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Category: Business and Industry
Date Submitted: 05/19/2016 10:04 PM
1
CHAPTER 10
SHOOTING STARS? GROWTH COMPANIES
In the last chapter, we looked at the estimation challenges associated with valuing
young and idea companies. One of the issues that we confronted was the question of
survival, since many young companies fail early in their lives. But what about those firms
that make it through the test of competition and become successful businesses? In this
chapter, we will look at a sub-set of these firms that become growth companies. A few of
these firms stay private, but many of them enter public markets, partly because of their
need for capital and partly to allow owners to cash in on their success.
In this chapter, we will examine the issues that we face when valuing growth
companies. Many of the concerns that we had with young companies – short and volatile
operating histories, uncertainty about future growth and changing risk profiles – remain
problems when we value growth companies, especially in their initial phases, though the
data and tools that we have to deal with them do become better. They will be joined by
new concerns about how growth rates may change, as companies get larger, and how
access and exposure to public capital markets will change financing and investment
decisions at the firm.
Growth companies
Companies at every stage of the life cycle aspire to be growth companies. The
young idea businesses in the last chapter hope to make it through the rigors of the market
place to become growth companies and mature firms keep trying to reinvent themselves
as growth companies. In this section, we look at the reason for this appeal and the role
that growth companies play in the economy and in public markets.
A Life cycle view of growth companies
While investors and managers often talk about growth and mature companies as
distinct groups, the differences are hazier in the real world. So, what is a growth
company? There are many definitions for growth companies used in practice but they all...