Contrary to what we usually hear, about 80% of small businesses do survive the first year, according to the Small Business Administration (SBA) Office of Advocacy’s 2018 Frequently Asked Questions. But only 50% make it through the first 5 years.
Of course, these stats don’t tell the whole story about those early growth years. And I was curious to find out what, if any, blanks I could fill in that would be valuable to companies in the midst of scaling. So I began an investigation, and have some early insights to share after our first dive into the data.
Observations from the US’s fastest growing companies: Growth Stars, Slow Growers, and Dropouts
To get the ball rolling, I turned to the Inc. 5000 list. As you might know, each year Inc. compiles a list of the fastest-growing companies in the US. To be accepted to the list in any one year, e.g., 2019, they look at a company’s revenue growth rate over the prior 3 years: 2016, ’17 and ’18.
We chose companies that were on the list in 2016 and in 2018, and grouped them into 3 categories: Growth Stars, those who were on both the 2016 and 2018 lists and had increased their ranking. Really hard to do … 5 years of increasing growth momentum. Wow! Slow Growers, those on the list both years but their ranking dropped … still really impressive to be among the 5000 fastest-growing companies in the US. And the third category, Dropouts, companies on the 2016 list but not on the 2018 list.
First interesting observation: Of the 5000 fastest-growing companies in 2016, only 30% remained on the list just two years later. Why? Didn’t want to reapply? Were acquired? Dropped into the growth company abyss? Prior academic research would suggest a fair number fell into the abyss scenario. While we’re going to take a deeper look into this, one factor appears to be the competitive intensity of a company’s industry sector.
We measured competitive intensity by the percent of new entrants that appeared on the 2018 list by industry sector. We labeled this the New Entrant Index. Sectors with high New Entrant Index scores reflect a number of things, but it certainly indicates a crowded and competitive field, in other words, a higher level of competitive intensity. We wanted to check if there were a correlation between the New Entrants Index and the percentage of Dropouts. You can see the results below:
The implications? When you’re a growth company it’s hard enough to maintain your growth momentum. When you’re in a highly competitive industry with loads of new entrants, the margin for error and missteps increases.
We decided to do a little extra creative digging. We picked a random sample of 50 companies from the Growth Star and Dropout lists and looked at their Glassdoor scores.
Second interesting observation: The Growth Star companies had an average score of 3.9. The Dropouts had an average score of 3.2 — almost 20% worse. Causal? Hard to claim. Correlated? It’s a small sample but the answer seems to be “yes.” And this directional insight is supported by related academic research on the importance of talent and talent retention. What seems clear is that among the many things growth companies need is the talent to scale.
More answers, more questions … that’s the beauty of research, and we’re looking forward to digging deeper into the issue. My team includes two terrific data science interns from UC Berkeley and they’re continuing to take these stats apart.
So stay tuned ...
I would love to hear any of your insights on the ability of new businesses to scale which might explain these findings. Leave your comments here, or leave your message on my contact page so we can discuss them.
Andrew Green shares perspectives and hard-won lessons on mastering the business growth path