Beyond the Boom: The Reality of Sustained Growth for High-Flying Companies
The latest issue of Inc. 5000 proudly declares, "Meet the Companies Building the Future," celebrating the fastest-growing U.S. private businesses. Inclusion on such esteemed lists offers founders significant advantages, from media exposure to attracting investors, customers, and top talent. However, as George Foster, a professor of accounting and management at Stanford Graduate School of Business, cautions, the celebratory headlines often obscure a less glamorous truth: many of these high-growth companies experience a dramatic slowdown or even decline shortly after their moment in the spotlight.
"A lot of the lists and write-ups focus on just the successful companies," Foster observes. "After they appear on the list, the overwhelming evidence is that many have sizably slower growth — or even go backward."
The Ephemeral Nature of High-Growth Rankings
Foster, who has extensively researched the dynamics of sustained business momentum, emphasises that while "growth matters", the allure of these rankings can sometimes mislead entrepreneurs. He advocates for a "grounded reality of the challenge they may face so they can better anticipate roadblocks ahead — it may be a hiccup or a wipeout."
To provide this dose of reality, Foster, along with GSB researcher Carlos Shimizu, Antonio Dávila of HEC Lausanne, and Xiaobin He and Ning Jia, PhD ’07, of Tsinghua University, conducted the most extensive study to date on high-growth company lists globally. Their findings are stark: a mere 30% of companies managed to stay on these lists for a second consecutive year, and fewer than 10% achieved a three-year streak.
"The finding is consistent across continents and types of sectors, including technology," Foster states, underscoring a universal phenomenon: "For most companies that appear, it’s one-and-done."
What Drives the Drop-Off?
The researchers identified several factors contributing to this rapid churn:
Self-Reporting Bias: Companies that anticipate a decline in their growth rate often opt not to resubmit their data for subsequent rankings. This is a strategic move to avoid the negative perception of falling off the list, which could signal reduced growth to potential investors or partners. Foster suggests this bias might even inflate the reported repeat listing rates.
Metric Manipulation: The typical three-year revenue growth metric used by many lists can be misleading. Foster points out that if a one-year growth rate were used, "less than 5% of the companies would stay on a list two years in a row." The choice of metric significantly impacts a company's ability to appear and sustain its presence on these lists. List publishers, he reveals, also have an incentive for this churn, as new companies provide fresh marketing targets for their sponsors.
Economic Gravity (Regression to the Mean): The natural forces of market competition often temper initial rapid growth. A highly successful early-stage company might attract larger, more resourced competitors entering the same space, or the overall market for their product may simply become more saturated.
Revenue Timing Artefacts: Seemingly exponential growth can sometimes be an illusion created by the timing of revenue. A company starting with minimal first-year revenue, then securing a major client early in its second year, will show a disproportionately high growth rate due to the small initial denominator. Foster cautions entrepreneurs against mistaking such "short-run revenue growth for sustained market traction".
Architecting for Enduring Growth
For entrepreneurs aspiring not just to make but to stay on these prestigious lists, Foster offers crucial advice: "It’s about architecting for growth rather than just cheering one or two big years of growth."
Prioritise Scalability: Sustainable growth hinges on a business model built for scale. Foster cites Zoom as a prime example, whose cloud-native architecture allowed it to grow exponentially during the pandemic, unlike its less scalable competitors.
Diversify Customer Base: Overreliance on a handful of large customers creates significant vulnerability. Entrepreneurs should "work as quickly as possible to build a large customer base so you’re not exposed to losing any one account."
Mitigate "Single-Risk Exposures": Beyond customer concentration, companies must identify and mitigate other single points of failure. This includes avoiding over-dependence on individual technology experts by building "division-level expertise versus individual expertise". Similarly, relying too heavily on a single partner for a specific market or customer base can lead to sudden revenue loss if that partnership dissolves.
Foster's parting wisdom is a humble but critical reminder: "Don’t fall prey to hubris, because you’re likely to be on the list just one or two times." Chasing fleeting revenue spikes rather than cultivating sustainable growth can quickly turn a "peacock to a feather-duster". As Foster humorously recalled, he once contemplated telling attendees at a growth list announcement dinner, "Enjoy yourselves, because 70% of you won’t be invited back next year!" His message is clear: true success lies not in a temporary ranking but in building a resilient, scalable business designed for the long haul.
Disclaimer: This article is based on insights and research shared by Professor George Foster and his collaborators. While it aims to provide valuable guidance for entrepreneurs, individual business outcomes are subject to numerous market variables and strategic decisions. The information presented here should not be considered definitive business or investment advice. Readers are encouraged to conduct their own thorough research and consult with financial and business professionals.