It’s really hard to start a business that lasts more than a couple years. First time entrepreneurs have a success rate of 18%. Even founders that were successful starting, growing, and taking their companies public via IPO, only have a 30% success rate with their second venture.
If you can create a business that simply survives you are doing better than most founders. Staying power is a fascinating topic. We all have companies in our local towns or cities that are relatively unknown but have been around forever. My grandfather started my family’s business, and my father took it over, and my brother in law has now taken it over. The business has been around for 70 years. The company only has 12 employees, but they dominate their little niche in our local geography.
Even rarer yet are founders that create and grow a relatively large businesses that dominate for decades. This is incredibly difficult. For example, less than 12% of the Fortune 500 companies in 1955 are still on the Fortune 500 list today. In our book, Intelligent Fanatics Project, and here on our research portal, we look to analyze the world’s greatest moat builders. Those rare and exceptional operators that created enduring high performance organizations.
Earlier this week I stumbled upon this fascinating article: Geoffrey West on the Life and Death of Companies. Physicist Geoffrey West believes that complex systems from organisms to cities are in many ways governed by simple laws — laws that can be discovered and analyzed.
Geoffrey West’s started his research because he thought there should be a formula, based on the underlying principles of how life works, that would let you calculate the life span of a human being. He started diving into scaling laws that basically represent how various measurements in a system, for instance if a mammal’s body changes proportionally as their size changes. Kleiber’s law is one of them which shows the metabolic rate (the amount of energy you need to stay alive per day) is related to an organism’s size. If you double the size of the organism you only need 75% more energy. West explains, even though a whale weighs 100 million times more than a shrew, you might expect its metabolic rate to be 100 million times greater. But it’s only a million times greater. This pattern holds true with very few exceptions across all organisms.
Next, he noticed another scaling law that shows that larger animals have predictably slower heartbeats than small animals, which translates into larger animals having longer life spans than smaller animals. Kleiber’s law and this combined let you see that big animals live very long but slowly, and little ones live very fast but over a very short period of time. West and his colleagues also studied the mammalian circulatory system and blood flow rate related to its size.
Then he started applying these laws and researching how cities grow and then companies.
When he studied cities, he found that unlike everything he saw with biology, cities scale in a super-linear fashion. When you double the size of a city, you get more than double the amount of both good and bad socioeconomic quantities i.e. patents, wages and crime. If you double a city from 100,000 to 200,000 or 1 million to 2 million or 10 million to 20 million he found the scaling law doesn’t change. In each case the wealth, number of patents, number of creative people, number of police, waste, number of colleges all increases by 15%. This also combined with a 15% savings in infrastructure. This 15 percent rule is a universal phenomenon.
People are attracted to living in places where creative people, higher wages and wealth seem to prosper. Most are willing to overlook the increases in crime or disease to be closer to innovation and wealth. A city is very open and people seem to congregate where they feel comfortable but also challenged. This achieves incredible diversity. This is why today 1 million people per week are moving into cities, and its why cities are incredibly hard to kill.
Geoffrey West and his team then started studying companies. They analyzed 30,000 publicly traded companies over the last 60 years and found that the average lifespan of a company is about 10 years. Very few last 100 years.
Why don’t companies last forever?
“What is astonishing about companies is they scale sub-linearly like biology, indicating that they’re dominated, not by super-linear innovation and ideas; they become dominated by economies of scale. In that interpretation by bureaucracy and administration.”Most of the 30,000 companies he analyzed started with a hockey stick curve due to innovation but then they became top heavy and bureaucratic. The companies couldn’t retain or attract talent. Innovation slowed. West states, if companies want to continue to grow they need to innovate faster and faster and faster as they grow. West concluded that very few large companies have the discipline and nimbleness to continue to innovate at a rapid enough pace to live forever.
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Check out his Ted Talk: