The very high profile sale of Instagram to Facebook for $1 billion after just 13 short months in business (and no revenue) of course has entrepreneurs and investors scrambling to divine lessons and wisdoms for where and how to be and find the next “big thing.”
While Instagram’s meteoric rise and quick exit has great excitement and story-telling value, I would posit that we need to use a wider lens to find the real “actionable” intelligence and where Instagram fits into the larger ecosystem of companies with high growth and exit potential.
The catch-all term I like best for these kinds of companies is emerging.
It does not suffer from "commentary fatigue" nor opaqueness as terms like “middle market” or “venture-backed” or “SaaS” or “startup” or “small and medium-sized” do.
And it effectively carves out the large mass of startups and small businesses destined forever to stay small.
Webster defines "emerging" as follows:
1. To rise from an obscure or inferior position or condition
2. To rise from or to come out into view
3. To become manifest
4. To come into being through evolution
1. To Rise From an Obscure or Inferior Position or Condition. Emerging companies, in their most common and interesting form, are small and obscure.
Instagram was - at least for a very little while - just a couple of programmers with a dream.
2. To Rise From or To Come Into View. Far more common than Instagram’s straight up success, emerging companies are often ones that have fallen on hard times and are seeking to "rise from" their current distress via turning around and restructuring their businesses.
The real estate sector remains a treasure trove of these kinds of opportunities, as are industries like publishing and music. As adversity intensifies, so does emerging opportunity.
3. To Become Manifest: Here we need Webster's help again - to become manifest, or to be "readily perceived," or to be "easily understood or recognized."
Emerging companies are usually SIMPLE businesses.
They make things or provide services, and sell them for more than they cost to make or deliver.
And every quarter and every year, they just "chop more wood" and "carry more water."
It often isn't fancy nor often even terribly interesting.
Just reading the above it should be obvious that emerging companies are usually NOT venture capital - backed. They are able to pay for their growth through operating cash flow and thus do not need outside capital to finance their businesses.
4. To Come Into Being Through Evolution. This is perhaps my favorite because it references the essence of any business - the talent of its people and the quality of its corporate culture.
The best emerging companies are always run by a group of hard-working, thoughtful, creative, persistent, and fantastically committed owner-operators who devote their lives to their businesses for multiple, non-contradictory motives.
They want to offer true value to the marketplace with their product and service offerings.
They want to leave a legacy via building an enterprise of lasting value and character.
And they want to make a lot of money.
While popular business culture is fascinated with "golden boy entrepreneur" stories like Instagram, these are way more the exceptions than the rule.
Far more common are stories like Amazon, Kinkos, The Body Shop, Outback Steakhouse, or even Wal-Mart and Hewlett-Packard - companies that had long gestation periods, and many slow or no growth periods, before evolving to successful forms.
Look for the above qualities in companies worth backing.
Look for them quantitatively with the key metric of operating cash flow growth.
And look for them qualitatively in the mindset of management and in the tenor of the corporate culture.
It will take longer than 13 months, but if both the numbers and the business tone align and you can get in before the whole world knows about it, then you have yourself a winner.
Or, another way of saying it, an emerging company.