Microsoft, Oracle, BEA, Google, Symantec, along with many examples in other industries such as Staples, Genentech, Starbucks and Nike, are members of an elite group of companies that managed to turn breakthrough innovations into billion-dollar businesses. What did these and other high-growth companies do to achieve such a goal? What blueprint do billion-dollar businesses follow to produce such results?
It took three years of in-depth research to answer these questions. The result is the first quantitative assessment of the success pattern across a distinct group of 387 “Blueprint Companies” – the five percent that have IPO-ed since 1980 to date and grown to $1 billion in revenue. They represent America’s highest growth companies. They achieved exponential revenue growth and returns.
What does it take to become a billion-dollar company? I realized the answer would not come from qualitative approaches focusing on innovation or organization life cycles but from a quantitative and fact-based analysis of America’s high-growth companies. I started my journey in the technology sector including the software industry but quickly found this common pattern across all industries. The analysis had to hinge on what is often overlooked: revenue performance. Every company can innovate and invest, even over-invest in order to grow. However, not every company can create stellar revenue growth.
The Blueprint Companies, including the Software Blueprint Companies, had a simple but definable growth characteristic: they not only grew fast and consistently, they exhibited exponential revenue growth. You may think that Google’s growth is unique. And it is, but it did follow this pattern along with Siebel Systems, eBay and many others.
Three growth points
A company’s exponential revenue growth has three definable points. The first is the time from founding to the inflection point. Second, the inflection point is the point where the business demonstrates its breakout to exponential revenue growth. This point marks the moment when the business is fully formed as a system – a pipeline of customers, a product or service that generates a concrete business model and an organization capable of sustaining growth. The third part is exponential growth to $1 billion revenue. This last part was truly exponential and of course at different growth rates.
You may think that $1 billion is a long way off. And it is, in terms of dollars when you are an entrepreneur. The good news is once you are at the inflection point; the time to get to $1 billion revenue can actually be faster and with a more predictable journey than getting to the inflection point!
One of the key counter-intuitive financial insights is the time frame and trajectory of Blueprint Company revenue growth. By centering the revenue curves at the inflection point, also known as year 0 in normalized time, I found that revenue growth from the inflection point to $1 billion revenue had two distinct parts: the time to the inflection point was highly variable from the founding year to the inflection point, which was then followed by three trajectories to $1 billion revenue that centered on 4-, 6- and 12-year trajectories.
One might naturally assume that the time to the inflection point is correlated with the trajectory the business follows to $1 billion revenue. Not true. For example, Google went from its founding year to the inflection point in two years and went up the front side of the four-year trajectory to become one of the fastest growing companies. In contrast, Cisco took seven years to get to the inflection point before going up the four-year trajectory. Microsoft was a six-year trajectory company. The mean time for tech from founding to the inflection point, including software, is five years.
Seven essentials for exponential growth
What did these companies do to achieve exponential growth? During my tenure at McKinsey & Company, I learned that business dynamics can identify the underlying inter-linked forces that lead to exponential growth. While it is impossible to model the particular business dynamics for each Blueprint Company, there are a set of dynamic essentials that were common: the seven essentials. Despite the diversity of corporate histories across different boom-bust cycles and economic sectors, five or more of the seven showed up in over 90 percent of the Blueprint Companies studied. This is also true of the Software Blueprint Companies.
1. Create and sustain a breakthrough value proposition
A value proposition states the benefits customers receive from using a company’s products or services in terms that the customer understands. The best Blueprint Companies not only created but also sustained breakthrough value propositions.
Value propositions tended to fall into three waves:
- Shape a New World as Oracle did with relational databases and Cisco did with routers. Redefine a market by shaping a market niche as Siebel Systems did with its Sales Force Automation Software.
- Another approach is to be second but better. When an incumbent has dominant share, a new entrant can capture significant share by offering a better product. As Microsoft did with Excel to Lotus 1-2-3 in the 1980s, Google did with search to Yahoo and as Juniper Networks achieved with high-end routers to Cisco.
- Finally, the category killers optimize the market by offering a tuned supply chain that offers lower price with just enough or better quality. We are seeing this with open source software. The analogy is the retail industry category killers: Staples, Office Depot and Home Depot to name a few.
2. Exploit a high-growth market segment
Opportunities exist in a lot of industries. Some industries have more opportunities than others. However, industries such as specialty stores generated the highest number of Blueprint Companies with 18 firms: AutoZone, Staples, Tractor Supply, Williams-Sonoma, PETsMART and others. This occurred because there were multiple market segments to address within the industry: office supplies, teen fashion and pet supplies to name a few.
