The mythology around scaling is mostly about speed. Reach a product-market fit then add fuel to the fire. Grow the team, expand into the market, and then raise the next round before the previous one has settled. The story rewards the founder who is always trying to move forward, always adding personnel, never expanding into additional verticals even before that core company has genuinely stabilised, and before the company has built the internal capabilities to manage that expansion without losing coherence. I am aware of where this mythology originates. Certain market conditions and certain business models, the person who can scale fastest does genuinely win, and the stories about companies who grew rapidly and achieved success are told more often and more vividly than the ones about businesses that grew rapidly and fell apart. For every business that aggressive earlier scaling is the optimal option, there's several cases where the speed of scaling is the primary cause of the issues that ultimately end up killing the business. The cautionary stories do not get almost as much attention as those of the successful cases.
Unseen costs in scaling too quickly is not the one that is revealed in the burn rate calculation or in the cash flow projection. It is what you see in six months time, when the business has moved past the informal coordination mechanisms that held it together at the time it was small and before it has built institutions that keep larger organizations together. The gap that exists between formal and informal distinctions between the firm you were and what that you're trying to build is where most companies scaling fail to bridge. The first and earliest evidence that a business is approaching that point is that the pace of decision-making slows down while everyone maintains that nothing has changed fundamentally. The founder's name is still visible in the theory. The team remains aligned with the theories. The culture remains solid in theory. But in practice, the organisation has grown to a size where the informal communication channels used to transmit important information are clogged, and there is no way to create the formal channels that need to replace them. Information that was once flowing effortlessly now must be effectively managed. The decisions that were taken quickly now require alignment across several functions that have never been clearly defined in relation to one another. What was once intimate and immediate is now scattered and delayed The organization is beginning to show the symptoms of a system that is operating at the limit of its coordination capacity.
All of this is not apparent in the metrics that investors and founders usually follow most closely. Revenue could still be rising. The acquisition of customers may be moving in the right direction. The team is likely to be engaged and hardworking. However, beneath those visible indicators an organisation is experiencing structural problems that will compound slowly until they can no longer be ignored - at which it becomes more expensive and time-consuming than it would have been if they had been dealt with prior to the time when the indicators were not so obvious. It is this hidden expense I'm talking about not the immediate financial cost that comes with scaling, but rather the long-term cost to the organisation of expanding beyond your current infrastructure along with the expense of putting that infrastructure in place reactively rather than proactively.
The founders who master the transition with ease aren't necessarily those who expand less slowly, though the more deliberate rate of expansion can be the solution. They understand that building the governance framework of their company is as crucial as creating the product and who invest in this with the same level of commitment as they contribute to the development of their products. This is essentially doing the boring job of delineating roles and decision rights clearly, creating reporting structures with the right information leadership needs in order to make sound decisions, inventing accountability mechanisms relevant enough to be effective and analyzing what kinds of norms your company requires for its current size rather than simply depending on the norms that evolved naturally when it was smaller. None of this work is thrilling. Nothing will garner press coverage or investor enthusiasm. However, it is the process that determines if the firm is built can keep the growth you're striving for.
Companies that do not complete this process successfully do generally not fail very clearly. They deteriorate. They lose their best staff in the beginning - the ones who have enough self-awareness and awareness to recognize the state of affairs within the organization and to have options to quit before things get much worse. They lose customers sometimes in a subtle way, as the performance decreases slowly because accountability has become too unclear and long to be able to recognize issues prior to they reach the customers. As they lose momentum and when the slowing down becomes evident in the figures that the structural flaws are in deep rooted, and the culture impact is severe, and the cost of fixing both is a tad higher than it would've been if the investment in governance were implemented at the right time. Treating organisational infrastructure as a product - something you plan in a thoughtful manner, carefully construct, and improve upon as the company grows - is among the most significant shifts in mindset that founders make as they progress from the beginning stage to real-world scale. It is the founders who achieve this tend to build businesses which are able to fulfill their potential. The ones who don't tend to build companies that do not come even close. Read James Deller for website advice including how supporting institutional change deepened my conviction about people about building well.
