The Most Important Number…

22 Sep 2011

Suppose you look at a company that you may be interested in joining or investing in. Note that you do not know ANYTHING about the company. In fact, you don’t even know what stage they are in or even what they do! It could be a small startup or a very large multi-national. They could be selling sausages over the Internet or wood-made tennis shoes in Starbucks stores in Europe!

You are meeting with the CEO for the first time and you are allowed to ask him or her just ONE number. It could be ANY number about the business, like for example, number of Russian employees, number of patents filed, any financial or related number, etc. Anything.

Here is the question: what one number would you ask the CEO?

We conducted a brief poll last week and received over 50 replies with a wide variety of responses such as, for example “How long do you want to stay at this company?” or “What is your “profit per employee?” or “Customer NPS (net promoter score) versus competitor peer group?” Interesting answers.

Of course, there is not a single number on which you should decide to join a company or make an investment. Having said that, we believe that there is a number that is the most important number in assessing a company: it is its annual year-over-year revenue growth rate. Interestingly, 9% of respondents from our informal poll gave the answer we were looking for.

Why do we think our answer is the right one?

High revenue growth makes a company relevant. It opens up financing options. Competitors take notice. If you are the fastest growing company in your sector, you are taking market share from others, you attract talent, you can raise money and you are increasing exit value for your shareholders. It’s all about momentum. Does a company growing at 3% a year excite you? If a company consistently grows at 19% quarter-over-quarter, it doubles its revenue year-over-year. Now, that’s interesting! You don’t need to ask if they have a good management team or a good product, the number speaks for itself. In fact, you don’t need to know anything about them. There is however, an interesting follow-up question that you should be asking. Figure out what the answer is on our next blog…

Thoughts? Perspectives? We look forward to hearing from you!

Up and Right!

6 Comments for this entry

  • Ken Ross says:

    I agree with your conclusions on revenue with one caveat – how do you measure revenue? I point out the recent dispute between Groupon and the SEC on revenue definition which resulted in a 50% reduction in their reported revenue.

  • Chalan Aras says:

    Phillippe

    High growth is the best proxity for many controllable and market factors! On the controllable side, having the best product/service offer for the customer, good execution, team synergy, clever use of the channel, are some of the factors that contribute to the growth. Clearly, having a market that is large, and if lucky, growing with multiple external factors is certainly nice to have!

    The mobility market overall is a good case in point. Steve Jobs singlehandedly rejuvinated the market with first the iPhone and then iPad. The Mobile operators, Wi-Fi suppliers all are benefitting from this. However, companies with poor execution, the prime example being Motorola, have clearly fallen behid on Mobility and Wi-Fi.

  • Eric Hautemont says:

    I don’t think this answer is “the right one”, at least not nearly as often as you seem to imply it should be ;-).
    I’m afraid it might suffer from Silicon Valley group-think – Focusing on YoY revenue growth rate to the exclusion of anything else (“it’s all about momentum”; “you don’t need to ask if they have a good management team”, etc.) can only work in the very short term (and even then…) and is often a surefire recipe for disaster.
    On the other hand, a company that grows at 5% for 100 years can turn out to be super sexy and very rewarding. It all depends on what you want in life…

    • Philippe says:

      You are making some good points in your comments. Thank you for taking the time to weigh in!

      We continue to believe that top-line revenue growth rate is the most important variable to understand if you could only ask for one number only about a business to have a sense of how they are doing. I certainly agree that it is not the only one. In fact, the growth rate has to be (i) one of the best in the industry segment they operate in and of course higher that the market growth (otherwise the company loses market share) and (ii) sustainable. It is hard to mater and be relevant and interesting with flat or decreasing revenues. If a company loses a lot of money to fuel its growth (think Groupon) then their business is not sustainable and the value they are building is going to evaporate over time. It is indeed possible that a company can sustain an averaged 5% annual growth rate and be very valuable, especially if it is one of the fastest growing company in their industry.

  • Fabrice says:

    Hi Philippe, I strongly desagree with this post! : ) In fact it depends a lot on your target job at this company. If you plan to be CEO (or VP of sales for example…), for sure revenue growth is not the good metric, because you will be hire to grow this number.
    One number can definitely not be enough.
    BTW, selling sausages or professional Data quality tool is definitely not the same business! And, I really think that employees of a company has to know and love their products…

    Fabrice, http://www.talend.com

    • Philippe says:

      For a job at a company to be sustainable, the company has to be sustainable itself. If the company is not growing then it will put a limit to their ability to hire. Any company that is increasing its workforce is going to expect to grow. A company that does not grow is not going to be interesting to an outside investor, who would prefer to make a bet on a company that will outperform its market. You are right that employees have to love what they do and the company’s products. If they don’t, it will eventually interfere with the growth of the business and impact revenue, profitability and ability to thrive as a business.

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