Ahead of the Pack

In Africa and Asia, gazelles are small antelopes known for their speed and agility. In the United States--and particularly in California--there is another type of gazelle, a decidedly American breed.

These gazelles are businesses that have seen their sales zoom in a short period of time, and from whose ranks are likely to emerge dozens of mega-success stories, and perhaps even the next Microsoft. Out of about 6 million businesses nationwide, there are nearly 275,000 gazelles, defined as companies with sales growth of at least 20% a year.

The term was coined by economist David Birch, who contrasts these fleet-footed firms with “elephants”--big, lumbering concerns that are growing slowly or contracting--and “mice,” small firms that stay small.

Gazelles often grab headlines, sometimes seemingly out of all proportion to their contribution to the broader economy. Yet they intrigue the public because of their potential for big payoffs for investors, because they are sometimes based on glitzy new concepts or technologies and because they add jobs faster than other companies.

“It’s raw capitalism,” said Dan Love, director of entrepreneurial services in Southern California for the accounting firm Ernst & Young.

“It’s a little bit of the Wild West in capital markets, and it’s telescoped in Los Angeles and Silicon Valley,” Love said. “People come from all over the world to be part of these companies.”

And they are a diverse bunch, as The Times’ gazelle list--the state’s fastest-growing publicly traded companies with annual revenues between $10 million and $50 million--clearly shows.

Topping the list, for example, is Titan Pharmaceuticals, a South San Francisco biotechnology company that has several treatments for cancer and central nervous system disorders under development.

Its 1997 revenue soared to $17.5 million from $258,811 the year before, mostly because of an upfront license fee paid by Swiss drug giant Novartis Pharma to manufacture and market Titan’s lead drug, Iloperidone, a proposed schizophrenia treatment.

Heartport, second on the list, is a Redwood City maker of medical products that make heart surgery less invasive, reducing pain and recovery time.

No. 3 is USWeb, a Santa Clara company that aims to build a national network of Web site designers. Redwood City-based At Home, fourth on the list, enables super-fast Internet access.

The lineup also includes such fast-growth businesses as Gentle Dental Services, a Yorba Linda-based provider of dental practice management services; Malibu-based toy company Jakks Pacific; and Premier Laser Systems, an Irvine maker of a new dental laser that could replace the dreaded drill.

For all their promise, of course, gazelles are often fraught with risk. Like a car speeding along a highway, these fast-growth firms face the danger of crashing. Missteps that could be weathered by mature companies often prove fatal for gazelles.

“In a rapidly growing company, the economic environment is unforgiving,” said Jon P. Goodman, executive director of EC2, a business incubator project at USC.

Fast growth, while exciting, can be dangerous to a company’s health if it isn’t managed properly, experts say. “I can show you lots of fast-growth firms that have keeled over dead,” said Alan Carsrud, chairman of the UCLA Venture Development Program, a technology business incubator.

Case in point: American Cybercast, producer of “The Spot,” the first soap opera on the Web, was backed by chip giant Intel and hailed as a prototype for Internet entertainment. But the Marina del Rey company ran out of cash and filed for bankruptcy protection last year after an ill-fated effort to expand quickly into a TV-style network of online shows.

A look at some of the gazelles that made The Times’ list a year ago reveals that several have had a rocky time since:

* Last year’s fastest-growing gazelle, SmarTalk TeleServices, saw its stock plunge recently after the Los Angeles distributor of prepaid phone cards said it would post a first-quarter loss because of higher costs and the delay of a new product.

* CyberMedia, a Santa Monica developer of automated service and support software for personal computers, was No. 9 on last year’s list. Its founder and chief executive recently resigned, as the company reported that its fourth-quarter results would be restated downward. It is also battling a competing product by industry leader Symantec, which it has sued, alleging copyright infringement.

* Irvine computer game maker Ignite, formerly named Graphix Zone, went through layoffs and a stock delisting since appearing on last year’s list.

* Advanced Tissue Sciences in La Jolla, which also made 1997’s gazelle list, recently received a letter from the Food and Drug Administration warning that its skin-healing product might not receive federal approval.

But last year’s list also included Internet-directory company Yahoo, at No. 8. Yahoo has since exceeded earnings expectations, and its stock has skyrocketed, leading the recent mania for anything Internet-related.

In the long run, what makes for a successful gazelle?

The answer lies less in the glamour of a cutting-edge product than in the passion and vision of the people involved, experts say. As Goodman put it, “The best technology doesn’t always win.”

Indeed, contrary to popular belief, most gazelles are not high-tech or biomedical companies, but are in more mundane fields such as retailing. What sets them apart, though, is that they use technology in sophisticated ways to make the most of their business.

A gazelle typically is the brainchild of a visionary leader who drives the business forward--and without whom the organization would probably collapse, said Birch, who is president of Cognetics, a Cambridge, Mass.-based consulting firm.

Picture Microsoft without Bill Gates, he said, and what comes to mind is a far less formidable company. Southwest Airlines wouldn’t be the darling of the airline industry without the leadership of CEO Herb Kelleher, he said.

Successful gazelles rocket to riches usually by bringing a significant improvement to the marketplace--because a visionary identified a need that wasn’t being met and was the first to figure out a way to fill it.

“The last thing we want to do is invest in companies that are building something that’s 10% cheaper than the other five guys in the business, or saves a little power or is a little prettier,” said Jim Cole, a general partner at the venture capital firm Windward Ventures in Westlake Village and San Diego. “We want products that are going to change the way the world works, that serve large, open-ended markets.”

In fact, a sizable lead to market usually powers a gazelle in the early going. Still, any edge is fleeting in today’s rapidly changing business world, experts note.

Netscape Communications is a prime example. The 4-year-old company, which once seemed poised to dominate the Internet age with its Navigator Web browser, is now under siege as Microsoft eats away at its market share. A few months ago Netscape reported its first annual loss and laid off 400 workers. Its stock has fallen by half over the last year.

Amazon.com is another gazelle that recognized an opportunity and seized it quickly. The Seattle-based company pioneered the sale of books online, and is considered a pacesetter in Internet commerce. However, it’s still far from profitable, and now faces competition from big booksellers such as Barnes & Noble.

The lesson? “Don’t assume anything about the life cycle of your product,” said Rohit Shukla, executive director of the Los Angeles Regional Technology Alliance. “There is no such thing as a worldwide market that’s static. Consequently, your product, that you think is so securely locked into a particular market, may actually morph several times.”

The best chance of long-term success, experts say, is with a gazelle that can quickly adapt to change.

“The minute you think you’re good, you’re in trouble,” Birch said. Intel CEO Andy Grove became one of the most respected managers in the world, Birch said, because “he’s always scared to death” of the competition and seeks to lead the market rather than follow it.

But gazelles face a major risk that bigger firms don’t, experts note: The companies are moving so fast they often ignore the fundamentals of building a business.

For example, gazelles may fail to establish sound procedures and policies and make sure the marketing, manufacturing and distribution functions are sufficient to support growth.

Some experts even say that fast-growing companies should opt to slow their own growth every so often to make sure all the pieces are in place to take them through the next expansion phase.

But slowing down also risks falling behind.

“You can’t run half a marathon and take a day off,” Birch said. “There are hundreds of people at your heels. If you take breather, you get run over.”

Titan Pharmaceutical CEO Louis Bucalo said he is well aware of the risks that lie ahead. But the former executive of biotech concern Genentech displays the trademark entrepreneurial optimism.

Titan’s schizophrenia treatment will significantly improve upon current treatments, the company says. It’s a huge market, and Titan has a deep-pocketed partner in Novartis.

Yet the drug business is a perilous one, requiring enormous investments and years of testing to win federal approval. Titan hopes to have the first of its drugs on the market in three years. All of its revenue so far has come from Novartis’ cash injections.

For most gazelles, deep-pocketed partners are the exception, not the rule. Partly for that reason, finding--and keeping--key managers and employees also is major challenge for the companies.

A gazelle’s founder, as the creative force behind the company, might become so enamored of the product or concept that building an effective, experienced management team is overlooked.

“You have to conduct your business and also pull away and build infrastructure,” said Byron Roth, president of the Irvine investment banking firm Cruttenden Roth. “You have to add the people who will take you to the next level.”

Individual investors in fast-growing small companies should consider what institutional investors ask when they’re examining a business, especially a new stock offering, Roth said.

The prospectus will be read, of course. “But where they really make their decision is in the one-hour meeting with management,” he said. “The money managers ask about the sales force: ‘How do you compensate them? What kind of turnover do you have?’ The company is saying, ‘Hey, we have this great technology.’ What investors really want to know is how they manage the company.”

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The Gazelle 100

Companies with sales between $10 million and $50 million are ranked by percentage increase in one-year sales. The Sales Growth 100 list on Page 30 measures companies with sales above $50 million.

