Early this year, BRW set out to find Australia's fastest-growing start-ups, the outcome being the first BRW Upstarts list. We call these companies Upstarts because they are aggressive, occasionally arrogant, and are changing the way business is done. To qualify, companies must be less than four-years old, and have made at least $500,000 in revenue in the 2003-04 financial year.
Forty companies eventually made the list, and each was analysed and surveyed. Some of the companies might one day make it to the BRW Fast 100 list (which looks at fast-growing small and medium-size enterprises that have been in business for four years or longer). Some of the Upstarts entrepreneurs might make the BRW Young Rich list (if they 40 years or under) and possibly even the BRW Rich 200.
BRW Upstarts research reveals a group of well-off serial entrepreneurs who begin well-planned businesses from home and, in a few years, become market leaders. These entrepreneurs tend to be exporters. More than half (54%) export, and 36% get more than 5% of revenue from exports. Half say they have international partners.
They are serious about innovation: one- third of the companies are spending more than 10% of revenue on research and development. Only 12% say they spend nothing on R&D.
Although they have not yet celebrated their fifth birthdays, many have already changed their industry for the better. Nudie Foods Australia, with its strikingly different fruit juices and brazen advertising, is a typical Upstart that gives its customers an innovative new product experience. It has pushed the giant juicer Berri to respond with new products.
Most of the Upstarts are between two and four years old. Their 2003-04 revenues range from Nudie Foods' $12 million to $500,000 for the fashion designers Ginger & Smart. Most of the Upstarts were started by men and more than half were started by people in their 30s.
Phil Ruthven, the chairman of the business information company IBISWorld, says one Australian household in seven now runs a serious small business. Ruthven says: "The Upstarts list includes the smart Generation Xers and the change of mindset they represent. The concept of being an employee has no appeal to the younger generation.
They either work for corporations with a contract mindset and view themselves as their own business or they run their own business. Although this terrifies the baby boomers, it is normal for the Gen Xers and those following. It won't stop this century."
Forget the conventional image of the founder of an Upstart being a high school drop-out who goes into small business. The BRW Upstarts are extremely well educated and qualified: only two had done no study after finishing high school; 25% have MBAs.
Many have completed other courses and joined networks, which they say were very useful, including the Young Entrepreneurs course at the Haas School of Business at the University of California Berkeley, AusIndustry's Comet programme, Young Entrepreneurs Organisation, The Executive Connection and networking functions and conferences run by industry associations. Elisabeth O'Brien, the founder of Australian Celebrations Training, says that doing a masters of marketing helped her to understand intuitive marketing. "I was impressed by the combination of solid knowledge and gut feeling."
Most Upstarts are experienced entrepreneurs: 70% have started businesses before and have corporate backgrounds.
More than half the companies were started from home. Start-up costs for 28% of the founders exceeded $500,000 although most of the entrepreneurs (49%) say it cost $21,000-500,000 to start the business; 10% started with less than $5000.
Nearly half the businesses were on the drawing board for between seven months and two years before they were launched; 54% took less than six months to plan.
A few opened after just a few weeks of planning. Chris Gray, founder of corporate marketing communications company, ICON International Communications, says it took three weeks from the initial idea to launch. "The initial business plan was written at home over a number of late-night sessions, and the business was started in the lobby of a Sydney hotel on a clunky old laptop and rented mobile. We did not have any premises for the first few weeks of operations."
Only half the businesses were profitable from day one, but nearly all (90%) were profitable after several years. The Upstarts are rewarding themselves with handsome salaries. Nearly half (46%) are paying themselves more than $100,000 a year; 10% earn more than $200,000 a year.
Ruthven is surprised that the young entrepreneurs take so much money out of their businesses. "The average national income for a two-income family is $94,000 and we know that the average small-business owner makes less than that. So this group of start-ups is doing very well financially."
Most of the companies are being run by the founders but 7% have appointed managing directors, some of whom are older, very experienced executives who demand high salaries. For example, David MacInnes runs Plantic Technologies, which is commercialising a biodegradable plastic, and is being paid more than $200,000.
