Have you ever seen a business plan with hockey stick revenue projections? It’s common for VCs to receive business plans showing sales growing from 0 to $100m in the first 5 years of a company’s life.
In fact, growth conversations between VCs and management teams often cause angst. One of the reasons is that people from both groups tend to have unsubstantiated beliefs about how long it takes to build an important company.
Maybe these conversations would be easier if we simply knew how long it takes to build a successful company?
The answer is shown in the visualization. The study is based on a large sample of companies, specifically the top 100 publically traded software companies. We analyzed the SEC filings for every company. All of the sales numbers have been inflation adjusted, so we can compare the performance of a company founded in the 80’s (e.g., Adobe) to one founded a few years ago (e.g., Salesforce.com).
The data are packed with interesting stories. For instance:
Most successful technology companies aren’t rocket ships.
Only 28% of the nation’s most successful public software empires were rocketships. I’ve defined a rocket ship as a company that reached $50 million in annual sales in 6 years or less (this is the type of growth that typically appears in VC-funded business plans). A hot shot reaches $50m in 7 to 12 years. A slow burner takes 13 years or more. Interestingly, 50% of these companies took 9 or more years to reach $50m in revenue.
The fastest rocket ship of today’s software industry was Novell.
Novell (NASD: NOVL) was one impressive company. It took only three years to reach $50 million after it was founded in 1983. In 2008 it still pulled in almost $1 billion in revenue. You’ll recognize the names of a few of the other genuine rocket ships from various decades: Adobe, Autodesk, Electronic Arts, Interwoven, McAfee, Salesforce, Sybase, Synopsys, and Verisign.
Microsoft and Oracle weren’t rocket ships.
Who would have thought? They are two of the most valuable companies ever founded, in any industry, in any country. Microsoft took 8 years to reach $50 million in sales; Oracle took 10.
It makes you wonder: Is it wise to prepare a business plan featuring steep hockey stick sales projections?
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I am curious, why is google absent from the list of top-100?
Thanks.
Sanjay
The ’sample’ link above goes into more detail about how the companies were chosen. Here it is explicitly:
http://www.ipo-dashboards.com/wordpress/top-100/
The list comes from google finance’s own list of ’software and programming’ companies. I would guess that Google isn’t on there because its revenue does not come generally from _selling_ software, but rather from advertising. In that sense, it is more like a media company than a software company.
:)ross
Also out of curiousity, did you just take the current list of public companies or also the ones that were acquired, e.g. BEA is missing from the list and if I recollect correctly, they went to $1b in revenue in just 6 years?
Joerg
This is based on the the Top 100 public software companies as of Q1-2009. The idea is that it’s a good sample of successful companies. So, acquired companies are not in there. BTW, I have heard the claim that Siebel was the fastest ever (they were ultimately acquired like BEA). At some point I will try to establish if this is myth or truth.
Great post, Christian. Too bad the private company data is so hard to come by. And many of them that are in the rocket ship and hot company category wind up getting acquired these days instead of going the IPO route.
Of course survivorship biases the stats on the public companies, but I wonder how the ratio of rocketship/hot private companies (VC backed) that never make it to public stage differs from public companies?
Among four companies I’ve been involved with as a founder or investor that fall into the rocketship category, only one actually made it to IPO: Excite. StubHub, Postini and Sling Media were the others. Only Postini got as far as drafting an S-1 before Google came knocking.
This is a great article, and it doesn’t surprise me in the least that VC’s see a large number of hockey-stick shaped projections for new business, generally the people involved in those kinds of business (me included) feel so very passionately about what they’re doing they can easily over estimate the potential market for their product, you soon learn what the realist projects are going to look like though.
However, I wonder how the social media websites would fit into this model? I can imagine them being very hock-stick in nature due to the fact that they’re generally a very popular community before the actually business model is put into action which causes a VERY sudden surge in revenue without any additional overhead.
Rob
I’ve been fortunate to have been with one rocket ship and several hot shots that eventually went public and or got bought out. I’ve noticed that private hot shots that stay private last much longer and retain their employees over long periods of time. The thing that generally ends the tenure of a long term private company is the next generation of managers. Sure is something to think about in today’s world.
Ryan, the dream study you envision would have all of the private companies included, I agree. There may be some survivorship bias, or maybe independance bias to be more accurate. Nonetheless I think today’s ‘top 100 public’ is an admirable set to learn from. All company builders should have some idea of what it takes to build a successul, long-term, independant company. This shows how their forebears pulled it off!
Hello Christian,
What a tremendous discussion! Thank you! Here are some talking points and gold nuggets from our research that I can immediately share with you and your readers.
Dream It! Plan It! Do It!
