What Advising Growing Businesses Has Shaped My Thinking About Results

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There Is A Hidden Price To Scaling Too Quickly What Founders Learn To Late
The mythology about scaling is largely about speed. To get to market-fit for the product, then add fuel to the fire. Build the team, expand markets, then raise the next round before the previous one has properly settled. The narrative rewards those who are always pressing forward, always adding people to the team, always expanding into new verticals prior to the core business has settled and before the firm has developed the internal capabilities to manage that expansion without losing their coherence. I can see where this mythology originates. For certain market conditions and business models, the first one to scale fastest wins and the stories of businesses that have grown aggressively and subsequently succeeded are told more often as well as more vividly than stories of companies that expanded aggressively and broke. But for every business where aggressive early scaling is the right approach, there's a dozen where the speed of scaling can be the main cause of problems that eventually destroy the business. The cautionary stories are not given nearly the same attention as the success stories.
It is important to recognize that the hidden costs associated with scaling too quickly is not the one that appears in the calculation of the burn rate or cash flow projection. It is the one that appears within six months after, when the company has gone beyond the informal coordination mechanisms that held it together when it was in its earliest stages, but before it's built these formal systems that keep larger organizations together. The gap between formal and informal in between the one which you are and the company that you're trying to build is where most growing businesses are able to fail. The initial and most consistent sign that a company is moving into this gap is when the pace of decision making slows while everyone maintains that nothing has changed fundamentally. The founder's name is still visible in the sense of theory. The team continues to be aligned in theory. The culture is strong in the theory. However, in reality, the organisation has grown enough that the informal channels for communication used to relay crucial information are now blocked, and nobody has yet built formal channels to be replaced. Information that once flowed naturally has now to be continuously monitored. Decisions that used to be made in a hurry now require alignment across multiple functions that have never been clearly defined as compared to each other. What was once specific and immediate is now in the middle and awaited, and the organisation is beginning showing the signs of a system functioning at the limits of its coordination capabilities.

The absence of any evidence is evident through the metrics entrepreneurs and investors typically follow most closely. Revenue could still be rising. Customer acquisition might still be improving in the right direction. The staff may still be energetic and hardworking. But underneath those surface indicators, the organisation is developing internal issues that grow gradually until they can't be ignored. At that it becomes more expensive and disruptive than it would have been if the issues had been dealt with earlier, when signs were not obvious. Hidden costs are what I'm talking about not the immediate financial cost to scale, but the ongoing cost to your organization of moving beyond your current infrastructure and the increasing cost when you put the infrastructure in place in the form of reactive rather than proactive.

The founders who handle this transition in a positive way aren't necessarily the ones scaling slower, though the more deliberate rate of growth may be part of the answer. They are the ones who understand that building the structure for governance of their business is as crucial as constructing the product and who invest in it with the same commitment and diligence that they apply to product development. It means performing the tedious operations of clearly clarifying roles and decisions clearly, building reporting structures that effectively present the information leadership needs in order be able to make smart decisions, developing accountability processes that are particular enough to be meaningful and also thinking critically about the type of norms an organization requires at its level of growth instead of being reliant on the ones that evolved naturally when it was smaller. This isn't exciting. The work will not generate any press coverage or enthusiasm for investors. But it's the work which determines whether the organization that you're establishing can continue to grow the way you're striving for.

Businesses that don't achieve this feat do not typically fail spectacularly and easily. They fade. They lose their best staff first. They lose those with enough self-awareness in recognizing exactly what's happening within the company and have the option to quit before it becomes dramatically worse. And then they lose customers usually in a gradual manner, when the quality of execution decreases slowly because accountability has become too scattered and long to be able to recognize issues prior to they reach the customers. They lose momentum, and by the time decline in momentum is visible in the figures that the structural flaws are deeply rooted. The cultural harm is significant, and the cost of fixing both is far more expensive than it could have been if the investment in governance were implemented at the right moment. It is important to view organisational infrastructure as an item - something that is designed meticulously, construct carefully, and improve upon as the company grows - is one of the most important mindset shifts an entrepreneur can undergo as they progress from the beginning stage to the real. Entrepreneurs who can make it tend to build companies with the potential to succeed. They who don't tend to create businesses that fail to meet their potential. Follow James Deller for site tips including why working across industries changed what i look for about culture.



