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.