Breaking through the start-up stall zone: An early rush of revenue growth is necessary-but not sufficient-for long-term survival

March 2, 2014 Leave a comment

Breaking through the start-up stall zone

An early rush of revenue growth is necessary—but not sufficient—for long-term survival.

February 2014 | byTed Callahan, Eric Kutcher, and James Manyika

The rapid pace of creative destruction in today’s global economy makes the ability to launch and grow (or to shut down and move on from) new businesses critical for companies large and small. Competitive dynamics have long been in overdrive in the software and Internet sectors, where we have studied patterns of birth and death for nearly 3,000 companies between 1980 and 2012. Seventy-two percent of them failed to reach the $100 million mark. Only 3 percent made it to $1 billion in sales (exhibit).

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Typically, the small minority of companies that grew from $100 million to $1 billion did so rapidly. Ten percent of companies in the $100 million club grew at annual rates of 60 percent or more within two years of achieving that milestone. This group was eight times more likely than the remaining $100 million companies to hit $1 billion in sales. Staying in the high-growth club appears to depend on a company’s ability to create new markets with hundreds of millions of users (think Facebook, Google, or Microsoft), disrupt existing markets through new business models (eBay or salesforce.com), set new and revenue-rich technology standards (Adobe Systems), or develop truly innovative products (Citrix Systems or Electronic Arts). Furthermore, some of these companies (such as Oracle, through a series of acquisitions and industry-consolidation efforts) have been able to transition to an “Act 2” product or market before their “Act 1” was tapped out—a tall order in software or any other industry.

About the authors

Ted Callahan is an associate principal in McKinsey’s Silicon Valley office, where Eric Kutcher is a director; James Manyika is a director in the San Francisco office and a director of the McKinsey Global Institute.

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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