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February 2, 2015

Does early growth mean long-term success?

Every year Deloitte comes out with a list of its top 50 list of Technology Growth companies. It’s quite an interesting list as it’s based largely on 5 year revenue growth patterns, allowing for a better indication of product demand than oft-quoted valuations. We often use these lists as a means of learning about new, fast growth companies and it certainly feeds debate over beers about who Canada’s next big tech company will be.

However recently we started to wonder whether the fast starts that these companies have experienced mean anything in the long-term. Moreover, given that these are, atleast in some way, some of Canada’s most impressive young companies, we thought a look at how they’ve evolved since their inclusion might yield some insights on the Canadian growth ecosystem. Thanks to our great data analyst Kirill, we did a deep dive on two sets of Fast 50 winners, those from 2005 and those from 2010.

Here’s what we found:

2010 Fast50 cohort

– Of the 50 selected in 2010, 17 are publicly traded vs 33 privately-held firms
– 3 companies IPO after their inclusion in the Fast50 cohort
– 1 company (Arise Tech) becomes insolvent.
– 24 are involved in transactions, including 16 that are acquired. These 16 include 8 that are acquired by American firms, 6      by other Canadian firms, and 2 by European firms
– Conversely, 8 of the 2010 cohort (2 privately held) are the aggressors and are involved in the acquisition of other firms

2005 Fast50 cohort

– Of the 50 in the 2005 cohort, 33 were publicly held firms vs. 17 privately-held firms.
– 3 companies IPO after their inclusion in the list
– 1 company (Unity Wireless) was delisted and ceased operations.
– 32 are involved in transactions, including 20 that are wholly or partially acquired by other firms. These include 9 firms acquired by US companies, 2 by European, 2 by UK-based, and 1 Chinese. The balance (6) are acquired by other Canadian firms.
– Conversely, 12 are ‘aggressor’ firms, including 1 privately held.

What does this tell us?

First, we need to acknowledge that the 2005 cohort had a far higher share of companies that had already gone public and were, most likely, more mature firms. That difference aside, the two cohorts are remarkably similar.

Forty percent of the 2005 cohort is subsequently acquired vs. 32% of the 2010 cohort, a rather small difference given the additional five years that have passed.  Across both cohorts, these fast growth firms are most often acquired by US based companies, though Canadian acquirers rank second in both cohorts. Non-North American acquirers are very limited in both. So too are insolvencies. In both cohorts, just 1 firm becomes insolvent over the following 5 or 10 year period. Returning to the methodology for the Fast50 list, 5 year revenue growth, there seems to be some sustainability built into this metric as a gauge for future survival.

As for the Canadian fast growth firms who acquire others, this seems to be largely the purview of publicly traded firms. In the 2005 cohort, of the 12 firms that do acquire others, only 1 is privately held. In the 2010 cohort, 2 of 8 aggressor firms are privately held. Given research we’ve conducted which links growth with acquisitions, one might wonder a little about what this small number of aggressor firms means for the evolution of this cohort. Are they bound to be acquired if they themselves don’t aggressively look to buy others? And how to revenues evolve for those who look primarily to organic growth for progress? We’ll look at these two questions later on in the month.

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