth in employment.

The OECD says growth firms are found in all industries, not only high tech while and the growth cycle is not always continuous: some declining firms reinvent themselves, some high growth firms go through slower periods of growth.

Anders Hoffmann, a Danish researcher, in a paper [pdf] showed that Europe looks at least as entrepreneurial as the United States if startups are used as the measure of entrepreneurship. However, Hoffman argued that Europe’s biggest challenge is developing more high-growth firms - - UK and Ireland had the lead in high growth firms but Irish data include the significant foreign-owned sector.

Dane Stangler, director of research at the Kauffman Foundation, a leading US entrepreneurship think-tank, has reported [pdf] that just 1% of companies - - those growing the fastest - - generate roughly 40% of new jobs in any given year.

The average company in the US adds two to three jobs per year. The top 1% of firms measured by growth rates add on average 88 jobs per year. A large majority of these companies end up with between 20 and 249 employees, and a fair percentage grow upwards of 2,500 employees.

In the UK, according to Nesta, an innovation think-tank, between 2002 and 2008 just over 50% of all new jobs came from just 6% of firms employing 10 or more people at the start of the period - - see 2014 academic paper.

In the US and UK, high growth firms are not typically in the high tech sector.

Derek Lidow, a professor of entrepreneurship at Princeton University, who was the founder of iSuppli, a business that provides important data to companies to assist them in making informed decisions, which he sold to IHS for $100m in 2010, is the author of a book, 'Startup Leadership' that was published last March [excerpt -- pdf]. He warns that there are not only startup failures but many once acclaimed high growth companies also fail or fade.

Lidow cites statistics from the Kauffman Foundation about Inc. magazine's annual list of the Inc. 5000 fastest growing private companies that lessen it as a full measure of success. "According to the latest Kauffman Foundation analysis, about 63% of Inc. 5000 companies are still in business 5 or more years after making it onto the list. About half of the companies still in business have shrunk from the size they were when they made in onto the list.  Thirty-seven per cent of the Inc. 5000 were sold or went out of business.  Many of the 32% of Inc. 500 entrepreneurs that sold their companies go on to try again, becoming serial entrepreneurs.  This implies that most of the entrepreneurs that sold their companies were not completely satisfied with the outcome.

Undoubtedly a fraction of these Inc. 5000 serial entrepreneurs did well in the sale of their companies yet still wanted to launch another company because they find founding companies exciting.  But the point is that just because an entrepreneur has a company that grows fast doesn't mean that the firm will continue to have even non-negative growth, or, that the entrepreneur will be satisfied with his outcome."

Inc. reported that overall from an analysis of the Inc. 500 lists in 2000-2006, 40 to 50% of companies generated less revenue in 2010 than in the year they made the list, according to Kauffman.

By 2010, just 34 Inc. 500 companies had gone public and remained in business.

Last year Fortune magazine began a piece: "Here’s a quick quiz: No matter whose brand name is on the smartphone or digital camera you’re using now, do you know who invented almost all of the technology in it? This outfit’s scientists came up with digital cameras way back in 1975, and then went on to produce more than 1,000 digital innovations, including the first megapixel sensor of more than 1.4m pixels, the first color filter tray, and the first method of image compression up to JPEG standards. What company was it?"

“Organizations are in greatest danger of failing when they’re at the peak of their success,” Gerard J. Tellis, who teaches management at the University of Southern California’s Marshall School of Business and directs the Center for Global Innovation there. “Market dominance can be a curse that blinds companies to the next big innovation on the horizon.”

Fortune said his new book, 'Unrelenting Innovation,' looks at exactly how that happens. Tellis and his colleagues studied 770 companies across 15 countries, including many — like Hewlett-Packard , Sony, and General Motors — whose struggles have made headlines. The researchers found that success over the long haul isn’t a matter of size, number of patents, or the dollar amount of R&D investments. Instead, staying on top requires a “culture of innovation,” including an appetite for risk, an eagerness to reward fresh thinking, and a focus on the future, not the past.

The answer to the Fortune quiz was Kodak.

Companies in the forthcoming Inc.500|5000 2014 are ranked according to the percentage growth of their annual revenue over a three-year period. To assess this, we ask for your 2010 and 2013 revenues. This gives us a three-year growth period, using 2010 as a base year for growth.

  • Have generated revenue by March 31, 2010;
  • Have generated at least $100,000 in revenue in 2010;
  • Have generated at least $2m in revenue in 2013;
  • Be privately held, for profit; based in the US, and independent (not a subsidiary or division of another company).

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