But 8% of the Upstarts founders are not yet drawing a salary and another 8% are drawing a salary of less than $50,000. Angie Bradbury, founder of Liquid Ideas, says the worst part of running a start-up is the lack of money in the first few years. "I earned $10,000 in year one as salary."
Anna Whitlam, founder of the recruiter Market U, says she started her business on $30,000, some of which was borrowed against the equity in her apartment and $15,000 from her mother (which she paid back in six months). "For the first six months, I did not draw a salary."
Many of the entrepreneurs put in back-breaking hours. About a third of them work more than a 70 hours a week and most work 45-60 hours a week. Only 10% say they work less than 40 hours a week.
Gray says he works in the office three days a week but "works on the business seven days a week". Whitlam says in the early days of a start-up, normal social life and recreations have to be abandoned. "It can be very lonely and at times drive you to despair, particularly in the middle of the night when the technology lets you down and you need to have a proposal to put before a client first thing in the morning."
Most of the entrepreneurs (72%) intend to keep expanding their companies. Only three companies plan to list on the Australian Stock Exchange soon; 8% plan to sell in the next two years and 6% plan to sell after five years. Many of the companies say they have received offers to sell. William Scott, the founder of marketing company Smart, says he has been approached by several companies to sell. "We still want to build a lot further before exiting."
But no matter what their intentions, nearly every company claims to be a leader in their field, the downside of which is that potential clients do not understand what they do. Upstart Charlie Gunningham from Aussiehome.com says: "You have a great system, many dozens of clients are using and loving it, and some people just dig their heels in and won't give you a go. Frustrating! But that's the challenge."
Elisabeth O'Brien, founder of Australian Celebrations Training, says that when a company is a market leader, it is hard to gauge the acceptance of price by consumers. Calytrix Technologies also found there were no products similar to the software tool it had created and was setting its own prices.
Growth in any industry
The Upstarts show that fast growth is possible in any industry, whether it is declining, maturing or emerging. The list has many industries, ranging from retail and manufacturing to technology and telecommunications.
Some industries dominate, particularly business services. The outsourcing trend, whereby small businesses provide services to large companies in their non-core activities, is very strong. These small businesses focus on a very specific niche and solve a specific problem.
The CFO Solution, for example, was set up to take over the back-office functions and day-to-day financials for listed companies drowning under the increasing cost and complexity of compliance. Its founder, Phillip Hains, says: "We only work with listed companies - no others. We have a firm grasp of what the regulators and governments expect and are also planning for the future."
One industry sector that has been slow to grow in Australia has been private companies in health care, mainly because Australians expect that governments should pay for medical services. The list indicates that private operators are moving into this industry; three health-care companies are on the list: BodyOnline, Neuromonics and Eyecare Plus. But Ruthven of IBISWorld says he is surprised there are not more.
Why they grew
Why do the Upstarts grow so fast? One reason is that these are highly innovative companies aiming to be leaders in their field. A 2002 report by the OECD, High-growth SMEs and their contribution to employment, which examined the characteristics of high-growth companies, found that their most salient characteristic is the ability to innovate.
This characteristic is clearly evident in the BRW Upstarts. They make technical advances in products and services, develop new products and make organisational and marketing innovations. They are strongly market-oriented, forge links between their technology and markets, and adapt their products to respond to consumer trends and client demands.
BodyOnline, for example, makes 30-second video animation clips that show the effects of various diseases on the human body. The clips are sold to doctors and pharmacies. Its founder, Greg Richard, says: "We grew fast because we brought new technology to a market where there was little technology and in a market where the Government was making technology mandatory."
Another example is Electronic Keying Australia, which uses new technology to create keys that use a wireless access control system that is cost-effective and offers more flexibility. Its founder, Steven Fine, says: "We sit between the old-style mechanical security locks, which have not changed for decades, and the expensive fully wired access control security systems. Our technology requires no wiring to the door, so our electronic keys can work anywhere and are told what they can unlock and at what time."
