Prolonged study of the schizophrenic market has had market professionals positively perplexed. During times like these it is always key to remember that it is a great time to start a business–if you can finance it. Your value is almost certain to grow dramatically with the rising economy. Determining value in times like these can be more valuable than simply managing risk if you want to grow wealth. In my search for value I decided to turn to an expert on valuation– David G.Thomson. David is an incandescent former McKinsey consultant who completed an exhaustive study of companies that went through the initial public offering process (my specialty!) and he focused on the businesses that grew to generate over one billion dollars a year in revenue–this is the way to find the next Google or Microsoft. David defined the specific tenets and milestones that made the hyper revenue growth acceleration possible, he then compiled this information and wrote the book that he aptly named “Blueprint to a Billion:7 Essentials to achieve Exponential Growth”. This book proceeded to march up the charts and rapidly became a best seller. I initially met David at an invite only financial conference where we left for a small meeting and 3 hours later into a deep discussion on the value of quantitative analysis–decided that we liked each other’s thought processes. The thing I admire most about David and his work is that it is quantiative and highly malleable which creates fluidity of in his model. This allows his work to be modified in new situations and paradigms making his work relevant and not static as a lot of pablum that is peddled as business knowledge. The quant inside me knew that his work would help to outline high growth opportunities–so I turned to him for his insights. The following are his suggestions on how to:
Thrive Through Economic Uncertainty
Per David, the odds of failure are far greater than success, the few companies that achieved fast growth from a million to $1 billion revenue demonstrate some surprising patterns. By understanding their financial success pattern and following 7 linked “Essentials” of management CEOs and top teams can increase the odds for success – through certain and uncertain economic cycles. The tenets he outlines work in both finding hyper growth companies in the markets and work as well in building them from an entrpreneurial sense.
David hails from Hewlett-Packard and McKinsey & Company (two companies known for their intellectual horsepower and thought innovation) and he also conducted a three year study to identify the success pattern of growth companies. Thomson’s focus was different: he wanted to understand an actionable success pattern for fast companies that grew from a million to a billion in revenue. This interview for the Critical Capital Management Series, I wanted to capture the “How to” spirit that Fast Company embodies for determination of how to find the next Google for market analyzers while assisting entrepreneurs in identifying key revenue drivers…with that let us begin!
Shawn Baldwin: David, Why did you do this research? Wasn’t this already done?
DT: The reasons for writing the Blueprint to a Billion is more relevant now as it was in 200 when I started the research, and maybe even more so. During the last recession cycle in 2001, companies were failing everywhere, due to collapsing market valuations and the absence of the next wave of innovation. Today the failure: success rate has actually gotten worse. The facts indicate that we view our approach to achieve growth through the lens of our experiences and values. There has to be a better way, I concluded: One based on a quantifiable success-pattern. What are the ’essentials’ required to successfully grow an exceptional growth company? As I learned then, the operative words are successfully and exceptional growth. I finally concluded that there was no quantitative, actionable business-building roadmap, or better said, a blueprint. The blueprint for laying the foundation for a truly “Fast Growth” business, not another shaky, imperiled venture.
Shawn Baldwin: Most management books identify insights look back in time. With times rapidly changing, do your original insights apply to today’s market and growth uncertainties?
DT: Since the release of Blueprint to a Billion (John Wiley, 2006), I continue to be amazed at the impact so few companies have on America’s growth, employment, and investors. As of year end 2008, this disproportionate ratio remains intact. While the number of public IPO companies has grown to eleven thousand (from 7,500 in 2004), only 410 companies or 4% account for over 6 million employees, $1.6 Trillion of the market value and $2 Trillion in Revenues! I call these 4% the Blueprint Companies. The good news is the success rate of new billion dollar companies is consistent since the book’s release and is forecasted to remain for at least the next 5 years. The bad news is the failure rate of America’s IPOs has increased from 25% to 60% over the past five years. The key implication for management teams is to follow the success pattern of the 4%!
Shawn Baldwin: Can you give me some examples of the Blueprint Companies?
DT: Look around and you will find Blueprint Companies everywhere. Their products enhance our everyday lives. They are at the top of their markets. When was the last time you used Microsoft software, used the Internet (which rides on Cisco and Juniper Networks equipment), sipped a Starbucks latte, shopped on eBay or Amazon.com, purchased office supplies at Williams-Sonoma, Staples or Home Depot; watched movies from Time Warner; took medicine from Amgen, Genentech or MedImmune; or used financial services from Charles Schwab? Do you depend on Express Scripts, UnitedHealth Group, or HCA for your health plan?
Shawn Baldwin: What about the smaller exponential growth companies on the way to a billion?
