The Challenge of Early-Stage Companies Sustaining High Growth and Defying the Gravity Effect

We identify a model of early-stage company growth persistence. Using seven commercial high growth company lists (either a Top 500 or Top 100 list of companies), we find that approximately 30% of companies remain on these lists for two consecutive years. This 30% figure also approximates the likelihood of companies on the list in the first year after being ranked repeating for a subsequent second year. To probe potential explanations for the 30% consistency, we examine the Inc.5000 list that Inc. magazine has published since 2007. We find that many of companies have significant drops in their growth rates post the year in which they are included in the more demanding Inc.500 list — this is the classic mean reversion or what we call the “gravity effect.†Next, we examine how the measurement of growth affects the growth persistence reported in these commercial high-growth lists. We build our own database comprising over 100,000 privately held companies from 11 different countries using ORBIS. We find that reported growth persistence, as defined by the transition probability, depends significantly on the choice of a growth measure. In particular, the use of longer periods to estimate growth and the use of average year-by-year growth (rather than difference between last and first years) increases the ability to identify companies with sustained high growth. These results, which hold for both revenue and headcount growth, highlight how reported growth rates and reported growth persistence rates can be engineered by the specific growth metric choices made. They also highlight how the commercial high growth company lists have an agenda that their lists understate the likelihood of early-stage companies achieving sustained high-growth. Implications for research, for media publishing high-growth company lists, and for the management of early-stage companies are discussed.