The manufacturer Callidan Instruments is not selling a unique product but it costs less and is better than its competitors' products. The company's design for a microwave analyser, which measures the amount of moisture in coal, was not new but the price was competitive with alternative technologies and it is more accurate and easier to use.
Another key characteristic of fast-growth start-up companies, according to the OECD report, is teamwork: regular communication, shared decision-making, skills training and profit-share mechanisms. High-growth companies also tend to be decentralised, participatory and readily adaptive organisations.
Steve Watson, who runs the construction certifiers Steve Watson & Partners, says his human-resources strategy was the main reason he grew fast. "We shot for a flat management structure, demolished all our offices and embarked on a campaign to empower even the most junior staff. This accelerated a focus on quality management as well as client expectations with significant results."
The founder of Aussiehome.com, Charlie Gunningham, says: "Our business model is so different from what we thought it would be and we are doing things now we never thought of. What we thought would earn the most money is actually earning the least."
The OECD report says high-growth companies are well integrated into a network of alliances and partnerships with other companies, service providers and public and private institutions. This network is absolutely crucial. When BRW asked the Upstarts what their best strategic move had been, many said it was developing external relationships and networks. Careers Australia says developing alliances with other quality specialist recruitment companies helped it to stay focused and strengthened its unique position in finance and accounting recruitment.
HotMagna says its best strategic move was forging alliances with multinational IT vendors including Sun Microsystems. Wireless IP aligned itself with Microsoft to fast-track sales and commercialisation of its software.
Other Upstarts use a large business to champion their products. The gift company RedBalloon Days says it deliberately pursued strategic relationships and customers who would openly promote the company to staff and customers. The biodegradable-plastics company Plantic Technologies focused its limited resources on getting a multinational brand owner to adopt its technology and launch with it. David MacInnes says: "We did this with Cadbury Schweppes' Milk Tray and this achieved our goal of getting credibility for the technology as quickly as possible."
High-growth companies face many difficulties: obtaining finance, expanding markets, calculating the risk of alliances, finding the right partners and consultants and hiring and training staff. But the Upstarts tend to nominate attracting and retaining staff as their greatest challenge. About 41% of the entrepreneurs say they have had trouble attracting the highly skilled staff they need. About 56% say they used recruitment agencies to hire staff but only half of those found it helpful.
It is easy to understand the angst when so many of these companies attribute their fast growth to their people. "Without a doubt the reason we grew so fast was our people," says Aussiehome.com's Gunningham. "The atmosphere is terrific. I love going to work where the staff are 15 years younger than me and very creative, show initiative, into R&D and are fun!"
THE HARDEST PART
Maintaining constant enthusiasm in the face of bloody difficult situations.
The uncertainty about how successful a product will be, even when you have done extensive market research.
The relentless pace at which you must work with limited resources and people.
Ginger & Smart
Ensuring business systems keep up with business growth.
Worrying how to pay the next wages bill.
Business Strategies International
Getting used to the fact that you generate your own pay cheque.
Ensuring the company is successful while spending quality time with a young family and enjoying life outside work.
ARK Consulting Group
The constant stress of trying to find new customers and projects to support a growing workforce.
Managing profitable growth and maintaining cashflow.
ICON International Communications
Having to be jack-of-all-trades and master-of-all.
Nudie Foods Australia
How to attract new customers
Play golf and catch the bus to work. Simple things like these provide Upstart companies with new customers. Chris Gray, the founder of Icon International Communications, says he uses every meeting, every event and every social occasion to hunt for business. "Two of the best international opportunities for our firm came from discussions on bus trips to work, and many good leads have been struck up on the fairway."
Cash-strapped start-ups with tiny advertising or marketing budgets can find the constant hunt for new customers time-consuming and stressful.
But the Upstarts relish the hunt and use every resource available to snare new sources of revenue. The strategy that works best, they say, is to use existing customers to attract new ones. Karina Heikkila, the founder of the software company Objectify, says: "No one sells our products better than our existing clients. Just one or two comments to their peers results in additional sales at the lowest possible cost."
