Spectacular growth: Idealog’s insights from the last 10 years of the Deloitte Fast 50
But what about former winners? How have they capitalised on their rapid early evolution, and what does that say about Kiwi enterprise in general? Are they still going strong? Or have they gone under? Or been sold? Is fast growth an indicator of sustained success? Or do companies that live fast, die young? And what does that say about Kiwi entrepreneurial culture?
What is it?
The Deloitte Fast 50 – run by audit, tax and consulting firm Deloitte – gauges and ranks the growth rate of the fastest growing companies in the world. It’s a voluntarily competition and covers a range of sectors, including manufacturing, technology, services, retail and consumer products, exporters and mature business.
To enter, companies need to have an operating revenue over a certain sum ($300,000 in 2013 for those looking to enter this year’s survey), they have to have been running for at least three years and must supply revenue details, export sales percentages, R&D expenses along with independent verification of those figures.
The New Zealand version of the survey is now in its 15th year.
It’s probably no surprise that the Fast 50 has featured some of this country’s most spectacular successes. Global (and now Bacardi-owned) vodka brand 42 Below has graced the list; as has hyper-successful New Zealand online trade site Trade Me; high profile cloud computing company, and now Microsoft subsidiary, Green Button and great white hopes Xero have both made the list at one time or another too.
But the list isn’t about success, it’s about growth. So just how fast is fast?
To register at all on the New Zealand version of the Fast 50 over the last ten years, a company would have to have experienced growth over three financial years of at least 168.7%. To hit the top five, that would be 811%.
If those numbers seem extreme, consider this: for last year’s survey (won by Voyager Internet, followed closely by 2 Cheap Cars, Pie Funds Management, Vend and I Love Ugly), average growth was 1233.2%. In 2011, the average was a staggering 2340%.
While fast growth doesn’t necessarily equal stability of course (and can sometimes mean quite the opposite), failure rates for companies involved are very low. Just two companies that made the top five over the last ten years (prior to the 2015 event) have closed their doors, IT Maniacs, which filed for liquidation in 2008; and touchscreen developer NextWindow, which was sold for US$82M to Canada’s Smart Technologies but closed in 2014.
All the rest of the top five over the last ten years have survived and of those, a 34% have been sold.
So what do these figures tell us? And what do they say about the creative destruction of the market?
Well for starters…
1. It’s all about digital
“Digital technology has taken over at the heart of the lot of these businesses,” says Bill Hale, partner at Deloitte Private.
“You can really see that infiltration of tech into business. The fastest growing companies are very deliberately using technology to connect with their customer base. From the 2014 list, Vend is a SaaS business, 2 Cheap Cars uses online and social media, and Voyager is a service provider to SMEs.”
Image: Bill Hale, partner at Deloitte Private
“It’s become a real theme that we’ve noticed in the last couple of years. Not only are they using this technology to scale quickly, but a raft of services come in behind that and I think that’s were a lot of this growth comes from. A lot of the newer businesses we’ve seen are around helping people use tech in their business or are using the tech themselves.”
Nikhil Ravishankar, managing director of communications at Accenture NZ says he sees a similar trend and that tech companies often display the volatility exhibited in the Fast 50 list.
“Over 60% of the top five business in the list are tech and e-commerce companies,” says Ravishankar.
“Not surprising given this has been the sector with most opportunities to disrupt existing markets and innovate; however this is also where there tends to be the lowest barrier to entry and highest volatility, and therefore also not surprising to see that most business sold, as well as the two business closed, over that period are within this sector.”
2. Scaling is difficult
As businesses scale they require more capital to maintain that growth, and that can create pressure for SMEs looking to make the most of their early successes, especially technology-based companies that often need to do extensive research and development to stay ahead of the curve.
“They go through lifecycles,” says Hale. “There’s a real need for funds, for R&D or scaling, employing staff, so some of [the companies on this list] are effectively capital raisers.”
“Not all of the sales we see here are pure, outright sales. As capital needs increase, these businesses have gone to market and got new shareholders and gone offshore. They’ve diluted down to keep that capital coming in.”
“People can underestimate how much capital is needed to scale,” he says. “People look at big, fast growing businesses and assume cash is just spitting out at the owners, but often there’s just more demand for cash, more equipment, higher head counts, all those issues.”
When you get that fast growth, there’s an absolute certainty that’s something’s going to break or something’s going to happen….No one tells you in business schools that when you grow fast you need more money. You don’t hear about the stress that that puts on the company. – Andy Hamilton
3. Growth brings pressure and that pressure brings ownership changes
“In fast growing companies,” says The Icehouses’s Andy Hamilton, “it’s like the difference between driving a Mercedes and a Formula 1.”
“When you get that fast growth, there’s an absolute certainty that’s something’s going to break or something’s going to happen. When companies grow this fast, they’re thirsty for resources, people and/or raising capital to fund their operation. Everything is coming at you that much quicker – it’s a high pressure environment. No one tells you in business schools that when you grow fast you need more money. You don’t hear about the stress that that puts on the company.”
