Growth is often seen as a double-edged sword. Yet research from the Kauffman Center for Entrepreneurial Leadership shows that growth pays off in some surprising ways. What’s more, it’s actually a better indicator of stability than size.
In its 1999 Survey of Innovative Practices, Kauffman analyzed 672 leaders of entrepreneurial achievement in various industries and found that growth-oriented companies distinguished themselves in four areas:
- Market share. Gains in relative market share were nearly five times greater for high-growth firms vs. low-growth ones. What’s more, these players were not just growing because their industry was — they were literally stealing market share from other companies, which made them stronger from a competitive perspective.
- Efficiency. Rather than achieving gains by adding more employees, top-growth firms used their resources better: Sales per employee over a two-year period were nearly 20 times higher than low-growth firms. Interestingly, low-growth companies actually lost ground over the same period: It cost them more resources to maintain the same level of sales.
- Profits. The fastest-growing firms achieved levels of profitability that were 25% higher than low-growth cohorts. Growth-oriented firms weren’t merely channeling additional revenues back to facilities or marketing, they were actually generating more real income. Increased profits made the companies better able to withstand competition and downturns in the economy.
- Net worth. Net worth for fast trackers grew three times faster than for low-growth firms, which translates into greater valuations and greater levels of personal wealth for entrepreneurs.
Though researchers expected to see greater market share and productivity from top-growth firms, the high levels of profitability and net worth came as a surprise. “To have all four performance measures line up so succinctly was compelling,” says S. Michael Camp, director of research at the Kauffman Center for Entrepreneurial Leadership.
|How Equity Compensation Plans Affect Growth
Source: Kauffman Center for Entrepreneurial Leadership
When it comes to business practices of high-growth firms, the study also debunked misperceptions:
- High sales growth is not necessarily associated with an emphasis on international sales.Despite all the hype about “going global,” entrepreneurs can still find ample opportunities within U.S. boundaries. International sales only accounted for 8% of total sales for all firms in the Kauffman study, and companies with higher levels of international sales were no more likely to demonstrate high growth that those with little or no international sales.
- High sales growth is not a matter of sticking to your knitting.Rather than focusing sales and marketing efforts on existing products and existing markets, fast-track firms were introducing innovative ideas to new markets.
- High sales growth is not the result of providing cash or noncash incentives to the CEO or key managers.High sales growth appears to be a function of providing incentive pay, or performance-related pay, for all employees. Equity compensation is especially critical to extend to nonmanagerial employees if a firm wants to grow.In fact, it’s better for a company to offer no equity compensation at all than to only extend it to CEOs. What’s more, data suggested that growth related to equity compensation is highest for firms that share equity with everyone but their CEO.
Currently, in private firms only about 3% of all equity is shared with employees. Private firms that want to grow faster will have to open the equity purse to attract and motivate employees, Camp adds.
Source: The Survey of Innovative Practices used a sales growth index that controlled for the size of firms to prevent bias in results. Firms included were members of the Entrepreneur of the Year Institute, and though all 672 firms were entrepreneurial leaders, not all would be considered high growth. Firms also ranged in size: Though more than 20% had less than $5 million in 1997 sales, the group averaged $89 million in annual sales.
Writer: TJ Becker
This article was originally published in the November 2000 issue of The Edward Lowe Report.