Testimonials and written referrals are also used. Visean Online seeks a written or verbal referral from a satisfied customer to a new customer five days after a job is completed.
The education provider Eduss uses credible and independent third-party endorsements to attract new customers. Neuromonics, which sells a cure for ringing ears, uses client testimonials.
Calytrix Technologies favours product testimonials. Its founder, Mark Rheinlander, says: "In our industry, prospects like to hear how other companies have benefited from our products." Electronic Keying Australia uses case studies in their advertising and direct mail. Its founder, Steven Fine, says: "Rather than an information dump, a case study does a far better job of attracting new customers."
The entrepreneurs also love the "try before you buy" approach and offer free trials and prototypes. They are so proud of their products that they feel if they can simply get people to sample them, they will win new customers.
Telecommunications company Symbio Networks swears by its slogan 'Don't pay until it works'. BodyOnline, which sells videos showing the effects of human diseases to doctors, says the company works in a conservative market. Its founder, Greg Richard, says: "The only way to attract customers is to demonstrate."
George Deligiannoudis, the founder of telecommunications company Wireless IP, says his industry is riddled with PowerPoint product presentations. "Our motto is 'real demonstrations', which has got us into some curly situations, but we firmly believe this approach has given us a reputation for delivery and some of our largest customers. Our ability to demonstrate it working, at every opportunity we get, is the key to attracting new customers."
The Upstarts work very hard on their pitches to prospective clients. ETM Travel says it exceeds expectations at the proposal stage. Founder David Hummerston says: "Instead of sending a proposal to Perth, we flew over for a one-hour meeting."
Ivan Kaye, founder of Business Strategies International, which assists companies to raise capital, develop growth strategies and ways to export, says: "We target customers carefully and develop a pitch that gives them something they can't refuse."
Some also use the media to win new business. Aussiehome.com says it wins awards and puts out press releases to help increase brand awareness. This helps it develop a reputation among its clients as an award winner and an industry leader.
Others use spin. The manufacturer Loaded Footwear found the best way to get customers was to spend money on public relations and be consistent with the message to consumers. Australian Celebrations Training says it successfully engaged the public relations company Spin to increase awareness.
Some Upstarts develop a reputation as a specialist in their industry. Software company HotMagna writes and publishes papers that demonstrate independent, provocative thinking and establish its technical credibility and thought leadership, says its founder, Henry Okraglik.
Recruitment company Market U positions its business and consultants as the centre of knowledge by openly sharing advice and intellectual property with potential clients who have never used its services. This leads to an excellent referral network, says its founder, Anna Whitlam.
Promoting the brand at every opportunity and with clever guerrilla tactics also wins customers, according to Mark Alexander-Erber, founder of the hotel/pub chain Pubboy. He leaves coasters and branded cigarette lighters in the pubs of the opposition, he wears Pubboy T-shirts when flying and he pays Penthouse Pets to parade in them.
Alexander-Erber says he is losing more than 100 branded schooner and middy beer glasses a week, often in country towns. "We estimate that one in every five country homes now has branded Pubboy glassware in their kitchen." He is not complaining.
- Started from home: 51%
- Planned the business for less than six months before opening: 54%
- The business was profitable from day one: 49%
- The business is now profitable: 90%
- The company exports: 54%; has international partners: 51%
- The company spends more than 10% of revenue on R&D: 35%
- We are a leader in our field: 97%
- Our technology gives us a very strong edge: 77%
- We price ourselves in the middle: 69%
- We plan to keep growing: 72%
- We plan to sell in the next two years: 8%; plan to sell after two years: 6%
About the survey
Companies met the following criteria:
- Must have commenced trading after January 1, 2000.
- Must have reported at least two fiscal years of revenue.
- Must have had at least $500,000 revenue in 2003-04.
- Must have more than one main customer (the bulk of revenue can not have come from government grants or other start-up funding).
- Must not be a subsidiary of a multinational.
- Must provide third-party verification of revenue (e.g. accountant/auditor).
- The final list of start-ups was ranked by 2003-04 revenue.