![]() In software and services, one of these matters more than the other. ![]() Classical corporate-finance theory holds that value creation stems from only two sources, growth and return on invested capital. Our data set is drawn from the McKinsey Corporate Performance Center and includes around 3,000 companies active between 19 in the Internet, application, gaming, and systems sectors it excludes network providers and hardware/device companies. It’s no secret that growth matters for any company and that software and online-services companies 1 1. If not, the research can help them determine the right time to make the transition to a second act that can sustain their growth and avoid some common pitfalls that have derailed several such transitions. Pitfalls include transitioning at the wrong time and selecting the wrong strategy for the next act.Ĭompany leaders can use these insights to understand their growth trajectory and determine whether their current products and strategy are sufficient to reach their aspiration. Finally, successful companies master the transition from one act to the next. ![]() Successful strategies in act two include expanding the act-one offer to new geographies or channels, extending the act-one success to a new product market, or transforming the act-one offer into a platform. A third principle is that the drivers for growth in act two are different. In act one, there are five critical enablers of growth: market, monetization model, rapid adoption, stealth, and incentives. First, growth happens in phases: from start-up to billion-dollar giant, growth stories typically unfold as a prelude, act one, and act two. While every company’s circumstances are unique, the research found four principles that are essential to sustaining growth and from which every company can benefit. Those companies that did regain their historical growth rate had market capitalizations 53 percent lower than those that maintained supergrowth throughout. Approximately 85 percent of supergrowers were unable to maintain their growth rates, and once lost, less than a quarter were able to recapture them. Of the approximately 3,000 companies we analyzed, only 17 achieved $4 billion in revenue as independent companies. Just 28 percent of the software and Internet-services companies in our database reached $100 million in revenue, and 3 percent reached $1 billion. Companies have only a small probability of making it big. ![]() Further, we observed no correlation between cost structure and growth rates. Increases in revenue growth rates drive twice as much market-capitalization gain as margin improvements for companies with less than $4 billion in revenues. Additionally, growth matters more than margin or cost structure. “Supergrowers”-companies whose growth was greater than 60 percent when they reached $100 million in revenues-were eight times more likely to reach $1 billion in revenues than those growing less than 20 percent. Second, growth predicts long-term success. High-growth companies offer a return to shareholders five times greater than medium-growth companies. Three pieces of evidence attest to the paramount importance of growth. The research produced three main findings. We also surveyed executives representing more than 70 companies and developed detailed case studies of companies that grew quickly and others whose growth stalled. ![]() In our new research, we analyzed the life cycles of about 3,000 software and online-services companies from around the globe between 19. To date, little empirical work has been done on the importance of revenue growth for software and Internet-services companies or how to find new sources of growth when old ones run out. The industry’s booms and busts make growth, an essential ingredient in value creation, difficult to understand. But we have seen similar industry phases before, and they have often ended with growth and valuations fizzling out. Year-old companies are turning down billion-dollar buyouts in the hopes of multibillions in a few months. Software and online services are in a period of dizzying growth. ![]()
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