Every company would like to expand rapidly and have an impressive growth chart to display on the wall during board meetings, But there is often more to expansion than meets the eye – a lesson made painfully clear by the dot-com bubble, which was fueled by firms that sacrificed profits on the altar of growth and ended up both very large and very overdrawn at the bank.
“Business growth can be a two-edged sword. When it is controlled, it usually leads to financial success. When it is uncontrolled, it can lead to financial failure.”
Small Business Administration’s Online Women’s Business Center
Fast growth requires vast outlays of cash, makes companies (and their employees) stretch beyond their current capabilities. Employees hired and trained in a hurry may not prove equal to the challenges thrust upon them. Increased sales can mean a cash crunch, as suppliers demand to be paid while firms are still waiting for customers to send in their payments. New investments in infrastructure may not pay for themselves immediately. Rapid expansion requires making careful plans and constantly updating them, which may be difficult to do if business owners are kept busy with day-to-day crises.
Nevada Business Journal asked readers to nominate fast-growing Nevada companies to be featured in this article. Firms nominated had to be for-profit enterprises headquartered in Nevada with minimum annual revenues exceeding $50,000 for each of the following years: 1999, 2000 and 2001. Although many worthy candidates presented themselves, two examples really stood out – each achieved a three-year growth rate in excess of 1,000 percent. We chose Sun West Bank and Alere Medical, Inc. as the best examples of firms that have successfully increased in size, while at the same time maintaining profitability. We offer their stories as illustrations of how planning and solid financial principles can overcome the problems often associated with fast growth.
SUN WEST BANK
Year established: 1998
1999 revenue: $56,000
2001 revenue: $1.095 million
Three-year growth rate: 1,855 percent
Sun West Bank opened with two Las Vegas offices in 1998. It now has three branches in Southern Nevada and one in Reno, and will open a Northern Nevada regional headquarters in Reno later this year. A full-service community bank, Sun West is locally owned by 24 Nevada business professionals. According to President and CEO Jackie DeLaney, it is the only bank in Nevada organized as a “Sub-Chapter S corporation” under IRS rules, which allow a maximum of 75 shareholders for this category of business.
Recently released figures show the bank netting $479,700 for the second quarter of 2002, an increase of 315 percent over the second quarter of 2001. Total assets for the quarter were $158 million, a 22.5 percent increase over the same period last year. DeLaney said the last 18 months have been difficult for banks. “Nobody in banking expected interest rates to drop as far as they did in 2001 and to stay there for so long,” she explained. “Maintaining profitability is a constant balancing act, with operating expenses of all kinds going up and interest rates at historical lows. You have to manage it every day, but I think it’s fun because I love a challenge.”
DeLaney named several reasons her bank has succeeded and grown in times that have proved trying for the banking industry. “The first reason for our profitable growth is our loan-to-deposit ratio,” she said. “Five years ago, a 65 percent ratio of loans to deposits would have been considered good. Today, we have to pay higher prices for deposits. In order to manage our spread, we try to carry at least an 85 percent loan-to-deposit ratio. This is better than most of our peers, and it shows in our earnings statements.” In addition, she cited the bank’s attention to credit quality, which avoids expensive loan defaults.
“We also price our loans for profitability,” DeLaney stated. “Rather than engage in a bidding war for someone’s loan, we realize there is a point below which it doesn’t make sense to handle it, and we won’t go that low. The price of the loan has to be enough to offset our risk and also to make money – that’s why we’re here. We could get more assets, but it’s wiser not to increase deposits until we have a corresponding growth in loan demand. Bigger is not necessarily better if you can’t get a return on the investment for your shareholders. We have been able to pay our shareholders close to 15 percent on their money, which is very good relative to what some other banks have done.” Taking care of shareholders is good for everyone, she explained. “Our customers get assurance that we are financially stable and will be there for them in the future, and our employees know their jobs are secure.”
Even though Sun West has stayed profitable throughout its growth curve, it has not been immune to the challenges faced by most fast-growing companies. One of these is infrastructure. After almost two years of scouting a Reno location for a Northern Nevada headquarters and overcoming permitting difficulties, the Sun West building at Kietzke and Del Monte Lanes is finally under construction. But growth involves more than just buildings – it also means purchasing computers and equipment, phone systems and furniture to handle the growth. “We’ve made it a priority to plan for expansion,” said DeLaney. “Part of our strategic plan has involved making arrangements for infrastructure as we grow.”
Many expanding companies find it difficult to keep up with increased demands for experienced personnel, and Sun West Bank is no exception. “The number one challenge we face is finding and hiring qualified people,” stated DeLaney. “We can train employees in-house, but we think it’s better to hire experienced people, and we do have a wonderful staff with many years of experience.” Sun West currently employs almost 50 people, some of them on a part-time basis. It is able to run its operations with such a small staff by outsourcing certain functions to providers who service the banking industry. For example, its data processing is done by a large firm in Burbank that also serves hundreds of other banks. “It’s all a matter of cost efficiency,” said DeLaney. “We are running a lean operation. If we ran things today the same way we did five years ago, we would have 10 more people on staff, but because of technological improvements and outsourcing, we are able to keep personnel costs down.”
