STRATEGY

TheMythoftheHighGrowth
SoftwareCompany
byGretchenGavett
MAY01,2015

How many software companies really make it big, at least in terms of revenue? McKinsey
analyzedmore than 3,000 software and online-services rms from a 22-year period, nding
that fewer than a third reached $100 million in revenue growth. Only a handful of companies
reached the elusive $4 billion mark.

This data, combined with interviews with executives at 70 companies, led researchers to
three main ndings: Growth trumps all, including margin and cost structure; sustaining
growth is really hard, even among companies with early momentum; and that (dont fret!)
there is a recipe for growth that involves four key principles. They are:

1. Growth happens in three acts.

2. The rst must contain ve steps: Picking the right market; dening a monitization model
that makes room for scaling; focusing on rapid innovation; being stealthy and maintaining
a low prole while developing new products; and creating the right incentives for senior
leadership.
3. Succeeding in the second act requires a strategy that falls into one of three buckets: having
a robust model you can expand upon easily as is (this is a rarity); expanding successfully
into an adjacency; or transforming your product into a platform.

4. Companies that have gured out how to master the transition from one act to the next are
the most successful.

Source: Grow Fast or Die Slow

GretchenGavettisanassociateeditoratHarvardBusinessReview.Followheron
Twitter@gretchenmarg.

ThisarticleisaboutSTRATEGY
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MAXWELLWessel

11monthsago

Gretchen,thisisagreatobservationandpoint.Butitmissesthepointalittlebitinthisindustry.Thesoftware
industryishighlymodularized.LikebigPharma,thereisadistributionengineavailabletosmallercompanies
thatmakesthemhighlyvaluablefromanacquisitivepointofview.Certainly,manyofthecompaniesyou
proledhavehitthebilliondollarthreshholdonacquisition.(Andat25%marginorhigher,thatthreshhold
makesthemequivalentinprotabilitytofarlargercompaniesfromarevenueperspective).Therealchallenge
inthisdataisnotbeingabletoknowwhathappenspostacquisition.Paypalwillcreate~2.5Binrevenuethis
yearforeBay.HowmuchwillExactTargetcreateforSalesforce?SuccessFactorsforSAP?DoubleClickfor
Google?etc.
00

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