What do they do for an encore?
That’s the question facing the owners of many fast-growing companies, who must figure out ways of maintaining or at least approximating rapid revenue growth.
It’s not easy. Indeed, just one of every five companies on this year’s List of the 100 fastest-growing private firms in L.A. County are repeaters from last year.
There’s no secret to what’s required for long-term growth: sufficient infrastructure, adequate financing, a product line with a big enough market to allow for large sales growth, and constant contact with the marketplace.
Lacking any of these elements, many of the firms on this year’s List will likely top out in one or two years’ time and end up as mere “cupcakes,” said Jim Gauer, a partner in the L.A. office of venture capital firm Enterprise Partners.
“Typically, companies that are in smaller niche markets tend to begin to top out and have smaller year-over-year growth,” Gauer said.
“In venture capital parlance, these are called ‘cupcakes’ companies that grow rapidly to a certain point and then tend to top out at the $5 million to $10 million level (in annual revenues),” he added.
The biggest factor that restricts a company’s ability to grow over the long term is a product line whose audience is too narrow to allow for expansion beyond a certain point.
Indeed, most repeaters in this year’s top 100 sell products and services with relatively broad appeal, such as computer peripherals, staffing services, printing services and infomercial production and distribution services.
Also important is keeping in touch with the marketplace, said Chet Pipkin, chief executive of Compton-based Belkin Components, a computer peripherals maker and one of the 20 repeaters in this year’s top 100.
“We sell to retailers like CompUSA and Best Buy, so we’ve got the luxury of going into their stores and seeing how the customers interact with the product line,” Pipkin said. “That’s something we’re doing all the time. We’re continuously questioning what we’re doing to service their needs.”
But staying in touch with the marketplace is only effective if the company uses the feedback to modify its products and systems to meet clients’ demands, Pipkin added.
Case in point: Pipkin recalled how Belkin installed a new delivery fulfillment system because its products weren’t reaching stores fast enough.
“We could see the stores were relatively slow to react when they were out of stock on something,” he said. “We used to receive orders and ship them in two to three days, which is already relatively fast. But even though we were fast, we now ship in hours or a day,” using the new fulfillment system.
Companies that lose touch with the marketplace and end up failing often suffer from the “Caesar syndrome,” said Alan Carsrud, an academic coordinator for the Price Center for Entrepreneurial Studies in the Anderson School at UCLA.
“They begin to think they’re divine and immortal,” Carsrud said. “Sometimes they think they know where the market’s going and they quit paying attention. They don’t talk to customers. But the customer changes, especially in technology.”
A strong infrastructure inside the company including good management is also key to maintaining rapid growth, said Mashi Rahmani, chief executive of MMC Inc., an L.A.-based staffing firm and another repeater in this year’s top 100.
Equally important is the way the new infrastructure is introduced when needed, he added.
Rahmani said MMC’s philosophy is to spend a little more money to hire new employees in advance of buying new systems, rather than forcing existing workers to take on extra duties and risk overworking them.
“When we know that our marketing department is going to have a new groove of clients coming in, we look at it six months ahead,” he said. “If we’re going to increase the number of clients, we hire the appropriate number of personnel and train them in our way of doing things a few months in advance. In this manner we take pressure off existing personnel.”
A final piece to the growth puzzle is financing, said Gauer. Many entrepreneurs fail to realize that expansion capital for firms doing $5 million to $10 million in annual revenues is easier to come by than it is for firms in the $10 million-plus range, he said.
“Getting from $10 million to $50 million requires a different kind of capital it’s more capital-intensive,” he said.
“People are not always aware of how capital-intensive rapid growth is. A lot of time a company’s growth gets choked by a lack of preparation for raising the capital that’s required to support rapid growth,” Gauer said.