A Growth-Company Visionary Tells Middle-Market Services Providers to Go Deep to Grow Big

Doug Tatum — consultancy builder, author, private equity investor, and the person few others can match when it comes to articulating the enormity of middle-market business opportunities — now wants you to know how terribly small the middle market is. It may seem like a major incongruity for an executive to have in the past built a management consulting firm — sporting 33 offices — just to consult to this all-so-small segment. But, as usual, Tatum’s latest musings are intended to challenge the business world’s conventional ways of thinking when it comes to the middle market. Middle-Market Executive recently caught up with Tatum, who today serves as chairman of Evolution Capital Partners asked him to help clarify some of what he’s been observing lately inside the bottom quarter.

MME: You have long been involved in studying and communicating the different thresholds of growth that middle-market companies typically experience, and certainly the 100-employee milestone remains a key point of departure for the growth trajectories of many companies. Does this insight vary by industry?

Tatum: When companies start to get north of 100 employees — in other words, start to get into financial scale — they can really take off. We have some data that indicates that companies in between 20 and 100 employees grow faster and climb faster, and if they get north of 100, then they can really take off because they can find the capital markets, etc. We have not found any industry concentration on a national basis growing faster, although you might see it on a state level. In fact, Dr. Gary Kunkle, who is our research fellow, has a paper that shows that sustainability growth is the best predictor of growth and not industry. In other words, if you demonstrate over a period of years that you can grow, you’re probably going to continue to grow.

MME: So when we look at your career — whether it’s your book No Man’s Land, your involvement with the Edward Lowe Foundation, or as chairman at Evolution Capital — what’s the common thread?

Tatum: The common thread is this area of growth among companies with 20 to 100 employees. For example, if you go look at our private equity fund, we invest only in companies going through this area — this no-man’s-land — which is unique in the private equity world. In fact, do you want a fascinating story of growth? We have three portfolio companies that were at less than $10 million in revenue when we funded them, because they were in the capital gap — the capital just hadn’t gotten down there — and now all three have made the Inc. 5000 list. What we say is that if you get the four Ms (market misalignment, outgrowing your management, outgrowing your model and outgrowing your money) taken care of, you get the fifth M — momentum — for free. What’s been missing is capital and executing around some of the principles I’ve written about, so we actually have a fund that does that which has been an extraordinarily successful investment. There’s one company, for example, that over the past few years, with only a couple of hundred employees, has grown to $75 million in revenue. So my common thread for what I’m doing is what I wrote about. I’m investing around it and I have a research institute studying it. We all love start-ups, but they’re not what I’m interested in. I look at what happens after the market has separated these companies out — where these companies have found out something and are actually starting to grow. These companies are the bulk of the economic engine. There are something like 600,000 companies down there that are completely misunderstood. They don’t really have a legislative bone to pick, so they aren’t really dealing with issues in Washington — and yet this is where all the employment growth is.

MME: When it comes to the middle market, you have commented about how it has become necessary for many middle-market services providers to “drop their line,” or go down deeper into the middle market than they have in the past …

Tatum: Well, they have to. People think that the middle market is infinitely big, while it’s actually incredibly small. We have some research that we’re not yet ready to share on this. But we believe that there’s been a sea change in how these companies should be thought about. These companies with 20 to 99 employees have added eight times as many new jobs and grown at a rate almost four times faster than others. So when you talk to a typical larger company, they say, “Wait, that’s somewhere between a $5 million and $20 million company, and we don’t know how to serve them.” Basically, they have to learn to deal with a different type of bird, because these second-stage companies are so different. We hear the same thing from insurance companies and other types of services providers, too.