Robert W. Price
Executive Director
Global Entrepreneurship Institute
Managing The Rapidly Growing Venture
Valentine hired an experienced manager, John Morgridge, to run Cisco in 1989. Morgridge immediately installed a professional management team and formal management processes. With these assets and resources coming together he established a revenue goal of $100 million, more than a twenty-fold increase from their revenues of some $5 million in 1989. By 1991 they reached $183 million and along the way paved the road for an IPO in 1990. Between 1995 and 2000, Cisco’s revenue grew an average of 53% annually, an unheard-of rate for a multibillion-dollar company. Cisco had reached a $100 billion market capitalization value in 1998. In March 2000, Cisco became the most valuable company in America with $531 billion in market capitalization, briefly eclipsing Microsoft as the world’s most valuable company.
http://blog.gcase.org/archives/163
First year, 1985, $6 million; second year, $34 million; third year, $70 million; fourth year, $159 million; fifth year, $258 million . . . year sixteen, $25 billion.
—From various Dell Computer annual reports
http://blog.gcase.org/archives/258
How Fast Is Really Fast?
One thing for certain, successful high growth-potential ventures do not stay small very long. When they do launch they can be as exciting as a rocket racing to the sky. Siebel Systems tops the list of the fastest-growing technology companies in the United States. In 1999 they recorded a five-year revenue growth rate of 782,978 percent! Founded in 1993 with $50,000, they had $391 million in revenues in 1998, and by 2003 had nearly $2 billion in revenues, with 8,000 employees working out of 136 offices in twenty-four countries.
http://blog.gcase.org/archives/119
BEA Systems, which claims the distinction of being the fastest software company to reach $1 billion in revenue. According to co-founder Bill Coleman, “It’s not magic. It is all about an addressable opportunity, great people, focus, and execution
http://blog.gcase.org/archives/207
Netscape generated $80 million in sales in its first full year, and in three years reached $500 million. For comparison, Microsoft took almost fourteen years to reach comparable revenues.
http://blog.gcase.org/archives/207
By 2001 eBay was number one on Deloitte & Touche’s Fast 500. In the five years prior, they had grown 115,874 percent, from $372,000 in sales in 1996 to $431 million.
http://blog.gcase.org/archives/209
You can go into a corner slow and come out fast. Or you can go into a corner fast and come out dead.
—Sterling Moss, Formula-1 racing legend
###
Robert the next sector I’d like to do is media, not just social media but all companies where revenue growth is more traffic-driven. I wonder if, by virtue of having more naturally leveraged business models (the web is the greatest leveraged distribution vehicle for software), the top companies ramp faster. Truth or fiction? I’d love to know. I’ll add it to the list.
My research on VC returns (at the investment-level) suggests that the cross-section from 1987 – 2007 is characterized by a “three-regime” world. Once corrected for the probability of bankruptcy, these regimes nicely correspond to your “rocket ship,” “hot shot” and “slow burner.” However, my sample includes all VC-backed firms and all exit types. My new work shows that breaking the sample into “early-stage” and “late-stage” changes the conclusions: the earlier the investment the bigger the rocket ship and the higher likelihood of a slow burner or crash.
Your graph gives me some ideas on how to better motivate my model.
Michael, thanks for commenting. Are the studies published, can you send links?
Not published yet…still a working paper. I’ll post links end of September once I have finished.
Chrystian,
Nice article. Just in time as there are a lot of discussions on the web about the VC industry in general. I just read Bill Gurley’s article titled “What is really happening in the VC industry” http://abovethecrowd.com/2009/08/24/what-is-really-happening-to-the-venture-capital-industry/
The question you pose at the end “Is it wise to prepare a business plan featuring steep hockey stick sales projections?” could be countered with “Are VC’s ready to accept a low rise hockey stick projections”. I think that answer is overwhelmingly NO. The VC industry still works on the model that one of those steep hockey projections will come true and the return on one such investment will counter all the others that turn out to be duds.
Given the current investment climate, an entrepreneur is better off not raising any capital if his projections show a slow rising hockey stick projection. Its a waste of his time and he should focus on building the company by boot strapping it. A VC only wants to talk to an entrepreneur who is going to think-like, talk-like and dream-like his company is going to be the next Google. Anything short of it, your biz-plan will hit the trash can before the ink dries.
Fred Wilson of Union Square Ventures wrote about the Venture capital math problem a few months ago. Here is the link “http://www.avc.com/a_vc/2009/04/the-venture-capital-math-problem.html”. An interesting discussion ensued based on that article.
