During the last economic downturn nearly a third of net new jobs were created by just 2% of companies—enterprises with $10 million to $1 billion in revenue, growing an annual rate of 20% or more, according to a new report by Wakefield Research. The study forecasts that this same cohort of companies will likely have an outsized impact on job creation during the current economic slump. These firms “reacted quickly to the COVID-19 outbreak with policies aimed at securing revenue, with most maintaining positive growth outlooks into 2021,” the study says.
The report identifies these fast-growth businesses as “ScaleUps,” which are distinct from small businesses, startups, and corporations. “When you’re not sure if your thing can be a thing, you’re in startup phase. When the question [you ask] is, ‘how big can this thing get?’ you’re squarely in the ‘scale up’ phase,” says Ryan Hinkle, managing director at Insight Partners, a private equity and venture capital firm that commissioned the study. He adds: “When everybody knows what the thing is, you’re probably grown up.”
Using data from the U.S. Bureau of Labor Statistics, Wakefield determined that some 90,000 fast-growing companies added more than 3.6 million net new jobs between 2006 and 2009, representing 32% of new job gains. From 2009 to 2012 the cohort added 4.2 million new jobs, or 35% of new positions created.
Executives of scaling companies are extremely optimistic about growth prospects, despite the economic uncertainty caused by the pandemic, according to the study, which surveyed 300 leaders of software companies, including 112 scaling companies. Four in 10 scaling businesses expect their rate of revenue growth to increase significantly over the next three years, while another 45% anticipate growth rates to increase somewhat (remember, these are companies increasing revenue and employees 20% or more each year).
Despite their positive outlook, leaders of growth companies face some headwinds. Some 42% of growth company executives said scaling their business was harder than the start-up phase, and 50% of those leaders noted that attracting investors is their biggest obstacle.
“When you’re raising a seed round, you’re really selling a vision. I don’t want to make it sound like it is easy, but there’s not necessarily a lot of execution required at that point,” says Deven Parekh, a managing director at Insight. “But once you’re a ‘scale up’ company there are metrics, [investors] are going to look at your customer-acquisition costs. What’s your lifetime value? What’s your gross margin? And this is the important part: Can you continue to do that at scale?”
Parekh believes scaling companies will punch above their weight in job creation, noting that Insight portfolio companies alone have 3,500 openings. But the report warns that scaling companies can’t rely on their traditional networks for recruitment as they have in the past. “Recruiting from talent pools known to existing employees can lead to a lack of employee diversity,” the authors admonish. One positive stat: Some 53% of growth companies say they have human resources policies aimed at addressing workplace inequity, five percentage points higher than the overall pool of companies surveyed.