Called ‘Gazelles,’ These Innovative Start-Ups Seem to Jump to Success Overnight

They are fast-growing. They’re often technology-driven. They hire smart people and they’ve got an eye on the global picture. And, often, they appear as if out of nowhere.

They are “gazelles,” a favored term for any start-up company that becomes a multimillion-dollar business in a short time.

“These are the innovators. They see the future accurately, and they act on it now,” said economist David Birch, who is generally credited with coining the term.

There are more than 250,000 gazelles nationwide, firms that are growing 20% annually, he said.

Because California is home to the largest portion of the nation’s gazelles--with Texas, Florida and Arizona close behind--The Times 100 takes a look for the first time at these companies and ranks them by revenue growth.

“California still has a culture of entrepreneurs, of hustle and of gold rush that most of the East Coast has lost,” Birch said. “California still respects entrepreneurs.”

Our gazelle list takes a simple approach, ranking firms by percentage sales growth for 1996 as compared with 1995, but focusing exclusively on companies with sales between $10 million and $50 million.

Many gazelles are gathering steam below the $10-million sales level, but too many small companies with uneven bursts of revenue would be listed if we didn’t screen California companies this way.

Large annual sales increases don’t always mean these fast-trackers are profitable. However, sales gains are a powerful indicator of growth and potential future profits.

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While many small-business owners are content to run a profitable company and make a decent living, gazelle operators tend to be aggressively interested in growing a business not only nationally, but internationally as well.

Important to the economy, a gazelle typically hires people for high-paying jobs, often with $50,000 to $60,000 and up as starting salaries. The bulk of small businesses create jobs that typically pay $25,000 to $30,000.

America Online and Netscape Communications are former gazelles that have grown into major businesses, said Tiffany Haugen, director of the Accelerate Technology Small Business Development Center, a program at UC Irvine.

Fast-growing gazelles are creating most of the new jobs in the economy, and are doing so faster than the Fortune 500 are cutting jobs, Haugen said. Yet gazelles represent only about 2% of all businesses starting up.

“A gazelle is a company that turns into a multimillion-dollar business in five years,” Haugen said.

While it might take some gazelles five years, it only took two years for our list’s fastest-growing company, SmarTalk Inc., to grow from a start-up located above a garage into a $200-million company.

Granted, it was a Bel-Air garage--but that’s not what made Robert H. Lorsch’s company grow so quickly. The firm posted a 3,208% increase in sales, to $15 million, in 1996 from 1995.

SmarTalk services a growing market of people demanding prepaid phone cards, what Lorsch calls the “unphoned”--immigrants, students or anyone who cannot get or does not want their own phone.

With a background in advertising, Lorsch got the idea for SmarTalk while working on a business plan for a company interested in offering prepaid phone cards to small businesses. The firm abandoned the plan, and Lorsch and a partner abandoned advertising jobs to try the venture themselves.

With about $5,000 in seed money plus $400,000 from credit cards, the two founded SmarTalk in October 1994. The first full-time employee didn’t join until a year later.

The company, analysts say, is well-poised to benefit from expected growth in prepaid calling cards, an industry expected to grow five-fold in the next four years.

In general, prepaid cards cost less than traditional calling cards for short calls but cost more for longer ones. But not all prepaid cards offer the kind of features that SmarTalk cards do. (Although cards are issued, they are not needed to make calls--customers access their accounts by punching in numbers on the phone keypad.)

Although the major long-distance firms are expected to start aggressively marketing their own sophisticated prepaid cards, analysts do not expect that to hurt SmarTalk because it engages in co-branding with retailers who will market the cards for them.

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The second-fastest-growing company on the Times 100 list is NetVantage, an El Segundo-based maker of switching devices for computer network systems that saw its sales rise 1,923% to $26.5 million.

While that sounds impressive, NetVantage is a good example of a company with rapidly rising sales that haven’t yet translated into profits. In fact, in its most recent quarter NetVantage lost $5.15 million, or $1.17 a share, including some one-time charges .

“We are very focused on growing our niche,” which is developing products for ethernet workgroup switching, said Stephen R. Rizzone, who joined NetVantage in 1995 and now serves as chairman and president.

He said debt payments and increased costs for research and development have kept NetVantage from earning a profit so far, but he expects the company to be profitable this year. The firm went public in May 1996 at $5 a share and saw its stock climb as high as $17.25. It is now trading around $7 a share on Nasdaq.

Probably the best known of the gazelles is Yahoo Inc., the Santa Clara-based World Wide Web search engine started in 1993 by two young Stanford grads. Yahoo saw revenues increase 767% during 1996, to $26.8 million, on increased demand for search engines that help Web browsers sort through the reams of information on the Internet.

The company is the stuff of Silicon Valley legend. Its public stock offering in April 1996 was priced at $13 a share. It opened trading at $24.50, soared as high as $43, and closed at $33, for the second-biggest first-day gain ever for a Nasdaq stock.

Still, the company has yet to report a profitable year. For the last nine months of 1995 it reported a loss of $634,000 and In 1996 it lost $2.3 million, or 9 cents a share.

However, in the first quarter of this year increased traffic on the Internet helped step up Yahoo’s advertising revenue, and allowed the company to post a profit of 1 cent a share, or $210,000--exceeding analysts’ expectation of a 3-cents-a-share loss. Sales shot up to $9.52 million from $1.73 million a year earlier.

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One of the hottest sectors on the California gazelle list is biotechnology. And one of the more interesting new applications of biotechnology is a San Diego company called Eco Soil Systems, which went public earlier this year.

William B. Adams, 50, acquired the company in 1991 and moved it from Nebraska to San Diego to help introduce biotech products into the golf and agriculture industries. The company has developed distribution and piping systems that allow biotech products to stay refrigerated so they can be sprayed or introduced into the land and manage a wide variety of soil, crop and water problems.

Adams predicts the company will grow even faster this year than its 222% growth in 1996 because it has expanded into so many new markets. While the company started with golf, it expects to continue to expand into agriculture, landscape and lawn care.