INNOVATORS' INSIGHTS ISSUE

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It’s natural to assume that one casualty of today’s tough economic climate will be up-and-coming disruptive companies that have had some early success but haven’t broken through to the mainstream. After all, consumers and companies snapping collective wallets shut will surely take the wind out of the sales of the up-and-comers.

History suggests otherwise. We went back to look at how up-and-coming disruptors (defined as disruptive companies with revenues of less than $1 billion) did in the face of the last three economic downturns in the U.S. (as dated by the National Bureau of Economic Research to cover 1980-1982, 1990, and 2001).

In 1979, 11 such companies, including Intel, Home Depot, Nucor, and Southwest, fit our criteria. Their compound annual growth over the recession between 1979 and 1982 was 22 percent. Between 1989 and 1991, the sample of 11 up-and-coming disruptors, which included Best Buy, Cisco, and Charles Schwab, grew revenues by 33 percent. Between 2000 and 2002, 23 up-and-coming disruptors such as Google, Amazon, and Research in Motion grew revenues by 32 percent.

Our sample is heavily biased, but still the directional results are interesting. One natural question is whether all small companies grew at similar rates. They didn’t — in fact the 8,200 or so public companies with less than $1 billion in revenue in 1999 saw collective revenues dip by 4.2 percent a year between 2000 and 2002.

The disruptive advantage goes beyond recessionary climates. The chart below compares the two-year compound annual growth rate of disruptive companies with less than $1 billion in revenues to the compound annual growth rate of all public companies with less than $1 billion in revenues.

Revenue Growth in Recessionary Times

The up-and-coming disruptors have grown in good times and in bad. Notably, the disruptive companies rebounded visibly faster and more strongly after each of the three recessions.

Interestingly, the gap between the revenue growth rates of these two groups of companies has been increasing over the past 30 years. Certainly, a number of companies that experienced unprecedented growth during the Internet bubble might cause the spike in the late 1990s. However, even without this distortion the trends still diverge, providing evidence that the tendency for disruptors to outperform the market is not likely to reverse any time soon — if at all.

If you are an investor or analyst, this research suggests paying careful attention to up-and-coming disruptors who have built a solid base from which to drive further growth, such as Alibaba, iRobot, EnerNOC, K12, First Solar, Facebook, and LinkedIn. If you work on an operating company that is debating whether to postpone disruptive innovation efforts until “better times” arrive, be careful. You might be missing great growth opportunities and creating space for competitors to create substantial competitive advantages in tomorrow’s great growth markets.