In contrast, there are numerous cases where a single company arises out of an industry to become the only player to achieve $1 billion in revenues — witness Harley-Davidson. Where are the software industries? Ranked in the middle.
3. Marquee customers shape the revenue powerhouse
Customers can be more than customers. The best of them can serve as an extension of your sales force — they become your most effective sales team! I call these “marquee customers,” that is, customers that shape the company by testing and deploying the product, recommending the company to their peers, and providing exponential revenue growth on a per-customer basis.
For example, eBay’s top customers are part of a feedback system that helps shape eBay’s new services. They are also a powerful word-of-mouth sales force to attract other customers. For Siebel and Oracle it was Fortune 500 customers such as HP, Motorola and Nationwide Insurance to name a few.
4. Leverage big-brother alliances for breaking into new markets
The complement to marquee customers is a big brother-little brother alliance relationships. These alliances, in which a bigger company helps a smaller one, provide credibility to the little brother, give it market intelligence, and lead it to marquee customers. Microsoft’s early alliance with IBM is a perfect example as was Oracle’s alliance with DEC.
5. Become the masters of exponential returns
Conventional wisdom suggests that companies should over-invest to grow. The technology industries serve to illustrate what it takes to create the highest value per company. In contrast to conventional wisdom, Blueprint Companies are cash-flow positive early and sustain this positive cash flow to $1 billion revenue. In the technology sector, and the software industry in particular, where the market values were highest, they were cash-flow positive as early as the inflection point.
Over-spending was not the path to success. The shareholder returns for being a top performing Blueprint Company can be shocking: Blueprint Companies on the four-year trajectory delivered an average of 87 percent returns to their shareholders! The average market value for the No. 1 industry, applications software, is $15 billion! Was Google overvalued at $1 billion revenue? It was ranked No. 5 of all Blueprint Companies, an indication that it was fairly valued in benchmark to those that ascended before it.
6. Inside-outside leadership
One of the pivotal essentials that enables the other essentials to be simultaneously executed is a dynamic leadership pairing in which one leader (or team) faces outward toward markets, customers, alliances, and the community with the other leader (or team) focuses inward so as to optimize operations. Contrary to the somewhat popular belief that one leader is “’the” leader, this inside-outside leadership pair is highly prevalent among Blueprint Companies: Microsoft, eBay, Yahoo!, BEA to name just a few.
7. The board comprised of essentials experts
Blueprint Companies’ boards are not packed with investors as one would think. Blueprint Companies recruited customers, alliance partners, and other Blueprint CEOs to the board, and that makes a big difference. I call them ”essentials experts” because their role is linked to the shaping and execution of one or more of the seven essentials.
Because most investors have not scaled Blueprint Companies to $1 billion revenue, CEOs who happened to be CEOs from Blueprint Companies often were recruited to provide insight into exponential growth. For example, Charles Schwab was on the board of Siebel as was Howard Schultz from Starbucks was on the board at eBay. In contrast, boards with only investors and management tended to be associated with struggling companies.
Do you have to do it all? The answer is: yes. The research shows that the Blueprint Companies executed these essentials to average or above levels of performance when compared to their lower-growth counterparts.
It’s about how you can use seven common essentials to better your business, organization, team or yourself and produce exponential growth. It’s about executing the essentials and linking them. It is about taking the actions that matter while avoiding pitfalls. Adopting one or more of these essentials will maximize your growth — both personally and professionally. Executing all seven essentials will enable your company to achieve unprecedented exponential growth.
Why must you aim high? Your success serves a greater good. While many have read “The World is Flat” and even more desire to restore America’s innovation leadership, the numbers prove that our business-building performance is also flat. Over the past five years, we generated a consistent average of 31 new Blueprint Companies per year. Given the Blueprint Companies account for over half of the employment and 64 percent of the market value created by all American IPOs since 1980 to date, we need to pick up the pace to restore America’s leadership. You can make a difference. Together we can make a bigger difference. May this blueprint serve you well on your growth journey.
David Thomson has led business growth for 20 years in general management and executive sales and marketing roles at Nortel Networks and Hewlett-Packard. He also served as an associate principal during his five years at McKinsey & Company. His book, “Blueprint to a Billion: 7 Essentials to Achieve Exponential Growth,” is available through bookstores such as Barnes & Noble or Amazon.com. Please refer to www.blueprinttoabillion.com for additional information.