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Why “Growth” Companies Stop Growing

April 1, 2011

Not all growth companies keep growing. Promising companies that pass $10M in revenue can lose momentum before they reach $20M.  Most growth companies are sold before they reach $30M in revenue, long before they’ve realized their full value.

Why do so many “growth” companies stop growing?

After two decades as a growth company leader and advisor I’m convinced that taking a company from $10M to $100M+ in revenues involves its own set of challenges.  Companies that are not prepared for the transition from startup to growth company can get stuck.  This is bad news for investors and employees, and worse news for our economy – growth companies create two out of every three jobs (Kauffman FoundationSBA).

I created this blog series to share the tools and best practices that can help growth companies scale from $10M to $100M… and beyond.

The $30M ceiling. A bewildering 70% of companies are sold before they reach $30M in revenue, well short of the $100M or so in revenue they need to go public.  Why do former darlings of venture capital – companies such as Amp’d Mobile, Mazu Networks, and Ounce Labs – get stuck?

Software Company Exits 2007-2010

Source:  Shea & Company

Growth follows an S-curve. Successful new products are like bacteria in a Petri dish.  At first they grow exponentially, taking advantage of an abundance of early adopters, but then growth tapers off as the opportunity for the first generation product runs its course.  To sustain growth the company needs to reach new markets with better products through more efficient channels…all while supporting customers of the first generation product.  Unfortunately, entrepreneurs get blind-sided by this predictable speed bump.  The financial forecasts of early growth companies assume that exponential growth will continue unabated – as though the Petri dish kept getting bigger.  When the reality of the S-curve becomes apparent the company finds itself unprepared to drive the next wave of growth.

The S- Curve:  Expectations and Reality

Successful growth companies plan ahead for this inevitability.  Two good examples are iRobot and Apple.

IRobot’s Innovation Engine. Founded in 1990, iRobot first introduced robots for the military to help soldiers with reconnaissance, disposal of land mines and other dangerous missions. Over its first 12 years iRobot built a $14M business for the government market.  Then in 2003 the company introduced robots for the home:  Let Roomba to do your vacuuming while you create playlists for your new iPod. iRobot’s consumer products put the company on a growth trajectory that led to a successful IPO in 2005.

If growth in home product sales ever tapers off, what will iRobot do for an encore?  iRobot anticipated the need to develop a pipeline of new product lines in order to sustain growth.  In its IPO filing in 2005 the company described its Innovation Engine — a process to create future robotic products for vertical markets beyond the military and the home:

Our innovation engine, comprised of our robot technology, roboticists and robot market experience, enables us to design and introduce new products rapidly in a wide range of markets:

In 2009, iRobot announced a Healthcare Division to serve the aging population.  A new line of robots will monitor patients, remind people to take their medications on time, and lift and transport objects.  Will iRobot find its next S-curve?  Whether healthcare or another vertical, I think it’s just a matter of time.

Apple’s Golden Decade. Steve Jobs has introduced one breakthrough product after another – first the Mac, then the iPod, then the iPhone, and most recently the iPad – while marketing and supporting all of its other products.  It’s hard to appreciate Apple’s achievements over the last decade without looking at the growth of its individual product lines.

If Apple were merely a computer company, it would have had a decade of solid growth on the strength of the MacBook which gained share in the desktop market.  But in 2004 Jobs performed his first miracle, creating a new product category with the iPod.  Three years later, iPod and iTunes had doubled the company’s revenues.  However, iPod sales peaked in 2008 and the company needed its next S-curve.

Over the next two years, Apple introduced two more category-creating products.  The iPhone and the iPad again doubled the company’s revenues.  What’s more, the iPhone positions Apple in the most explosive growth market since internet computing – mobile computing.    I’m sure that Steve Jobs is already challenging his team to find new, extra-large Petri dishes.

Apple Product Revenues

Finding the Next S-Curve. What iRobot, Apple and other successful growth companies have learned is that the search for the next source of growth is never over – and can never start too soon.  The time to search for the next growth path is when the current product or service is hitting its stride.  A growth company has an ‘innovation window’ to develop and launch new growth strategies before the current business matures.

                              © Power Strategy Inc, 2010

Unfortunately, companies encounter a number of roadblocks during this critical innovation window.  The most common roadblocks fall into five areas: market, product, business model, people and capital.  The causes of these roadblocks are outlined my blog, “The Barriers to Growth“.

Follow Dave on Twitter: @WDavidPower

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