It is interesting to note that there is no company in this list that was started after 2004… and most of the Rocket ship companies were in the Mid 80’s or 90’s. I read the book Outliers by Malcom Gladwell he talks about being the right guy at the right time to be able to really ride a wave… maybe we can learn some ideas based on the pattern to bet on some coming technologies. For example, I would like to bet the Electric Vehicle or Green Energy companies will be the trend in this decade or next… any comments?
This is certainly the best that I read today in the Internet
I wonder why Compaq (CPQ) which was founded in 1982 is absent from this list. Compaq was perhaps the most impressive rocket ship of all time. It had revenues of $111m its first year. $329m it second year and over $500m by its third year. Has that business record been beaten yet?
I think that in many ways your focus on revenue rather than profit misses the point. Isn’t the key idea that one wants to build a long term sustainable business? Doesn’t that mean a business that is profitable? Yes, in the short term focus on building revenues is important, but if after 10 years, the business still is not profitable, perhaps there is a real issue with the business model? If you invested in a company and 10 years later it had only 1MM in Net Income, with over $200MM in revenue, you would have to be worried that the business might never make it as at some point the capital sources may dry up? For awhile investors may bet that your business will ultimately hit profitability, but if you continue to do so after 10 years, investors may not believe that, unlike Amazon, it’s “just a matter of scale.” Now I’m not arguing to focus on profit at the expense of growth. A business that makes $500k-1MM per year is not going to provide a VC with the 10-100x return that is needed to return the fund, but I am arguing that revenue growth should not be the only metric to measure “rocket ship success.” It would be really nice to see which companies grew EBITDA profits to $50MM the fastest? I’m sure that Google’s EBITDA and Net Income growth would certainly rank way up there. This might help separate the tech companies that had great low capital, high margin business models versus the others. In the long run, it is profits that make a company valuable (i.e. if you own 100% of the capitalization of the company, you ‘own’ the profits), therefore I think if you’re considering growth + long term value, looking solely at revenue is misleading. Of course, if you have a venture investment and can achieve liquidity by selling your revenue growth maybe it doesn’t matter :-).. but there is always one investor in the end holding the bag…in the 2000 dot-com bust, it was often a public one. I’d be interested in hearing what others think..
Having Google and Yahoo! absent really skews this survey. Indeed, we also know that Facebook has exceeded $100m in five years; as did most online poker/gambling businesses.
The question as to what is a technology company is hardly moot.
If you insist that technology companies have to make their money selling software, you are asking for a double filter: companies whose value comes or is significantly driven by their technology and companies who choose a very particular business model or set of business models.
So this is a comment as much about a firms business model — and the difficulty of getting to $50m from the selling software model — as it is about ‘tech companies’. Salesforce had a different model to ART technologies–and look where they go to.
Surely, you also need to control for GDP growth, and more specifically growth in the market for these sorts of services.
It’s nice analysis but isn’t it made entirely redundant by your arbitrary selection (and decision that Google (!) isn’t a technology company).
Great work! Regarding your comment about Microsoft not being a rocket ship, it seems intuitively possible (albeit not for me righ now as I lack the data) to establish a negative correlation between age/date of foundation and growth speed, the thesis being that companies founded in less technological times had a harder time growing fast than more recent ones. Or not.
This is awesome data. Much appreciated! There seems to be an implication that VC’s can often be too narrow-minded by only being willing to support “rocketship” plans. I wouldn’t argue it’s narrow-minded at all. Perhaps I’m misreading you, and you’re only intention is to present these fascinating facts. Assuming the risk involved with new start ups though, a high return in short order is simply called for. Just because many companies have proven themselves over time doesn’t mean that most don’t still fail. Just sayin :)
To the commentators asking if the study is obviated by the exclusion of Google and Yahoo which are considered media companies not software companies…well the answer is “No, it is not obviated.” This is a study of the software industry, one of the most important technology sectors in our economy and one that is well defined by major stock indices and industry analysts. Companies in that specific industry primarily make money by selling access to s0ftware, not advertising. So Salesforce is included but Google is not. So for the purpose of studying the software industry and how it works, the sample above is a very good one indeed (the top 100). Of course a fun follow on study would be to examine media companies too.
Michael Ewens, is your paper done yet? September’s come and gone… :-)
- Varun.
Here it is:
http://michaelewens.com/research/
I don’t frequent this blog, so I forgot to post it.
Very cool analysis. Just curious – do you have the workbook/data to share? It might be interesting to look at indexing this to the amount and timing of their financing. I’m wondering how this variable – the ease of raising successive rounds of funding – influenced their growth rate.
Jeff – Yes there is another post of it below which includes the “Download” link in the lower right corner. That will let you open the document in Tableau Public (a free edition of Tableau) which has all the data as well as the visualization. Enjoy.
http://www.tableausoftware.com/public/gallery/taleof100