Busting Myths About High-Growth Startups

Each year, a variety of prestigious organizations and publications issue lists of the fastest growing tech startups (Deloitte Technology Fast 500), private companies (Inc. 5,000) or other such categories. Somehow, the entrepreneurs who make these lists have figured out how to grow their businesses quickly, and have discovered the best growth levers to pull more quickly than other founders.

But while examining the companies on these lists always proves interesting, numerous myths persistent about the kinds of businesses that earn such aspirational accolades.

When the Kauffman Foundation — a premier entrepreneurship think tank — examined the Inc. 5000 list closely, it identified three key myths that challenge what millions believe about high-growth businesses:

The Location Myth: Most people believe that America’s fastest-growing companies are heavily over-weighted in startup hotbeds such as Silicon Valley, Boston’s Route 128, Austin, TX — or more recently — Southern California’s “Silicon Beach” area (where I live and work).

As it turns out, however, a “heat map” of the U.S. showing high-growth company locations indicates they exist in every region of the U.S. While there are certainly heavy clusters in the entrepreneurial hotspots above, states such as Arizona, Washington, Oregon, New Mexico, Michigan, Illinois, Florida and others are home to hundreds of the fastest growing firms.

The Industry Myth: Most people also assume that high-growth companies are mainly in some kind high tech field. That, too, is a myth.

When Kauffman broke it down, they did find that 25.6% of the companies were in areas considered high tech, such as information technology (IT) and healthcare/biotech. But Kauffman also found that 10.1% were in business services, 8.5% in advertising and marketing, 7.3% in government services, and 48.1% in numerous other sectors outside of high-tech.

The Funding Myth: And — of course — there is widespread belief that most of the nation’s fastest-growing startups are backed by venture capital (VC), private equity (PE) or angel investor funding.

Alas, that’s not the case either. Borrowed money — from banks, crowd funding platforms or other sources — was the largest single source of startup capital for the fast-growers. About 35% of the companies on the Inc. list received funding from that source.

Personal savings was close behind at 30%, followed by money from friends and family (6.3%) and credit cards (6.2%). Angel investors provided funding to 5.8% of the companies, while just 4.4% received formal funding from venture capital firms. A mere 2% received funding from government-related sources, including government grants.

Lessons for Would Be Entrepreneurs

What this should tell would-be entrepreneurs, of course, is that you don’t need to be a high-tech, VC-backed startup in Silicon Valley to launch and build a highly successful, high-growth company. Sure, those kinds of sexy stories tend to get more attention from the media. But as a closer look reveals, they definitely don’t represent the real world.

Three takeaways from the Kauffman research:

1) Venture capital is not a requirement for rapid growth. Far more entrepreneurs hit it big by building businesses with their own funds, or funds from family and friends, generating revenue and actual profits (a novel idea for some VC-backed tech firms), and then bootstrapping the venture to greatness.

2) Locations outside of high-tech hotbeds have their own tangible and intangible strengths. These can include lower business costs and cost of living, a longer “runway” before burning through available capital, access to underserved clients and markets, and a strong work ethic among employees.

3) The mentor next door. Three out of four high-growth entrepreneurs had mentors. But in the most highly competitive markets, mentors are harder to come by. Smaller communities can provide easier access to experienced mentors for budding entrepreneurs.

For more myth-busting ideas and research on high-growth entrepreneurship, visit the Kauffman site called Growthology.

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