Fast Starter 2008

If Australia’s 100 fastest-growing start-up businesses are worried about the darkening economic clouds, they aren’t showing it. The 2008 BRW Fast Starters are richer, faster-growing and have higher turnover and more confidence about their success than ever before. After a decade of strong global economic performance, these companies are a reflection of a consumer society that has been spending freely and a business sector that has had ready access to cash. But it is not all good news. Like all other sectors of the economy, the Fast Starters are being affected by rising interest rates, the value of the dollar, the tightening of the lending approvals by banks and a downturn in consumer confidence.

The biggest factor hindering their business development is the skills shortage. More than 74 per cent of Fast Starters say the greatest challenge is finding and retaining the skilled people they need to keep growing. A perennial problem is the difficulty in getting access to investment capital, particularly from the banks – 20 per cent say this is their greatest challenge, a further 18 per cent report continuing frustration with government red tape as the most difficult aspect of running their business. While the Fast Starters report that they are making more money and growing faster than before, they highlight a new, worrying trend for all Australian small to medium businesses. More than 54 per cent –up from 24 per cent last year – say that controlling cash flow is the most difficult aspect of operating the business.

The results are in line with recent Dunn and Bradstreet research, which shows that the average invoice cycle has blown out from 30 days to more than 50 days in recent months. Cash flow is the life blood for most small to medium businesses. When invoices take longer to be paid, this puts pressure on a company’s ability to meet its outgoing commitments such as rent and wages. It also hinders its ability to grow. As with previous years, the fastest growing industries have been property, information technology, finance and insurance, communication, personnel and recruitment. The success of these companies is also seen in the fact that 10 per cent are listed on the Australian Securities Exchange.

The success of the Fast Starters is not simply a matter of being in the right place at the right time. Many can attribute their growth to the way they apply technology and communication resources to promoting the company and selling their goods or services.

The internet has come of age for this year’s Fast Starters. Many use methods such as search-engine advertising to promote themselves and their services to a much wider audience than they had previously been able to reach. The survey shows that, like most small to medium businesses, the Fast Starters still underpin development with their own capital. More than 78 per cent established their business using their own savings, and 20 per cent mortgaged their homes to get the necessary start-up and operating capital. Only 15 per cent of start-up capital came from banks and other investors, which shows that despite the good performance of the sector, their investment risk profile is still high. New South Wales again led the list with 43 of the top 100 Fast Starters, but this was down from 49 last year. Queensland showed the largest increase, with the number of companies jumping from 10 last year to 16. Planning seems to be a big issue for the Fast Starters, the discipline leader in entrepreneurship and innovation at RMIT University’s school of management, Professor Kosmas Smyrnios, says.

“It is interesting that 33 per cent say they have suffered a major setback due to poor planning,” he says. “While that is not uncommon for start-ups, the size of this response indicates a potential change in the economy.”

To back up Smyrnios’ view, the founder of hygiene products company Millie & More, Mia Klitsas, says the process of growth is “a bit like building a new house”. “We discovered we needed more money than we had originally thought, particularly to launch our new lines,” say says. “We really needed to improve our budgeting and forecasting so that we weren’t overspending in areas we couldn’t afford to.”

The founder of the Chefs Toolbox, David Mills, says: “The bankruptcy of a major supplier could have destroyed the business but we were small enough to increase our mortgage. We are now so much more aware of our major suppliers’ finances and we duel-source certain key products.

“Another area has been recruitment, which is recurring problem and a major issue (given) the problems facing the economy.”

Ben Macpherson, founder of Brightstarts, which is part of the listed Artist & Entertainment Group, says the failure to properly research an issue at an early stage resulted in millions of dollars being wiped off his company’s value because of lost earnings and goodwill. “It taught me a lesson I will never forget, he says.

Smyrnios says a positive aspect of the Fast Starters research is increasing interaction with customers. “They are using search-engine optimisation to manage a number of areas in their markets,” he says. “They are using information technology tools to gain greater presence to advertise, to position themselves in the market and to make themselves look bigger than they actually are to gain market presence. They are doing this very successfully.”

Smyrnios, whose team at RMIT university has collected data on the BRW Fast Starters since its inception four years ago, says the reason the companies on the list do better than other SMEs and also seem oblivious to negative economic indicators – such as the extending cash-flow cycle and a contracting economy – is that they view themselves as market leaders.

“They are not afraid to innovate and take risks, and that gives them market presence,” he says. “They are often able to take advantage of turbulence in the market, and they see this as an opportunity rather than a business inhibitor. “We can see their vulnerability, however, in the profits that they are making. Their turnover is high but their profits are low.” Smyrnios says that many Fast Starters see themselves as “untouchable” because of their risk-taking attributes and their conviction that they are leading the market.

A new trend among the Fast Starters is that most are not relying on one source of finance and they are prepared to give up equity to get the capital they require, he adds.

In line with their predecessors, this year’s Fast Starters tend to have exit plans and few are interested din passing on their businesses to family members. “They are interested in growth, capitalisation of their investment and getting rich,” Smyrnios says: “The personal wealth of the founders was much higher in 2008, with the median being between $4 million and $5 million.”

Companies tended to employ people early in the life of the business. This, he says, is a clear indication that the business owners are entrepreneurial managers whose focus is on planning and building the business rather than doing the day-to-day work.

Adrian McFedries is the managing director of DC Strategy, a specialist consulting and legal firm focusing on business development strategies. He represents several Fast Starters companies.

McFedries says that what sets the Fast Starters apart is that they are able to overcome the hurdles of rapid growth that can stop others. Although many claim a net worth that has to be taken with a “pinch of salt”, there is no doubt that many are achieving real financial success, he says. “You only really know the value of a business when you sell it. In the past, business owners didn’t value their input enough and underpaid themselves. That is a problem in terms of how others perceive the company, particularly when they come to sell the business.”

He says this also creates staffing problems as it makes it difficult to hire senior people, a vital component for a company to grow to quickly. The Fast Starters tend to be led by entrepreneurs who attract people who are “better than they are”.

The greatest problem for start-up businesses is not during the initial growth stage – it is after five or six years when success has been achieved. At this stage, McFedries says, many entrepreneurs become bored. “Founders can be the greatest asset and the greatest liability in that they often stay too long,” he says. “The best start-ups build a strong foundation of support staff and create a scalable business. The best founders replace themselves and they do it quickly.”

McFedries says a good analogy of a founder’s role is the circus trick of spinning plates on poles. “One person can’t possibly keep 100 plates in the air on their own. Ten maybe, but with help they can do it easily.” Another attribute of a good business manager is the ability to be tough and get rid of people who don’t fit in. “Often, business owners confuse loyalty with progress,” he says. “In these circumstances underperformers can seriously damage growth.” As for the challenging economic times ahead, McFedries says the likelihood is that small to medium businesses will repeat many of the mistakes of the past. “Australia has enjoyed a long period of strong economic times. That is a breeding ground for a lack of structure,” he says. “The fact is that the country needs a good spring clean and a reality check. It is getting harder to get money, people are getting paid too much and the pressure will come from increasing wages and costs. Funding working capital will be harder, but all of this will force business to make some hard decisions. In these times you will really sort out the players from the stayers. The good ones with good management practices will grow in these periods.”

McFedries cites travel agency and former BRW Fast 100 member Flight Centre as an example of a business that has maintained growth through difficult periods.

”Flight Centre had tremendous periods of growth through downturns when others did not survive,” he says. “They had developed strong management philosophies which formed a major part of their business strategy.”