From Commerce to Character Why the Businesses I Back All have one thing they share in Common
When I look over all the investment activity I have been involved with over the last few years - the technology companies along with the consumer business, the new sector investments those organizations within and around football that I've been drawn to support There is a common thread that I never want to come up with but has become more evident to me over the years as I have been thinking about the characteristics that successful investments share between them and what the ones that don't work share with one another. It is not a sectoral pattern and spans services, consumer products, technology and sport. It's not structural, it is present in businesses having very diverse ownership structures, capital profiles in addition to operating and financial models. It's it is not about size, growth rates or the technological infrastructure that supports the product. It is about character - specifically, about whether the business at the foundation of the investment has an honest, operational committed to the wellbeing and advancement of the people within it. It is expressed not just in what the company says about itself but also in the choices it takes by saying the right way while doing what's convenient are not the same.
I know that this observation sounds, straightforwardly, something that is published on office walls, the company's website pages only to be systematically dismissed by the company that have commissioned it. I'd like to emphasize about this. I'm talking about the formal version of the commitment to people, the values document, the strategic plan for inclusion and diversity the culture deck which was produced for the benefit of the hiring process, and investors' pitches. I'm talking about the operational aspect: the decisions that actually get made, every day, when the principles set out in those documents along with the commercially or personally practical option come into conflict and the organization is forced to determine which governs. Organizations that I have witnessed have created truly durable value - not only outstanding performance in the short-term but also the sort of compounding, multi-year performance that yields exceptional long-term profits - are the ones where the response to that one is easily determined. When the determination to do right by those who work in the business is not contingent on whether doing so is also the cheapest, fastest, or most immediately profitable option.

The process of identifying those organizations - prior to the investment being made, the ones where that commitment is genuine that being executed, or a ethic of accountability and care is rooted in the way that an organisation operates than the way it describes its own operations. This is, i believe, the most significant and most difficult job in long-term investing. This is as it's the type of organization which is most likely to predict how to compound outperformance that results in truly remarkable return over significant time periods. It's a challenge because it's not found in a financial model, can't find it in a well-crafted management presentation, and it is not a reliable source even in thorough reference checks, though these can be useful. You can find it by spending enough time working with an organization with enough contexts and at enough different levels of the hierarchy, to discover how it behaves when circumstances are ambiguous and nobody in particular is paying attention. This kind of thoughtful, exploratory engagement is structurally difficult to integrate into process of investment, which is one of the reasons why the majority of investment procedures are not successful in identifying truly exceptional organizations than they typically acknowledge or discuss.

The link between authentic organisational character and long-term performance is one which I feel more strongly about today, with years of long-term observation ahead of me that I did at earlier in my investment career. The organizations that take care of their employees consistently, and communicate that concern through operational decisions, not only in culture and communications documents, tend to fare better than those who view their people in a primary way as resources to be optimised. It's not always the case in the short long term, an organization that maximizes the output of its staff through high pressure and a high level of security can appear extremely efficient over a span between a few months and even few years, particularly given that the period is associated with an environment in which the market is thriving and allows for internal problems to be addressed. But over longer periods there are advantages to the true people-first culture will multiply over time in ways genuinely hard to replicate via the other mechanisms. The number of talented people increases as people who have choices – the most successful people - tend to select environments where they feel genuinely valued over those who feel undervalued even though the former pay more. The knowledge of institutions grows because individuals stay for long enough to develop it instead of going through on the whimsy of the schedule that stressful environments can produce.

The decision-making quality improves because employees feel safe enough surface problems and share bad reports without weighing the personal cost for doing so. This results in problems being identified and addressed earlier and less expensively than they would in organizations where the person who is speaking up is shot. The ability of the organisation to adapt to new circumstances is improved because the employees are so invested in its performance to go beyond their duties in formal settings when the situation requires it. None of these benefits are an individual event. None of them is the kind of thing that creates a compelling story in an investor update or a board presentation. But they compound over time into a competitive advantage which is really difficult for companies with weaker cultures, because the advantage is not located in any specific product or process that can be observed or replicated. It's embedded in the framework of how the organization performs its business - the level of the culture it has built for personnel within it and the quality of the decisions that employees make as result. So, character, for individuals as well as organisations can be a hard notion. It is, according to my experience the hardest and most important concept of all.}