10 Lessons From The Inc. 500

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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What do the following words and phrases have in common: government services, IT services, business services, and California? They’re the words that bubble to the surface if you do a content analysis of the just released 2011 Inc. 500 list of fastest growing small companies.

I always look forward to the annual Inc. 500 list, which expanded to the Inc. 5000 in 2007. I follow it not so much because I’m interested in the companies that make the grade, but because it lets me put a finger on the pulse of entrepreneurship.

This year was particularly interesting because companies are ranked by their three-year revenue growth, and this year’s winners would have to have achieved their growth during the recession.

I used Wordle to create a picture of the words that most commonly appeared in the descriptions of this year’s top 500. If you’re not familiar with Wordle, it’s a simple word cloud tools (they call it a toy) that allows you take a chunk of text and instantly create a image based on the words that appear most frequently.

Can You Say "Service"?

The Inc. 500 list lumps products and services together, but there’s heavy emphasis on the latter, as you can literally see thanks to Wordle. The “products and services” sector dominated the list with 39 percent, or 198, of the Inc. 500 entries.

We all know that we’re a service economy, but what was surprising in the list, was the composition of the category. Almost a third (62 of the 198) were involved in government services, up from only 35 in 2007. Obviously, some smart entrepreneurs managed to rake in their share of federal stimulus monies that poured into the economy over the past few years.

The balance of the 198 sector winners provided products and services (again, with an emphasis on the services) in:

• Information technology: 22 percent
• Business: 19 percent
• Consumer: 15 percent
• Financial: 12 percent
• Environmental: 02 percent

Location Matters

Almost a fifth of all winners were based in California, more than double the next two most common states, Virginia and New York with 7.4 percent each. Together, California, Virginia, and New York plus Florida and Texas accounted for about half of the Inc. 500 winners.

Year over Year Changes

But what about the recession? I decided to look back and compare the composition of the list before the recession, in the middle it, and most recently.

Aside from the big increase in government services, a couple of interesting industry changes bubbled to the surface:

• In 2007, 10 percent of the Inc. 500 was comprised of human resource companies. In 2011, only seven companies(compared to 50 in 2007), made the list. The labor and talent shortages that dominated the minds of business owners before the recession obviously took a back seat to economic woes.
• Before the recession, the word “marketing” showed up a lot in the list. By 2008, it was lost in the noise as companies focused more on survival than growth. In 2011, the list once again prominently featured "marketing"—perhaps a harbinger of economic recovery.

Flaws

That’s all interesting, but I think we have to recognize that the Inc. 500 “competition” has a few flaws. One is that growth percentages can be skewed in favor of those who did poorly in the first year. Second, I’d be more impressed if the growth was based on profits, rather than revenue—the latter without the former just doesn’t do it for the former-banker in me. And third, many of the applicants, who pay $125 to apply, do so entirely for the publicity value of being able to brag about the fact that they’re an Inc. 500/5000 company.

Opportunity

Still, the list holds a wealth of data gems, competitive information, and business plan fodder that simply isn’t available elsewhere. Best of all, the Inc. website offers lots of tools to help you in your search. Here are some ideas of how you can use it in your business:

1. Compare your per employee revenue to that of others in your industry. Stratus Building Solutions tops the list at $9.1 million per person. A more typical rule of thumb is $100,000.
2. Use the per person revenue to help project your own employee hiring needs.
3. Evaluate the trend of companies in your industry that make the list and use it to show investors to build enthusiasm for your business.
4. Use it as a sanity check when projecting your own growth.
5. Look for downward trends that might portend trouble for your business.
6. Compare your eating, sleeping, commuting, social networking, and work habits to those at the helm of fastest growing companies.
7. Check out the multi-year winners to see who has the greatest staying power.
8. Compare your business to others in your state, region, and industry.Do you measure up?
9. Pick your favorite winners and commit to reading their blogs, and following them with other social media.
10. Read and reread the inspiring stories of those who have struggled and won.

Some of the nation’s most recognizable companies have had their place on the list including 7-Eleven, Toys 'R' Us,Zappos.com and many others.

While not every entrepreneur aspires to the fast paced growth it takes to make the cut, it’s hard not to be inspired by those who have.