High Growth Rates in Sales

The next focus of this section is on factors associated with high growth rate of sales, distinguishing firms which experienced annual compound rates of sales growth at levels significantly above those of other firms. We actually undertake the analysis based on a variation of an earlier definition of fastest-growth firms (Reynolds, 1993) that utilized the annual compound rate of sales growth. To undertake this analysis we divided the population of firms which survived at least four years into two sub-groups using one-half standard deviation from the median, annual, growth rate. In our sample this division yielded 44 firms in the highest-growth category and 227 firms in the other categories. The highest-growth, average, compound, annual, growth rate in sales was 141%. The comparable rate for the rest of the firms was 16%. This includes firms which had gains and others which experienced losses in sales over four years.

The highest-growth firms are different in several other ways as well. Their first year sales are markedly smaller, on average, $83,461 compared to $269,975 for all others. This low start obviously makes it more likely that they can experience higher relative rates of growth, if they are successful. Their smaller initial sales are not particularly reflected in lower levels of employment. The average number of employees for all other firms their first year was 4.5 persons while for the fastest growers the average is 3.9 persons. By the end of the fourth year, the fastest growers are quite distinguishable. Their average sales had risen to $764,478, and their average employment was 8.6 employees. These are markedly greater than the others which had average sales of $435,536 and average employment of 6.6 persons. Of all these differences, however, only two are statistically significant -- the compound annual rate of sales change, as one would expect by definition, and the average annual change in employment. The two are closely intertwined.

Some 30 other characteristics of the firms or their teams appear in Table 2. The first column contains the survey results for the fastest-growing firms with regard to each individual characteristic. In the second column is the comparable figure for all other firms combined. The third column contains a statistical estimate (t-test) of the association between the preceding two columns. In instances where the differences are statistically significant, this is noted by the presence of asterisks.

In several respects, such as the average team size, the representation of males on the start-up team, and the average age of the owner, the highest-growth firms look extremely similar to all other firms which had survived four years. But as one looks further down the list, there are several differences between the two groups, mostly in the direction one would expect. For example, highest-growth firms have more leaders who have completed college and who have had experience starting other new businesses. The fastest-growth firms have more commonly been started as corporations. The owners of the fastest-growth firms' incomes tend to be higher both near the beginning of the firm and later. Unfortunately, only one of the differences is statistically significant--the percentage of leaders with a college degree. The other factors cannot be said to matter.

Fortunately, a few factors that matter (statistically) are identifiable. The fastest-growth firms themselves are much more likely to have been started in manufacturing, FIRE, or business services. They had higher first-year sales outside of Wisconsin, no doubt due, in part, to the industries in which they are concentrated. The firms were also considerably more likely to consider themselves to be "high tech." And given their sales trajectories, it is not surprising to see that the highest growers expect their sales in five years to be almost three times greater than the average for all other firms.

What may be a bit surprising is that some of the early financing does not fit neatly with their high growth. The teams did not initially invest more money. The fastest-growth firms did not finish their first year with higher average assets. Nor did they develop greater equity. They tended to borrow more money, but the differences are not significant.

Some of these relationships have been found previously (e.g., Keeley and Knapp, 1994; Reynolds, 1993 ). But the scale of most of the differences varies from other inquiries. One possible reason for the differences is sample sizes, both smaller and larger than ours. Another reason is definitions of high growth - ours is less exclusive than some. A third is the mix of firms in Wisconsin: the state may not contain the truly high performers that others have studied. And a fourth is that we have a more precise measure of firm age than some studies (e.g., Reynolds, 1994). One piece of good news is that accepted wisdom is often shown to be reflected in the relationships. The other good news is that having only modest start-up team investment-resources is not the kiss of death or mediocrity. Firms appear to need an average threshold of initial investment considerably higher than the low growth average of $11,615. But having close to this implied threshold or higher does not in any way guarantee more rapid growth; it just increases the potential.

Consistent Sales Growth

There is not a clear sales path to longevity, but there may be some important links between the number of paired-years of growth and such factors as employment, sales, assets, and their growth. One possible factor related to consistent growth is the number of employees initially. One could speculate that having more employees should lead to more consistent growth. When the sample of firms is divided by the number of paired years of growth we find that those firms which grew more consistently had more employees, on average, their first and their fourth years. Firms which did not grow averaged 2.1 employees their first year and 4.3 their fourth. Those with one set of paired-years of growth averaged 3.8 and 4.8 employees, respectively; those with two paired-years, averaged 4.2 and 6.7 employees, respectively; and those which grew consistently averaged 4.8 employees in their initial year and 7.9 in their fourth. But when we check for the statistical significance of the size differences ( Table 3), we find that it does not exist: the number of employees is not consistently related to consistency of sales growth.

Perhaps consistent growth is related to high sales starts? This was not the case. In fact, there is a very strong and statistically significant inverse relationship between consistency of sales and level of first year sales. Those survivors which grew slowly, if at all, had average, first-year sales of $324,985. By contrast, firms which grew consistently had an average, first-year sales of $145,969. It could well be that with a smaller sales base, more growth would be expected.

This expected growth did occur in an absolute sense. Firms which grew every year added $309,000 to their average sales figure by their fourth year. Those which did not grow as consistently added $155,178, on average, over the three year period. But the differences in fourth year sales are not statistically significant. All that is the dramatically higher compound annual growth rate (60%) among consistent growers.

Changes in Finances

The relationship of various finance factors to consistent growth in sales is another question. We find that initial assets bear little relationship to initial employment level and growth of sales or employment. The firms that grew consistently in sales had lower levels of assets at the end of the first year, $70,904, on average, than the firms which grew inconsistently, $101,716. The difference, however, is not statistically significant.

Initial equity, defined here as the amount that the start-up team invested before other financing, also appears to be unrelated to subsequent growth patterns. As we look down the list of factors, there is no clear pattern in the equity and debt levels. Financing seems not to matter in any consistent way.

Overall, continuous sales growth is positively associated with few factors. These include firms with higher percentages of leaders with college degrees, lower first year sales, higher compound sales growth rates, and more major start-up problems. Basically, there are few hints here for entrepreneurs seeking consistent sales growth.

Employment Growth

The analysis to this point has been concerned only with sales' growth patterns. Some entrepreneurs are more concerned with employment growth. Because of that concern, we briefly analyze the same set of factors to see whether any are related to employment growth. The statistical analysis appears in Table 4.

To examine possible relationships between employment growth and these 35 factors, we divided the population of firms into two groups: those which had realized fast employment growth, defined as adding one or more employees annually, and those which did not. Surprisingly, some of the factors that might have been expected to be related to sales growth but were not are found to be related to employment growth.

Average team size and legal form are statistically related to rapid employment growth, as are first year assets and 1993 average total debt. These seem logical: more leadership and more resources could be linked to faster growth and an ability to pay for more employees. High initial and fourth-year sales levels are statistically linked to employment growth, as are a high rate of sales growth, high first-year employment, high first-year sales outside of Wisconsin, and high levels of sales in five years. Overall, some twelve of our 36 factors are statistically, significantly related to rapid employment growth. This number gives entrepreneurs a little more insight into what it is they might be able to do, if they seek to achieve higher levels of employment growth. But what should also be clear is that few of these relationships hold for achieving any of the other three possible goals.

Top of Page
Previous Page | Main Page | Next Page


1997 Babson College All Rights Reserved
Last Updated 4/1/97 by Cheryl Ann Lopez

To sign-up for the Center for Entrepreneurial Studies' publication lists,
please register with the
Entrepreneurship WebTeam.