The term “emerging company” is frequently used; however, there is still no widely accepted definition of the term and the characteristics of the firms that might fall within the scope of the definition. This post will not resolve the issue but it will nonetheless provide some ideas of the types of companies that are the focus of The Emerging Companies Blog.
It is telling that the terms “emerging company” and “emerging growth company” are used interchangeably. While I selected the former for the title of this blog it should be understood that a growth-oriented strategy is a key element for the types of companies that I am interested in. Also, while I will discuss the trials and challenges that small groups of entrepreneurs will go through during the very earliest stages of conceiving and starting their business (i.e., the “concept” stage), my real interest is in what happens after the “next great idea” has left the garage or the laptop in the attic and landed in its own discrete working space with human and financial resources obtained from outside the founder group.
Applying these conditions, and a few others, I think that a working definition of an “emerging company” should begin by focusing on newly formed or reorganized companies that have successfully survived the early challenges that typically drive 80% – 90% of new firms out of business and established a resource base and organizational structure suitable for sustained growth. One very important implicit assumption in the previous sentence is that the founders, other senior managers and outside investors have all targeted growth and expansion as a key goal in the overall strategy of the company. In addition, emerging companies are built on the assumption that the desired growth will come from some new and unforeseen development that totally changes the dynamics of the market in which they are competing—technological breakthroughs, dramatic shifts in the costs associated with satisfying existing consumer needs, identification of new consumer needs and/or sociological or economic changes. It is the job of the managers of the emerging company to embrace and exploit these developments by identifying business opportunities and creating new products or services to take advantage of them.
Whether or not a particular company is “emerging” is sometimes assessed by reference to how the company stands with respect to certain key business and financial characteristics. These characteristics not only test the current and projected financial performance of the company—measured by revenues, sales, profit margin, cash flow, etc.—to determine whether the business has been, and will be, generating steadily increasing revenues at above-average rates, but also examine whether the company has the resources and strategies in place to grow rapidly. Specifically, in order to qualify as “emerging” a company should demonstrate all or most of the following characteristics:
Management: Probably the most important success factor for any business is the presence of qualified, experienced and credible management and this is especially true in the case of emerging companies since they must face and overcome turbulent and challenging conditions as they move quickly through several growth stages. Ideally, the founder(s) and other senior managers should be experienced in the target industry and each of them must demonstrate a strong entrepreneurial spirit and dedicated focus on the business. In any event, the company must have a management team in place rather than just one person acting as the CEO.
Distinctive Competence: A company should have a distinctive competence in one or more areas that are essential to competitive success in its particular market. Examples include proprietary design technology (e.g., patents and trade secrets), manufacturing know-how, a unique brand, or extraordinary services.
Market: Emerging companies tend to be technology-oriented that have the potential to achieve annual revenues of at least $50 million on a profitable basis within three years after launch and ultimately attain a market valuation in excess of $1 billion within five years after launch. While the current size of the market is relevant the more important consideration is whether the market is expected to grow and expand rapidly in the future and, in fact, many require that the company be competing in an industry that itself is considered to be “emerging”. A related issue is whether the company has a sensible and believable strategy for distributing its products and services within the target market.
Strategic Alliances: Emerging companies must have, or be in the process of developing, relationships or contracts with recognized companies in the industry in order to demonstrate the credibility of the company’s business model in the marketplace. Strategic alliances can provide access to technology and other needed resources and allow the company to scale up its manufacturing and sales activities quickly without having to make substantial capital investments.
Products: Emerging companies have innovative distinctive products, processes, or services that can dominate a niche market segment. Ideally the company will be able to begin commercialization of its products immediately following completion of development without delays caused by the need to overcome regulatory hurdles; however, biotechnology and life sciences companies certainly fall within the definition of emerging companies even though they generally must wait several years before their products are approved for release to the public. It is also a positive sign if customers must make recurring purchases of the company’s products and services.
Margins and Cash Flow: Actual or potential gross margins and/or cash flow should be large enough to permit financing of growth over an extended period of time, and produce a favorable return on invested capital.
Food for thought . . .
Where does your company or client stand in relation to the various characteristics of an emerging company listed above? What characteristics might be the most important? At what point should the founders begin to structure their business model and strategies to guide the company into the profile of an emerging company?