What you read is mostly wrong.

Among the list of businesses founded in the US over the past 30 years that achieved $100m in revenue, what do you think was the best represented industry and region? If you guessed information technology and California, I wouldn’t blame you but you’d still be wrong.

Talk to someone a few years in to working in one company in one specific industry, any industry. Ask them to think for a moment about whether coverage of their focus area is accurate, particularly in the easily accessible places. The answer you’ll probably get is a resounding NO.

And yet that’s what we all rely on to keep up on the professional world outside the narrow area of our everyday focus and that’s what you probably rely on in figuring out early career choices. What’s more is that even within a sector, say information technology, the heuristics people develop can be an inaccurate representation of reality.

So why is that? You could blame the internets, the sensationalist bloggers, the stretched journalists, or any number of others. But its likely deeper than that. In areas as disparate as politics and investing and over eras preceding the internet, we see a phenomena called various names: groupthink, herd mentality, echo chamber, and so on. This phenomena seems to result from the combination of two effects.

First, as described by Daniel Kahneman in Thinking, Fast and Slow, we have two modes of thinking which he calls System 1 (fast, emotional, intuitive) and System 2. (slow, logical, deliberate). Interestingly, even when we seek to use System 2 to analyze a problem, we create a representation of the problem in our mind quickly using System 1. And we tend to give undue attention to certain features.

Second, this System 1 lens makes us susceptible to the bandwagon effect, a formal term for the observation of “the probability of any individual adopting [a belief] increasing with the proportion who have already done so.” This applies more obviously to fashions and fads, but the first effect above makes it relevant even in this analysis context.

And this is one form of cognitive bias. Many others likely play a role. Confirmation bias, for example, gets us actively seeking information that validates our view than information that invalidates it.

Now imagine this process playing out in the minds of each person, those who read, discuss, and write about professional trends and make implicit choices about what to focus on and what not to.

As one recent example, Dan Primack’s piece Why we’re paying attention to the wrong deal summarizes the relative coverage of the acquisition of Tumblr by Yahoo and of a revenue-generating mid-sized drug maker:

Price being paid for Warner Chilcott: $8.8 billion
Price being paid for Tumblr: $1.1 billion

# of Warner Chilcott employees: 2,700
# of Tumblr employees: 175

Warner Chilcott 2012 revenue: $2.5 billion
Tumblr 2012 revenue: $13 million

# of online Actavis/Warner Chilcott stories today: 192
# of online Yahoo/Tumblr stories today: 1,059.

So back to our original question. What industry and region tops the list for producing the most companies that achieve $100m in revenue? In Companies That Matter, Paul Kedrosky finds that of the hundreds of thousands of companies founded in the US each year, about 125 to 250 companies in each cohort achieve $100 million in revenues in a reasonable timeframe. While information technology is important, the largest contributors are industrials and consumer discretionary. The most productive region is the U.S. southeast.

In the next post, I’ll take a closer look at the many “hidden” industries.

Please sound off. How do you get reliable information about industries and trends to inform your career choices? What data do you wish you was available? Fire away in the comments or in email.

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2 comments

  1. Praveen Ghanta

    Go ATL (capital of the southeast)! I knew there was a reason this place keeps adding over 100k people per year…

    But to be fair, some of the hype is right. What’s that number on % of VC funding that goes to Cali – something like 45%? Of course, VCs aren’t exactly known for their investing prowess, as a group their returns have been abysmal over the past decade:

    http://www.geekwire.com/2013/vc-returns-improve-10year-horizon-investing-wall-street/

    Over longer time periods their returns have been better – but we should be careful about survivor bias, as private investment indices aren’t always corrected for dead VCs, hedge funds, etc.

    • vivek

      Praveen,
      I agree if you’re making the following point: “If you want to work for a venture-backed consumer startup for a good paycheck and gourmet lunches, then California is a good place to be.” But the data calls into question how much value is being created and whether it can continue. Per Herbert Stein’s Law, “If something cannot go on forever, it will stop.” Here’s two recent examples, a detailed 50-page report from the Kauffman Foundation last year that addresses your point about bias and the VentureScape annual meeting this year:

      “The Kauffman Foundation investment team analyzed our twenty-year history of venture investing experience in nearly 100 VC funds with some of the most notable and exclusive partnership “brands” and concluded that the Limited Partner (LP) investment
      model is broken. Our research suggests that investors like us succumb time and again to narrative fallacies, a well-studied behavioral finance bias.” – Kauffman Foundation (I think “narrative fallacy” is a fancy way of saying hype.)

      “The truth is many of you in this room won’t get to raise another fund,” said Jamey Sperans of Morgan Stanley. – Wall Street Journal, Why Limited Partners See Venture Business as an ‘I Love Lucy’ Skit

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