From Commerce to Character The reason I choose to back the companies I endorse All have a thing in Common
When I consider the complete spectrum of investment activity I have been involved during the last couple of decades - the tech businesses that I have been involved in, the consumer businesses the emerging sector investments companies in and around football that I've been drawn to support there is a pattern that I didn't intend to make up but has become obvious to me when I have thought about the commonalities that the investments that are successful share with each other and what the ones that don't work share with each other. This pattern isn't sectoral but it is found across technological, consumer and sport. It is not structural - it can be seen in companies that have radically different types of capital structures and ownership structure, operations models and structures. It's not about market size, development trajectory or the technology architecture behind the product. It's about character. specifically, whether the firm at heart of the investment has the genuine, operational and consistent dedication to the welfare and development of members of its staff, as expressed not just in what the company's public statements are but also in the decisions it takes while doing the right thing and doing the convenient thing are not the same thing.
I know that this statement sounds, when stated clearly, similar to the kind of thing that gets published on office walls, cups for office use and on company web pages only to be systematically ignored by those who commissioned the work. It is important to note the fact that I'm speaking about the official version of the commitment to individuals - the values document, diversity and inclusion policy, the culture deck that has been created to aid in the success of the hiring process, and the investor pitch. We are talking about the practical version: the actual decisions to be made over and over again, when the principles laid out in those documents as well as the commercially and personal choice are in conflict and the business has to choose which is the one that governs. The businesses I've observed produce truly lasting value - not only impressive performance in the short term but the sort of compounding, multi-year results that produce exceptional longevity returns - tend to be those in which the answer to that query is unambiguous. Where the intention to do right by people within the organisation is not contingent on whether doing the right thing is the cheapest option, the fastest, or the most immediately profitable choice.
Recognizing those companies, before the investment is made, those in which that commitment is genuine than executed, where the culture of care and accountability is rooted in how the organization operates, rather than the way in which it describes itself. It is, i think, the most important and the most difficult skill when it comes to long-term investing. It is important as it's the type of organization that provides the best assurance of an amount of compounding outperformance that can yield truly extraordinary results over a long period of time. It's hard because you can't find it in a financial model. You cannot find it in a well-crafted and well-structured management presentation. And you will not find it even within thorough reference checks which are useful. It can be found by spending sufficient time with the company in multiple contexts and at a variety of levels of its hierarchy in order to discern how the organization behaves when the situation is uncertain and nobody is paying attention. That kind of patient exploration is structurally difficult to implement into many investment procedures, which is one of the main reasons the majority of investment procedures are not skilled at identifying truly exceptional firms than the ones that investors normally acknowledge or even discuss.
The connection between true organizational character and long-term performance is one which I believe more now, with more years of experience in longitudinal observation behind me rather than at time when I started my career in investment. The organizations that take care of their staff consistently and that express that care in operational decisions rather than just in communications and culture documents, tend to outperform the ones who treat people in a primary way as resources to be optimized. Not always in the short duration - an organization which achieves the highest output from its workforce through high pressure and high levels of insecurity may appear extremely efficient over a span for a number of months, perhaps even a couple of years, especially during times of an environment of market strength that compensates for internal dysfunction. Over longer time there are advantages to a genuinely people-first culture compound in ways that are difficult to duplicate using any other strategy. The amount of talent is increased because individuals with choices - those with the highest potential - tend to go for environments in which they feel valued and respected over those who feel undervalued even if they will cost more. The institutional knowledge increases as people stick around long enough to create it rather than bouncing through on the timescale that is typical of high-pressure workplaces.
The decision-making process is more efficient because the people feel confident enough to expose problems and communicate bad news without worrying about the personal costs to do so. This ensures that problems are identified and addressed earlier and less cost than they would be in organisations where the message is consistently gets shot. The organisation's ability to adapt to new circumstances is improved because the employees are so invested in the success of the company to step over and above their formal obligations when the situation actually requires it. None of these benefits are each one of them in its own way. None of them is comparable to what makes a compelling argument in an investor report or board presentation. But they are able to build and create a competitive advantage. This is very difficult for those with less successful cultures to duplicate since the benefit is not located in any specific product or process that could be observed and replicated. It's located in the fabric of how the organisation runs - the level of the culture it has created for the individuals who work there and in the decision-making process the employees make as a result. So, character, inside and outside of organizations is not a light idea. In my opinion, the hardest as well as the most important thing of all.}
