Fractal theory has been successfully applied in various fields to explain natural growth patterns. FEV Analytics has discovered fractal kinetics at work in business growth. This exciting development unveils industry-specific patterns that could potentially be applied to maximize growth and business value.
Fractal mathematics is not theory or academic speculation. It is a description of real-world data. For example, key valuation multiples MVIC/Revenue and MVIC/EBITDA fit a functional f(x) which has the property that
This means the behavior of these valuation multiples tends to be self-affine. The exponent β differ by ratio and this implies non-integer dimensionality. These two properties (self-affine and non-integer dimension) suggest that valuation multipliers exhibit fractal kinetics during company growth.
All fractal patterns have something in common: infinitely complex objects are created by repeating a relatively simple operation and feeding the results back in to the next iteration.
If business growth has a fractal nature, then – as fractal theory would suggest – a set of relatively simple business patterns that result in growth should fuel the next round of growth. This extrapolation is something of an oversimplification.
Analysis shows that revenues, gross profit, and net profit all demonstrate fractal mathematics that behave differently and probably depend on different patterns. Our research also indicates that growth from any one fractal pattern tops out; there is a point of diminishing returns where further repetition adds complexity but not necessarily growth.
More research to describe the mathematics underlying these kinds of fractal patterns is needed, but has the potential to help companies and investors estimate growth rates and the point at which each pattern tops out.
In the next post, we return to more specifics by examining the research results to see what the data says about sales growth, margins, and profitability.