“Everyone talks about ‘let’s grow, grow, grow’, but seldom to do people say ‘if you grow fast, the risk goes up’.”
“What a lot of businesses do, is they become attractive to acquirers, or the existing investors start to go ‘this is beyond our funding ability’, so it pushes those boundaries on ownership.”
“Having said that, it’s a quality problem to have.”
Image: Andy Hamilton, CEO, The Icehouse
4. An exit strategy is important
“With rapid growth, burn out can happen,” says Hale. “Growth is hard on resources, capital and families, and it’s hard on the people within the business.”
“You may have a great culture but as these businesses get larger, people end up wearing a lot of different hats. That can be exiting, but there’s definitely stretch there too, so for a lot of these businesses, there’s an exit plan in from day one.”
Hale says that pressure can be compounded by New Zealand’s relative isolation from the global market.
“To be fair, if it’s an international business, it’s very hard to run that from NZ,” he says. “There’s a huge drain on owners trying to do that, so for a lot of these companies, that sale is just part of a natural progression.”
5. Exit timeframes are speeding up
One undeniable element of the results is the surprising speed at which businesses are being created, developed and then recycled.
“In the tech industry it is not uncommon for innovation to be driven at the edge by start-ups who are inventing or experimenting with new technologies, and who then get acquired by larger more established players once the idea has been commercialised, e.g. Green Button,” says Ravishankar.
“The macro global trend worth noting in all of this this: Technology disruption is having an impact on the average lifespan of a company; companies are expanding and shrinking more rapidly that even before, leading to significant volatility, be it via mergers & acquisitions or closures.”
Image: Nikhil Ravishankar, communications, media and technology, Accenture New Zealand
“In the 2000s we used to say that it takes 15 years to build and sell a business,” says Hamilton.
“This is further evidence that it can be done in ten. The timeframes to exit are speeding up and that’s encouraging for everyone, both founders and investors. Rather than it taking a lifetime, that recycling is happening.”
6. We’re still a nation of DIYers
Ravishankar says that the healthy sales figures for Fast 50 companies may be an indication of New Zealand entrepreneurs’ energy and self-sufficiency.
“New Zealand is known for being a nation of DIY’ers coupled with a ‘give it a go’ attitude, which are obviously very conducive to entrepreneurship, and, in fact very much aligned to culture and attitude required to take full advantage of the current digital revolution. This is evident in the sheer number of small business in New Zealand and their size i.e. over 95% with less than five total employee size.”
“On the flip side, this geographic isolation and the DIY ways of working can sometimes be at odds with scaling these start-ups and small business to the next level, which might, to an extent explain the high percentage of these companies being sold and exited by their founders.”
7. We’re still not sure whether Kiwis are building companies to pay for their lifestyles
“It is hard to say whether we are serial ‘build it and flick it’ types,” says Ravishankar.
“Most of us probably know of a serial entrepreneur in our networks with multiple start-ups on the go or even people who have been successful entrepreneurs who have shifted into funding and mentoring new and upcoming innovators. The old adage of ‘founders don’t always make great CEOs’ could also apply here in New Zealand.”
“It’s age and stage in life,” says Hamilton. “If people are exiting in their 30s and 40s, then absolutely they’ll be going [to be starting companies] again.”
“For people in their 40s and 50s, that’s probably not the case. The evidence here suggests to me that they’re not going on in business, but they’re recycling the money and investing in other businesses. They’re moving to become investors. The data suggests that.”
“New Zealand is known for being a nation of DIY’ers coupled with a ‘give it a go’ attitude, which are obviously very conducive to entrepreneurship, and, in fact very much aligned to culture and attitude required to take full advantage of the current digital revolution.” – Nikhil Ravishankar
8. It says a lot about emerging tech
“I think the list shows that the newer NZ economy is based around those technology-embracing business,” says Hale.
“Whether you’re a pure tech company taking your products to the world, or using technology to engage with your customers or helping people to use the technology better, that tech backbone – there’s a real industry in supporting that.”
9. In the eyes of investors, fast growth = quality
“Some of the exits happen gradually as investors come in and let the owners take money off the table,” says Hale.
“So those operators dilute down and become a smaller holder in the business. To be fair, the Fast 50 list has become a little bit of a buyer’s or investor’s wish list. We’ve had two business that have made the list five times – TradeMe and Next Window – they’ve kept their growth going and ended up with large businesses and significant exits.”
“The Fast 50 is an index around recognising businesses are doing things and growing successfully at the top benchmark,” says Hamilton. “The question is: Are these businesses good businesses?”
“Well 34% of them have been purchased, and I guarantee you that 34% of businesses are not sold every year. The Fast 50 group, because of their fast growth, are great opportunities for investors and shareholders, so the index is indicative of good companies, because that 34% have been purchased. People see value there.”
“If you get onto the Fast 50 list you’ve got a one in three chance someone will want to buy you.”