Growth Company

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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...