In the past thirty years, business thinkers have come up with many ways to define “best run” companies. Based on my financial research of the past six years, I have found that best run companies are characterized by 7 Essentials. This article will focus on the three financial elements that characterize these companies: compounding or exponential revenue growth, compounding or exponential profit growth, and a great return on invested capital.

You're probably wondering how these elements translate into shareholder returns – especially in today's highly volatile, even scary, stock market. I found that whether your company is private or public, the same managerial lessons apply.

The truth is, though, these lessons are all too rarely applied! To set the stage for this discussion, did you know that of America 's 8,000 IPOs since 1980, only 5% achieved one billion in revenue? Companies such as Microsoft, Google, Staples, Amgen, and Harley Davidson grew from a million to a billion in revenue with compounding or exponentialrevenue growth across up and down market cycles! They account for two thirds (64%) of the market value created by all IPO companies. The obvious question is why did only 5% account for 64% of the market value generated? And can we find this pattern prescriptively – what to look for currently and in the future – versus descriptively – what has worked up until now?

After the publication of the Blueprint to a Billion: 7 Essentials to Achieve Exponential Growth book, I and a team of researchers worked with a Professor of Finance, Dr. Tommi Johnsen, at the University of Denver, as well as Standard & Poor's applying S & P's databases and backtesting tools to identify the unique factors that drive shareholder value for “Blueprint to a Billion” Companies. The result of this two-year research project has been a suite of Blueprint fund constructs that outperform the market in good times and bad. Yes, the best run companies do have the best returns in both up and down markets. Proof positive that if you achieve being a best run company, the shareholder value created will most likely outperform the average company.

So what are the drivers for shareholder value from these 5% of companies that are unique from the other 95% of IPO companies? For the masses of publically traded companies you probably listen to the typical earnings reports, how the company leverages its assets and capital and book value assessments. Many value investors love to screen for companies based on the ratio of market value to book value. In fact, most growth funds, as a subset of stock market indexes, are defined by having a Price/Earnings (P/E) ratio greater or less than one.

Not exponential growth companies. They are characterized by their growth rates in fundamentals such as revenue, earnings, cash flow and return on assets. These factors are independent of industry and P/E ratio.

What are the secret fundamental factors? There are three groupings, with one surprise at the end.

The unshakable fact is that only 5% make it from IPO to a billion in revenue. Early research that I conducted in 2008 indicates that these odds also apply globally. I found that America graduates an average of 36 companies per year that achieve a billion in revenue of all publically traded companies. This has been true for the past 10 years and continues to be true since the book's release. In contrast, there are an estimated 175 companies per year across the globe achieving a billion (USD) in revenue annually. These companies also achieved exponential or compounding revenue growth. They also share a common growth path whether American or Global: Though the time from founding to the point where the company “takes off to a billion” can be highly variable, once the company is on path to a billion at $50M in revenue, it exhibits consistent exponential growth on one of the trajectories to a billion: 4, 6, or 12 years.

In addition, be #1 or #2 for revenue growth in your industry. I acknowledge this is easier said than done, and when you are small and growing this is often impossible. So the new benchmark is being the fastest growing company. If your industry is slow growth, be #1; and if your industry is fast growth be #1. The growth rate is relative to your industry. Just exhibit exponential revenue growth and be #1. There is an extremely important to being the fastest growing company in up and down market cycles. Customers like to buy from the top growth company and investors like to invest in the next rising star because customers know that a high growth company will probably develop new products or services that are ahead of others and customer needs. In contrast, if a company is failing, customers are concerned about stranded investment and service.

Companies passing through the inflection point of $50 million in revenue are typically cash flow positive and increase their cash flow as they grow to a billion. This affords them the opportunity to reinvest in their company to achieve continued growth.

Companies like Cisco, eBay, SEEK, and Coldwater Creek were all cash flow positive early and had no or little long term debt. This may hardly seem like an insight, but it is not the typical profile of growth businesses today. Liquidity and cash flow are the new fundamentals in vogue for all companies in today's economic downturn. This news is not new to “Blueprint to a Billion” Companies. They practiced this prudent approach when it seemed out of style to do so.

Focus on maximizing gross margin, containing investment in sales and marketing and R&D to achieve over 10% EBITDA (Earnings before Interest, Taxes and Depreciation). If you can't get the profit up, then look to the drivers – e.g. selling value to increase prices and optimizing your supply chain to lower costs – to achieve higher gross margins.

“Blueprint to a Billion” Companies deliver returns exceeding the cost of capital. Whether you measure this as Return on Invested Capital or Return on Assets, the best run companies deliver returns over the cost of capital. The greater the spread over the cost of capital the greater the potential returns to the shareholder.

For example, if your company's cost of capital is 7% wouldn't you prefer what a best run company achieves, say, a return of 10% or 20% on assets deployed? It truly beats the more typical alternative.

The surprise!

Most management teams rejoice when they make their objectives every year or quarter over quarter. Make no mistake; this is a great feat that many divisions or business units do not achieve.

But the best run companies surprise investors by exceeding analyst expectations. It is a fact that the companies on the 4- or 6-year trajectory to a billion exceeded financial analysts' expectations over 50% of the time. The implication is you don't just meet expectations, you deliver upside surprises. Stated more emphatically, you deliver true surprises, not the unsustainable or imaginary ones that have fueled such wildness on Wall Street.

If you think back to your favorite “hot” growth company do you remember companies exceeding expectations every quarter. Google was one such example as it grew to a billion in revenue. Look for the next generation billion dollar companies and you will find the best run growth companies delivering the best returns by executing to these fundamentals and delivering upside surprises.

The great news is “Blueprint to a Billion” Companies outperform the market in Bull and Bear market cycles. Our latest research shows that these best run companies outperform the market in up cycles – as one expects. When the stock market indices are delivering negative returns, these best-run companies tend to hold their value or not decrease as much. As a result, they outperform the average of all companies in up and down stock market cycles.

Become a best run company – i.e., follow the 7 Essentials, especially to achieve the three financial ones highlighted in this issue – and you can count on delivering the best returns to shareholders whether you are public or private. And...whether the market is in an up or down market cycle.