DT: There’s more good news: Resilient growth continues even for smaller exponential growth companies. The companies most likely to achieve a billion over the next five years are averaging 49% (2008/2007) revenue growth and continuing to achieve new revenue highs! You may know some of these up-and-coming billion dollar companies: Morningstar, a leading source for financial services and evaluation of mutual funds; or Under Armour, a leading sportswear provider; or Omniture, a leading online business optimization software provider that doubled revenues in 2008 to achieve $300 million revenue. The companies with the highest revenue growth rates and strongest fundamental performance can be found in these top industries: Oil & Gas Exploration, Production and Services; Health Care Equipment and Services; Internet Software; and Biotechnology. Like Under Armour, companies offering distinctive consumer products continue to grow in the face of consumer spending headwinds.
Shawn Baldwin: You mentioned these companies utilize 7 Essentials. Can you identify a few actions that can help companies grow through this uncertain economy?
DT: During down economic cycles, achieve consistent exponential revenue growth is a top concern of management teams. Applying the principles of the 7 Essentials, here a few time-tested techniques that will enable your company to navigate through economic uncertainties:
Deliver “Way Better Value or Benefits” that truly differentiates your business and makes it relevant and valued in the eyes of the customer. Delivering Higher-Order Benefits is especially important during “down” economic cycles. Customer’s needs to change or the way they articulate their needs changes. Here are a suite of pragmatic actions to fortify your benefits: First, redefine your customer’s benefits by interviewing your best customers to understand the higher-order benefits they define. Listen and use their rationale and language to market to other customers. Second, innovate fast and test. Take a small slice of your innovation investment and quickly prototype product line extensions, enhancements or new products to test with customers. Get feedback early. Iterate fast and cheap in order to find the next growth opportunity. Under Armour and RIMM are two great examples of companies that started at a million and grew to a billion by following this approach.
The #1 gap for most companies is leveraging their customers to help define a growth roadmap and to engage their best customers to sell to their friends and associates! To get started, form a Customer Advisory Council with your best customers. Companies that grow in up and down markets leverage customers to guide their company’s roadmap define higher-order benefits and sell to other customers! This advisory council is one of the most important actions you can take, particularly in down markets. These customers will be an invaluable extension to your management team, marketing team and sales force. They are your biggest fans. eBay Powersellers are a wonderful example of how a few customers who spread the word can be marshaled into a “million” customer salesforce!
A company cannot achieve sustainable revenue growth without generating profits to reinvest in the company without a Dynamic Duo of Inside – Outside Leadership to execute the internal and external essentials. During tough times, formalize and focus on Inside-Outside Leadership. In the early days of Microsoft, it was Jon Shirley and Bill Gates, at eBay it was Maynard Webb and Meg Whitman. Pairs lead companies today at Garmin, Cerner and even HCL Technologies headquartered in India. Do you have a dynamic duo leading your company? Your outside executive should be travelling over 100 days a year innovating in alliance relationships and creating customer demand. This role and the other outside facing parts of the company are especially critical to creating customer demand during down market cycles. A truth for up market cycles too!
Whether you are developing an allocation strategy or building a technology company these tenets can assist you in creating tremendous value. The 7 Essentials necessary to achieve and sustain exponential growth as defined by David are:
Essential #1: Create and Sustain a Breakthrough Value Proposition – What does it take to create “way better” value”?
Essential #2: Exploit a High Growth Market Segment – Does your market have the potential to create a new billion dollar company? Does your company rank #1 or #2 for revenue growth in your industry?
Essential #3: Marquee Customers Shape the Revenue Powerhouse – Are your best customers the source of exponential revenue growth and is your sales force extraordinary?
Essential #4: Leverage Big Brother Alliances for Breaking into New Markets – Are you leveraging alliances with Big Companies to accelerate growth?
Essential #5: Become the Masters of Exponential Returns – Is your team ranked #1 or #2 for returns in your industry? Is your company cash-flow positive and achieving high return on investment?
Essential #6: The Management Team: Inside-Outside Leadership – Does your management team make the most of inside-outside leadership skills?
Essential #7: The Board: Comprised of Essentials Experts – Is your board balanced with CEOs who have led billion dollar companies along with customers and alliance partners to guide your company to a billion and beyond?
David G. Thomson is a bestselling business author, advisor and speaker. He has been studying and leading business growth for twenty years in general management and executive sales/marketing at Hewlett-Packard, Nortel Networks and as an Associate Principal during his five years at McKinsey & Company. He is the Chairman of Blueprint Growth Institute, dedicated to advising growth companies, and the Managing Director of Blueprint Growth Investors, LLC which is focused on private investments in Blueprint Companies. The Blueprint to a Billion has been translated in Korea, Thailand, China and soon Vietnam. David had been recognized by Investors Business Daily for being a “guru” to uncover the patterns behind billion dollar firms. For more information visit www.blueprintgrowth.com