Fast growth requires strategic planning to keep up with changes, plan for expansion and make adjustments as necessary. Because the market and the economy change so rapidly, Sun West doesn’t plan much longer than five years out, DeLaney explained. “Our board has significant input into our strategic planning,” she said. “The management and board get together for a retreat every year or two to make sure we’re on course. Right now, we’re on track with the plan we set up two years ago.”
ALERE MEDICAL, INC.
Year established: 1996
1999 revenue: $304,000
2001 revenue $4.497 million
Three-year growth rate: 1,379 percent
Alere Medical was established in 1996 in Northern California and moved to Reno in December 2000. One of Nevada’s high-tech success stories, Alere is a medical monitoring company focused on improving the lives of patients with congestive heart failure (CHF). According to CEO Ronald Geraty M.D., over 500,000 heart failure patients in the United States are at high risk for re-hospitalization. To help manage these patients at home and reduce costly hospital stays, the company developed AlereNet, an integrated system designed to collect critical biometric data daily from the patient and transmit the information to a central database for review by expert cardiac nurses. The program has two goals: to provide physicians with timely information about changes in patients’ conditions so problems can be addressed before they are serious enough to cause hospitalization; and to provide patients with education and support so they can better manage their illnesses.
Because heart failure patients can deteriorate quickly, the key to effective management of the disease is early intervention. Patients often don’t recognize subtle changes in weight and other symptoms and they may not understand the importance of reporting changes quickly to their physicians. Alere’s patients in 29 states across the country step onto DayLink monitors in their homes each day to have their weight recorded and answer a series of yes-or-no questions about their condition. The information is transmitted to Alere’s headquarters, where nurses trained in cardiac care evaluate the results and notify the patient’s doctor in case of a change that may require treatment. Patients can call a toll-free number and talk to a licensed cardiac nurse seven days a week if they have questions or concerns.
Geraty said the secret to Alere’s success is that it offers a service with benefits for everyone in the healthcare system. “This is the only company I have worked for where everybody loves what we do,” he said. “Patients, doctors and our clients – large health plans – all benefit. Our job is to keep patients with advanced CHF out of the hospital. We have reduced hospitalizations from an average of more than two admissions per patient per year to under 0.2 admissions per year. Patients are happy because they spend more time at home instead of in the doctor’s office or the hospital, and they feel we’re paying close daily attention to them. Payors are happy because we’re reducing the frequency of expensive hospital stays, and doctors would much rather do preventive care instead of waiting for their patients to have a medical crisis. We save money at the same time we’re saving lives.”
Geraty said the biggest problem facing his company in the next 12 months is its accelerated growth rate, which he estimated will top 300 percent this year. In 2001, Alere increased the number of enrolled patients from 1,000 to 3,700. By mid-2002, it reached 5,000, and he anticipates the number will reach 9,000 by the end of the year. Geraty, who joined the firm in fall 2001, has years of experience running high-growth companies. From 1991 to 1998, he served as an officer and director of Merit Behavioral Care Corporation, participating in its growth from $60 million to over $600 million in annual revenues.
Alere Medical has not faced a problem with capitalization in funding its growth. A Nevada venture capital firm, Nevada Ventures, LP, encouraged the firm to move to Reno from California and assisted it in raising over $10 million in investments in February 2001. “I joined the company at a time when we needed to raise money to fund our growth,” said Geraty. “Nevada Ventures was a very important factor in raising the capital we needed to buy computers and medical equipment and to hire nurses and support staff.”
Alere currently has a staff of 90 employees in its Reno headquarters, including 50 cardiac nurses. “The hiring situation in Reno for non-nursing staff is good,” said Geraty. “The downturn in the national economy has actually been good for us, because it’s a great employment market now. However, the nursing shortage has impacted us in a major way. One of our biggest concerns is getting cardiac-trained nurses. We’ve exhausted the supply of trained nurses in Northern Nevada and recently started advertising in Oregon and Washington and offering bonuses for their nurses to come here.” Alere has also opened a second call center in Portland, Maine, to take calls from patients on the East Coast.
Infrastructure has not presented a problem for Alere, according to Geraty. Because of its unique financing arrangements, money has been available to purchase the medical equipment and computers necessary to keep up with the increased patient load. Finding space in which to expand has also been easily solved. “Luckily, there’s a building boom in Reno,” said Geraty. “We have located in South Meadows in a major growth area, and there is available space nearby.”
Planning for expansion has been an important factor in Alere’s success, according to Geraty, who said strategic planning is a board-level activity. He pointed out that Alere’s investors are intimately involved with operating the company, rather than just providing financial backing. “We’ve been very fortunate to have four high-quality, nationally known investors on our board,” he stated. “I talk with the investors at least once a week.”
Common threads running through these success stories would seem to be the importance of a solid business plan supported by strong financial backing, as well as a concern for cost containment and profitability. The achievements of Sun West Bank and Alere Medical prove that Nevada companies can indeed achieve smart growth.
