Like Children, Companies Go Through Different Phases Of Growth

06 Dec 2011

Over the years, we have observed that companies go through three distinct growth phases. It is our view that a company becomes a “real” company when it reaches about $10 million in revenue. Until then, it is still defining who it is, who the right prospects are, its true value proposition and its place in the market.

The first phase of growth is to get from $10 million to $100 million. Of course, these numbers are not set in stone, but should be thought as some indicative boundaries. We call this phase “Accidental Growth”, because companies get there mainly by accident, chance or some strange chaotic alchemy that is hard to predict or reproduce. For some companies, it takes a long time for others, it’s quick. Compaq was probably the fastest company in history to cross the $100M mark. It was founded in February of 1982 by three Texas Instrument managers. The following year, its employee base grew from 100 to 600 and the company generated $111.2M that year on its way to become the largest personal computer company in the world. By contrast, it took 10 years for Microsoft to cross the $100 M revenue mark in 1985.

The second phase of growth is what we define as “Deliberate Growth.” This is when the Board and Management set their eyes on the $1B mark. There is a considerate and deliberate effort to reach that goal. Various paths are examined; growth strategies and tactics are crafted and tested. Recurring revenue, business repeatability and churn become the center of attention. A good example is Red Hat that crossed the $100M mark in 2004 and that will be over a billion this coming year. During these 8 years, the company acquired Netscape and JBoss, aggressively expanded in China and South America, continually improved its product line including JBoss and Enterprise Linux, launched into virtualization and Cloud and released desktop products.

The last phase is what we describe as “Calculated Growth.” This typically applies to large businesses over $1B and in mature industries. Companies like Verizon, United Airlines or Toyota tend to have a fairly well understood formula for growth; be it by adding a certain number of subscribers, or opening up routes for the airline industry or adding a number of trucks and cars through its dealership network. For example, Starbucks grows primarily by adding new stores and secondary by increasing the average revenue per store. In FY-09, it had 9,800 stores in the world. It added 900 stores in FY-10 and another 1,000 stores in FY-11. Revenue per store averages $640,000. Total revenue grew from $9.8B in FY-09 to $11.7B in FY-11.

Knowing where the company is in its growth lifecycle is important and like parenting with children, different approaches need to be taken depending on the growth phase. If you are in the accidental growth phase, try various approaches and quickly abandon the ones that don’t work and focus on the ones that do work. If you are in the Deliberate Growth phase, understand the key components that will drive growth: adding new customers, selling more to existing customers, expand in geography, acquiring other companies, etc.

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