The fast-growing startup has become an icon of our times. But that story has changed a bit in the last year.

Are today’s fastest-growing private companies different from those of a year or two ago? And do those in Los Angeles experience different challenges than they did before.

Tim Lovoy, a partner at Big Five accounting firm Deloitte & Touche has been providing consulting services to emerging growth companies for three decades. From his vantage point as head of Deloitte & Touche’s Pacific Southwest Technology and Communications Practice, Lovoy shares his view of what it’s like in the fast lane of L.A. entrepreneurship.

Question:

Are today’s fast-growing L.A. companies any different than those of the recent past?

Answer: I think they are different in that the growth rates are higher, particularly for our companies somehow involved in technology. We have, and I have as clients, revenue run rates of $500 million and still growing every year at 40 percent. Those are tremendous growth rates, and I think there are a lot more of those companies in our region today than there were certainly 10 years ago.

Q:

Are fast-growing L.A. companies any different than those in other parts of the country?

A: Not really. What we see in these other markets is that many of the growing companies are technology and communication companies. And that is because the market for these products and services is growing exponentially. We are not talking about dot-coms; we are talking about software and hardware companies producing network equipment. We are also talking about companies that produce all of the peripheral items that go along with a connected network economy. Some of them are selling to original equipment manufacturers and some are selling to the mass merchants that will ultimately get to the consumers. But at the end of the day, it is all somehow taking advantage of this exploding market for technology and communications equipment services.

Q:

Are they facing different sorts of challenges today, compared with the past?

A: All fast-growing private companies have the same issues. There are capital issues, there are people issues and governance issues.

Companies that are growing quickly need to finance that growth. If you are private, you need to have access to capital. One difference now compared to five to 10 years ago, particularly in L.A., is that there is a tremendous amount of capital available to high-growth companies if the companies are in the technology and communications space. It is not as true if the companies are normal manufacturers other than the tech space, but I think it still is true.

Q:

Any other differences?

A: The people issues are a huge difference from 10 to 15 years ago. It is so tough to get good people, and having good people has always been the name of the game. Invariably, the companies with the best people win, and I think that has always been true. But because our economy has been so good for so long, the war for people is being fought at unprecedented levels. It is sometimes more difficult for private companies to compete for the talent with public companies because they can’t offer the equity incentives that public companies do. They can offer options, but the employees don’t immediately see a liquidity event for those options unless there is a promise to go public.

Q:

Clearly, recruitment is a challenge. What are some others faced by fast-growing private companies?

A: Another problem is succession planning. Typically, high-growth private companies have one visionary or a small number at the top driving that growth. They need to build an infrastructure to take them to the next stage, or they need to have an exit strategy and sell the business. Again, I would say that because of the amount of capital that is in our system, I think it is easier for companies to package up their business and sell it. It is a tremendous time to own a high-growth business in our area valuations are so high for high-growth profitable companies.

Q:

But sometimes the owner only wants to sell a certain stake, rather than the whole business. In those cases, doesn’t management control become an issue?

A: That goes into the governance issue, which is, “How do you sustain a culture and system inside a company that can maintain these incredible growth rates?” Many times these visionaries and leaders who fueled the explosive growth can constrain it because of the very same personality traits that got them there, like control and wearing too many hats. They need to bring in someone from the outside that understands how to take a company from a couple hundred million dollars to a couple billion dollars.

Q:

Among this year’s list of fastest-growing private companies are a number of firms that have been around for decades. Are more such companies reinventing themselves, and thereby enjoying new surges of growth?

A: When you look at our Deloitte & Touche “Fast 50,” most of them have not been around that long. Off the top of my head, I would say the average life is five years. I have seen some companies reinvent themselves and become high-growth companies, but I would say by their nature most of the high-growth companies tend to be younger companies.

It comes back to the definition of what is a high-growth company. Does it have to be $100 million with 20 percent annual growth, or can it be $10 million and 60 percent annual growth? It depends on your definition, but I would say most of them are younger companies. Five years is average and 10 years is about as old as they get when I think about some of the largest private companies in Los Angeles that I know of. Most have not really reinvented themselves and some of them have gotten really big. They have managed to grow very big by sustaining 40 to 60 percent revenue growth rates, year after year after year.

Q:

With Wall Street sour on many types of IPOs right now, how will that affect financing for fast-growing companies in Los Angeles?

A: I still think there is a tremendous amount of venture capital and, while we are seeing the rate of increase in venture capital slowing, it is still increasing. There are tremendous amounts of venture capital. Still the very good companies can get out and get public financing.

I was talking to a company that is doing a serious “B” round of venture funding. The value they are doing it at is not anywhere close to what they thought it would have been a year ago; it is about where it would have been three years ago. Investors are much more focused on making sure the company can build a sustainable profitable business, or that it is in one of the market niches that people are convinced are going to experience explosive growth.

Q:

If the economy slows or inflation heats up, would that hit fast-growers harder than the slower-growing companies?

A: To the extent that inflation significantly increases and it further dampens the market, it would make it even harder for companies to go public. Eventually, it will decrease the amount of venture capital available to our companies and we may be seeing the start of that now, with the softness of the IPO market. That would be the biggest effect on growth companies.

I will tell you, though, that the slowing down might have a positive effect because it is a little bit easier to get people now than it was a year ago. Employees were leaving to go to dot-coms down the street, but they are coming back (to more-established companies) now. Still, the talent is very tight, and it is tough to get the right people.

Q:

Besides tech, where else do you see emerging growth companies in large numbers in Los Angeles?

A: If it is not in tech, then it is probably in the service sector. We see a lot of service companies doing well. And many of these companies are using technologies to deliver their services more efficiently and in new ways, though they are not necessarily technology companies. Many of them are taking advantage of the trend toward outsourcing and providing services to different kinds of companies that are not necessarily related to them.

Q:

Are there any types of mistakes that L.A. fast-growers tend to chronically make?

A: I don’t think it is endemic to L.A. One chronic mistake is to not build an infrastructure for the company you plan to have in six to 12 months from now. Once a company gets behind the curve in infrastructure, the people and the systems that it takes to manage a larger business, it is almost impossible to catch up while growing at a 40 to 50 percent annual rate. I always advise my clients to start building infrastructure for a bigger company today. Obviously, you have to balance and do it in the most cost-effective way, but you can put in place things today and plans that you have your eye on that say, “How do you build infrastructure for a much larger company?”

Q:

Is Los Angeles becoming a better environment for attracting fast-growing businesses?

A: I think Greater L.A. is becoming a more conducive environment for fast-growing businesses. To the extent that we have more large fast-growing businesses here makes it easier in some respects to have other businesses. The infrastructure tends to be built up and we have larger amounts of capital available. Larger numbers of qualified professional service advisors are attracted to the area. Also, the large companies tend to incubate some very talented employees, who then tend to have an entrepreneurial itch and start their own businesses. It tends to be a virtual cycle.