The Illusion of High Growth

High growth is not without severe risks

High-growth company rankings, while attractive, present a misleading picture of sustained success. The vast majority of companies featured on these lists experience a sharp decline in growth following their inclusion, with many disappearing from the rankings entirely.

Key Ideas and Facts:

• Transitory Growth: Research indicates that only 30% of companies remain on high-growth lists for a second year, and less than 10% make it three years consecutively. This trend holds true across industries and geographical regions. As Professor George Foster puts it, "For most companies that appear, it’s one-and-done.”

• Misleading Metrics: The three-to-four-year revenue growth metric used by many rankings creates an illusion of sustained growth. Foster argues that using a one-year growth rate would result in less than 5% of companies maintaining their ranking for two consecutive years.

• Economic Gravity and Regression to the Mean: Initial high growth often attracts competition or market saturation, leading to a natural decline in growth rate.

• Revenue Timing Distortions: A single large customer or contract can create an artificial spike in growth rate, obscuring the company's true market traction.

• Self-Reporting Bias: Companies experiencing slower growth are less likely to submit data for subsequent rankings, further skewing the results.

Factors for Sustainable Growth:

• Scalability: Building a business model that can easily handle increased demand is crucial.

• Diversified Customer Base: Over-reliance on a small number of large customers creates vulnerability.

• Mitigating Single-Risk Exposures: Avoid dependence on individual employees, specific partners, or single geographic markets.

Advice for Entrepreneurs:

• Focus on Sustainable Growth: Foster emphasizes "architecting for growth" rather than chasing short-term revenue spikes.

• Avoid Hubris: "Don’t fall prey to hubris, because you’re likely to be on the list just one or two times," warns Foster.

Key Quote:

"By chasing one-time increases in revenue rather than focusing on sustainable growth, you could end up not making the list the next year and go from a peacock to a feather-duster.” - George Foster

Source: Stanford GSB Article