It’s no secret that growth matters for any company and that software and online-services companies1
grow faster than those in other sectors. Classical corporate-finance
theory holds that value creation stems from only two sources, growth and
return on invested capital. In software and services, one of these
matters more than the other. While returns on capital are often strong
in mature companies, it is growth that matters most in the early stages
of a company’s life.
But few executives can say precisely how important growth is to these companies, or how it is achieved. The rules of the road in other industries do not apply here. If a health-care company grew at 20 percent annually, its managers and investors would be happy. If a software company grows at that rate, it has a 92 percent chance of ceasing to exist within a few years. Even if a software company is growing at 60 percent annually, its chances of becoming a multibillion-dollar giant are no better than a coin flip.
In this section, we will explore the unique physics of growth in these industries—the principles that underlie revenue expansion in software and online services.
We created two samples of companies: those with between $100 million and $200 million in annual sales, and those with between $1 billion and $1.5 billion. We then divided these into three rates of annual growth: supergrowers (greater than 60 percent two-year compound annual growth rate, or CAGR, at the time they reach $100 million in sales and greater than 40 percent at $1 billion), growers (CAGR between 20 and 60 percent at $100 million and between 10 and 40 percent at $1 billion), and stallers (CAGR of less than 20 percent at the first threshold and less than 10 percent at the second). Note that these stallers underperformed only in the context of their sector; on average, they achieved growth rates that would be the envy of companies in most industries.
We found that only a small fraction were supergrowers: 10 percent and 15 percent, respectively (Exhibit 1). That’s a big drop-off from the period before they reached $100 million in sales, when 50 percent of our sample grew at more than 60 percent annually.
But few executives can say precisely how important growth is to these companies, or how it is achieved. The rules of the road in other industries do not apply here. If a health-care company grew at 20 percent annually, its managers and investors would be happy. If a software company grows at that rate, it has a 92 percent chance of ceasing to exist within a few years. Even if a software company is growing at 60 percent annually, its chances of becoming a multibillion-dollar giant are no better than a coin flip.
In this section, we will explore the unique physics of growth in these industries—the principles that underlie revenue expansion in software and online services.
We created two samples of companies: those with between $100 million and $200 million in annual sales, and those with between $1 billion and $1.5 billion. We then divided these into three rates of annual growth: supergrowers (greater than 60 percent two-year compound annual growth rate, or CAGR, at the time they reach $100 million in sales and greater than 40 percent at $1 billion), growers (CAGR between 20 and 60 percent at $100 million and between 10 and 40 percent at $1 billion), and stallers (CAGR of less than 20 percent at the first threshold and less than 10 percent at the second). Note that these stallers underperformed only in the context of their sector; on average, they achieved growth rates that would be the envy of companies in most industries.
We found that only a small fraction were supergrowers: 10 percent and 15 percent, respectively (Exhibit 1). That’s a big drop-off from the period before they reached $100 million in sales, when 50 percent of our sample grew at more than 60 percent annually.
No comments :
Post a Comment