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1-yr. 1-yr. sales, % chg. Name Ticker in millions in sales 1 Titan Pharmaceuticals TTNP $17 6,656% 2 Heartport HPRT 23 3,653 3 USWeb USWB 19 959 4 AtHome ATHM 12 737 5 UroQuest Medical UROQ 17 619 6 Aurora Biosciences ABSC 15 572 7 Landec LNDC 14 514 8 Xoma XOMA 18 410 9 Hybrid Networks HYBR 14 382 10 Software Publishing SPCO 14 368 11 Gentle Dental Service GNTL 43 305 12 Exodus Communications EXDS 12 296 13 JAKKS Pacific JAKK 42 248 14 Eco Soil Systems ESSI 38 210 15 Premier Laser Systems PLSIA 14 206 16 Life Financial LFCO 21 205 17 View Tech VUTK 50 192 18 Concentric Network CNCX 45 191 19 Javelin Systems JVLN 12 188 20 Digital Generation Systems DGIT 29 177 21 NAB Asset NABC 17 156 22 BroadVision BVSN 27 149 23 Cherokee CHKE 11 145 24 MMC Networks MMCN 28 139 25 Inhale Therapeutic Systems INHL 16 136 26 QuadraMed QMDC 45 135 27 Triathlon Broadcasting TBCOA 30 131 28 Infoseek SEEK 35 129 29 CNet CNWK 34 127 30 Tejon Ranch TRC 41 117 31 ArthroCare ARTC 13 112 32 Fields Aircraft Spares FASI 12 111 33 Biopool International BIPL 17 106 34 Tier Technologies TIER 32 95 35 ProBusiness Services PRBZ 37 94 36 Abaxis ABAX 11 93 37 Power Integrations POWI 46 92 38 Rambus RMBS 34 91 39 Metricom MCOM 13 88 40 SRS Labs SRSL 10 87 41 IntelliCorp INAI 18 87 42 SBE SBEI 25 86 43 AccelGraphics ACCL 34 79 44 Digital Video Systems DVID 19 74 45 8x8 EGHT 42 74 46 Innerdyne IDYN 16 72 47 Scheid Vineyards SVIN 20 70 48 Puma Technology PUMA 20 70% 49 Cholestech CTEC 19 69 50 Harvey Entertainment HRVY 15 68 51 Corvas International CVAS 10 66 52 Award Software International AWRD 23 66 53 Affymetrix AFFX 20 65 54 VDI Media VDIM 41 65 55 Netter Digital Entertain. NETT 32 64 56 Pacific Research & Engin. PXE 12 60 57 Steven Myers & Associates WINS 40 59 58 Versant Object Tech. VSNT 29 59 59 Peerless Systems PRLS 25 58 60 Quality Systems QSII 28 54 61 Imaging Technologies ITEC 33 54 62 Retrospettiva RTRO 20 53 63 Amcor Capital ACAP 17 51 64 TMCI Electronics TMEI 39 49 65 Tivoli Industries TVLI 11 49 66 Shoe Pavilion SHOE 45 49 67 Idec Pharmaceuticals IDPH 45 49 68 Craig CRG 33 48 69 Advanced Materials Group ADMG 32 48 70 Daou Systems DAOU 42 47 71 EndoSonics ESON 37 47 72 CinemaStar Luxury Theater LUXY 24 46 73 Iridex IRIX 18 46 74 Prism Solutions PRZM 43 43 75 Interlink Electronics LINK 19 42 76 LECG XPT 44 41 77 Onyx Acceptance ONYX 43 40 78 Fremont BYCL 25 40 79 Storm Technology EASY 34 39 80 Sonic Solutions SNIC 20 39 81 Pacific Crest Capital PCCI 38 39 82 Health Systems Design HSDC 19 39 83 Isis Pharmaceuticals ISIP 37 37 84 Capital Corp. of the West CCOW 28 37 85 Digital Power DPW 19 36 86 Applied Digital Access ADAX 33 36 87 Neurocrine Biosciences NBIX 26 36 88 Intl. Remote Imaging Sys. IRI 27 34 89 Core CORE 39 34 90 STM Wireless STMI 46 34 91 SierraWest Bancorp SWBS 44 33 92 Research Engineers RENG 13 33 93 Microcide Pharmaceuticals MCDE 15 32 94 ICU Medical ICUI 34 32 95 Sibia Neurosciences SIBI 11 32 96 Chicago Pizza & Brewery CHGO 26 32 97 JMAR Industries JMAR 21 31 98 Oacis Healthcare Holdings OCIS 23 30 99 Cardiovascular Dynamics CCVD 11 30 100 TriTeal TEALE 16 30

Years of positive EPS* 1 0 2 0 3 0 4 0 5 0 6 1 7 0 8 0 9 0 10 0 11 0 12 0 13 2 14 0 15 0 16 3 17 0 18 0 19 0 20 0 21 0 22 0 23 1 24 2 25 0 26 0 27 0 28 0 29 0 30 15 31 0 32 0 33 6 34 4 35 0 36 0 37 1 38 1 39 0 40 2 41 0 42 1 43 0 44 0 45 0 46 0 47 3 48 1 49 0 50 2 51 0 52 3 53 0 54 2 55 1 56 4 57 3 58 1 59 1 60 0 61 1 62 4 63 4 64 4 65 2 66 3 67 0 68 4 69 2 70 6 71 0 72 0 73 4 74 0 75 3 76 5 77 2 78 2 79 0 80 0 81 3 82 0 83 0 84 6 85 4 86 0 87 2 88 0 89 1 90 0 91 9 92 2 93 0 94 9 95 0 96 0 97 3 98 0 99 0 100 0

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