Research on 3,000 tech startups since 1980: Grow fast or die slow
By Michael Hennigan, Finfacts founder and editor
Nov 20, 2014 - 7:52 AM

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Only a small fraction of companies achieve the highest rates of growth.

Research on about 3,000 tech (software + online) global startups in 1980-2012 shows that companies either grow fast or die slow. Only 3% of companies achieved revenues of $1bn or more and about 85% of the fastest growers were unable to maintain the pace.

McKinsey the US consultancy, says in its research on the almost 3,000 companies, that it also surveyed executives representing more than 70 companies and developed detailed case studies of companies that grew quickly and others whose growth stalled. The research produced three main findings.

Growth trumps all. McKinsey says three pieces of evidence attest to the paramount importance of growth. First, growth yields greater returns. High-growth companies offer a return to shareholders five times greater than medium-growth companies. Second, growth predicts long-term success. “Supergrowers”—companies whose growth was greater than 60% when they reached $100m in revenues—were eight times more likely to reach $1bn in revenues than those growing less than 20%. Additionally, growth matters more than margin or cost structure. Increases in revenue growth rates drive twice as much market-capitalization gain as margin improvements for companies with less than $4bn in revenues. "Further, we observed no correlation between cost structure and growth rates."

Sustaining growth is really hard. Two facts emerged from the research. Companies have only a small probability of making it big. Just 28% of the software and Internet-services companies in our database reached $100m in revenue, and 3% reached $1bn. "Of the approximately 3,000 companies we analyzed, only 17 achieved $4bn in revenue as independent companies. Moreover, success is fleeting. Approximately 85% of supergrowers were unable to maintain their growth rates, and once lost, less than a quarter were able to recapture them. Those companies that did regain their historical growth rate had market capitalizations 53% lower than those that maintained supergrowth throughout."

There is a recipe for sustained growth. McKinsey says while every company’s circumstances are unique, the research found four principles that are essential to sustaining growth and from which every company can benefit. First, growth happens in phases: from start-up to billion-dollar giant, growth stories typically unfold as a prelude, act one, and act two. In act one, there are five critical enablers of growth: market, monetization model, rapid adoption, stealth, and incentives. A third principle is that the drivers for growth in act two are different. Successful strategies in act two include expanding the act-one offer to new geographies or channels, extending the act-one success to a new product market, or transforming the act-one offer into a platform. Finally, successful companies master the transition from one act to the next. Pitfalls include transitioning at the wrong time and selecting the wrong strategy for the next act.

McKinsey insight report

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