10 Secrets of Breakthrough Companies

by Keith McFarland

Why do some companies "break through" while so many others do not? Author and business consultant Keith McFarland has spent years researching thousands of private companies in an attempt to answer that very question. After studying the performance of more than 7,000 companies that have appeared on the Inc. 500 list of America's fastest-growing private companies, McFarland, a former Inc. 500 CEO himself, wrote the best-selling book The Breakthrough Company: How Everyday Companies Become Extraordinary Performers. Here are 10 secrets to long-term entrepreneurial growth:

1. The sexiest businesses don't always win.

In fact, the most interesting companies often don't operate in the markets that Wall Street and the business press consider interesting or "cool." Many of the breakthrough companies began in market segments experts considered unattractive at the time. We certainly didn't expect to find a nuts-and-bolts distributor, a snowmobile maker, a payroll processor, or even a niche real estate business on our list of top performing growth companies. But we did.

2. It's not all about the entrepreneur.

They're the ones that grab the headlines, right? And in fact, in the earliest stages of development, the quality of the entrepreneurial team tends to swamp all the other variables in predicting firm success. But as soon as the business gets on its feet, the best entrepreneurial leaders are too smart to let the company make it "all about them." Breakthrough leaders understand that no one wants to serve a king. These leaders work hard to put the company's vision -- and not their own personality -- at the center of things.

3. Entrepreneurs aren't always risk takers.

Over a five-year period, we administered a psychological inventory to more than 4,000 entrepreneurial leaders. We discovered that contrary to conventional wisdom, entrepreneurs are actually distributed evenly across the risk-taking spectrum. Even more important, there is evidence that as they achieve success, some entrepreneurs actually become more risk averse -- "playing tight" (as they say in poker) at the very time when they should be upping the ante.

4. Founders don't need to let go.

Conventional wisdom holds that entrepreneurial companies fail to reach their full potential because founders just won't "let go." So we were surprised to learn that in eight of nine top-performing companies in our study founders stayed deeply involved -- usually for decades. It turns out that, rather than letting go, founders and founding teams need to redefine their roles as the business grows.

5. You don't necessarily have to stick to your knitting.

Sticking to your knitting is fine, as long as your competitors stick to theirs as well. But competitors rarely behave the way you want them to. To achieve breakthrough performance, companies need to be constantly scanning the changing needs of the customer and developments in the industry so they can spot the most important opportunities to advance the business.

6. You don't need OPM (other people's money).

We've all heard the professional investor's pitch: "Sure you can grow your business on your own, but you can grow it faster with our money." So we were surprised by the fact that not one of the breakthrough companies were funded by venture capital in their start-up years -- not even several high-tech ventures (one company accepted venture money just before going public because the founder wanted some sharp VCs on his board, not because he needed the money). The right investor at the right time can be crucial, but outside money is far from a requirement.

7. It's not all about hiring the right people.

So much has been written about the importance of hiring the "right people" that we expected the top-performing Inc. 500 companies to have some really innovative techniques for attracting the best and the brightest in the industry. Instead, we found that these companies focus more on making the people already in the company productive through intense training and education. In the words of one breakthrough CEO, we have succeeded because we have built a place where ordinary people can do extraordinary things."

8. It doesn't matter where you went to school.

In our study of the top performing Inc. 500 companies over a 22-year period, we found that it's not about where (or even whether) you went to school. One company was run by a Ph.D in statistics and former college professor; another was run by a person who hit the bricks right out of high school.

9. You don't have to let the MBAs take over.

Many business people divide the world into two groups -- entrepreneurial firms and "professionally managed" firms. But reality is not that simple. Many small firms are very well managed -- though probably not in a way that most bureaucrats in giant companies would recognize. And in many big companies, it is easy for the "professional management" tail to start wagging the company dog. Companies large and small alike should strive to create an entrepreneurial enterprise that combines the quickness and customer focus of an entrepreneurial firm with the systems and processes of a more mature organization. MBAs are optional.

10. Strategy isn't just the job of the CEO.

The most successful companies recognize that strategy is a firm's "source code" -- the fundamental set of assumptions upon which everything else in the business is based. So they strive to get people throughout the organization thinking about and debating strategy. They nurture an environment that includes "insultants" -- people willing to take a full swing at the issues, even if it means questioning the fundamental assumptions upon which the firm is based.