Your company is on a high-growth list! It may not be there next year

“The finding is consistent across continents and types of sectors, including technology,” Foster says. “For most companies that appear, it’s one-and-done.”

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What Goes Up…

The researchers started with seven top 500 and top 100 lists of high-growth companies compiled by Inc., Deloitte, and other sources. After analyzing that data, they built a database of more than 100,000 privately held companies from 11 countries. By observing the firms’ growth rates and the factors behind them, the researchers could understand the dynamics underlying the companies’ appearance on — and disappearance from — the growth rankings.

Self-reporting bias is one factor at play here. “We believe part of what’s going on,” Foster says, “is that companies that are on the list one year are likely not to submit their information the next if they know they’re not likely to make it back on. They don’t want people saying, ‘Why aren’t you on the list anymore?’ because it means they’re not growing as fast, and that can be a negative signal to investors or joint venture partners.”

Even the 30% repeat listing rate may be an overestimate because the lists are based on a comparison of current revenue with revenue from three to four years ago. “If you were to take a metric based on one-year growth rate, less than 5% of the companies would stay on a list two years in a row,” Foster says. “So choosing a specific metric makes a big difference as to whether a company makes the list and sustains appearances there.”

“There’s a lot of randomness in those growth rates from year to year, and it would look ridiculous to have a list that only 5% of companies survive each year,” he continues. His preference would be a metric based on an average of growth rates over a period of time or changes in headcount. While these measures may provide a more accurate picture of year-by-year growth, they may clash with the list-makers’ incentives. “I called five or six magazines and firms that do these lists and they said they want a certain amount of churn because they and their list sponsors use the lists for marketing purposes by targeting the companies on them as customers,” Foster says.

Why do so few companies survive on growth lists? One factor is what Foster calls “economic gravity” — what goes up must come down, in a form of regression to the mean. “It might be that you’re a successful early-stage company and another company with larger resources comes along and says, ‘Wow, that’s a brilliant idea. We’re going to go into that space.’ Or the product space just becomes more competitive overall.”

Similarly, seemingly high growth rates may result from the timing of revenue. Say a company starts with a very low revenue figure in its first year and then lands a large customer just after the start of its second year. “The denominator will be really low, so the growth rate will be really high. But it’s just an artifact of when the revenue came in,” Foster says. “The company shouldn’t mistake short-run revenue growth for sustained market traction.”

Don’t Waste Your Shot

Entrepreneurs who aspire to make these lists — and stay on them — should consider several takeaways from Foster’s work. “It’s about architecting for growth rather than just cheering one or two big years of growth,” he says.

Scalability matters for sustainable growth. “The classic example is Zoom,” Foster says. “Eric Yuan, the founder, initially proposed the idea to Cisco when he worked there, but they said, ‘No, we have Webex.’ He told them Zoom would be more scalable because it was built in the cloud. Then the pandemic hit and Zoom grew fastest because it was built for scale.”

Overreliance on a small number of large customers can hinder growth as well. “Work as quickly as possible to build a large customer base so you’re not exposed to losing any one account,” Foster advises.

High customer concentration is part of what Foster calls “single-risk exposures.” This includes factors like losing key technology experts. “The idea is to build division-level expertise versus individual expertise,” Foster says. Another risk is dependence on a partner business for a specific geography or customer base: “If that partner decides not to work with you anymore” it means large revenue lost overnight — so be wary of staking too much on such single partnerships.

His parting advice for company leaders is not to get caught up in the exhilaration of getting a spot on a growth list. “Don’t fall prey to hubris, because you’re likely to be on the list just one or two times,” Foster says. “By chasing one-time increases in revenue rather than focusing on sustainable growth, you could end up not making the list the next year and go from a peacock to a feather-duster.” He recalls being asked to speak at a conference dinner where a new growth list would be announced. “I told the organizer that I might say to attendees, ‘Enjoy yourselves, because 70% of you won’t be invited back next year!’”