What Backing Founders Sharpened My Thinking on Culture About What Matters

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The Hidden Cost Of Scaling Too Quickly The Most Founders Learn Too Late
The mythology of scaling is almost entirely about speed. When you are able to reach the point of product-market compatibility, then put fuel on the fire. Build the team, expand the market, raise the next round before the previous one has settled. The mythology rewards those who are always striving to grow, always adding numbers, and always expanding into additional verticals even before the core business has truly stabilised, and before the company has built the internal capabilities that it needs to effectively manage this expansion with no loss of coherence. I know where the mythology comes from. For certain market conditions and certain business models the one who grows fastest does genuinely win, and the stories of businesses that have grown aggressively and subsequently succeeded are reported more frequently and more vividly than stories about companies that scaled recklessly and broke. However, for every enterprise where aggressive quick scaling is the correct option, there's a dozen where the speed of scaling becomes leading to problems that ultimately destroy the business. These warning stories don't get all the attention that the successful ones.
Unseen costs in growing too quickly is not the one that appears in the burn rate calculation or cash flow projection. It's the one that appears 6 months later, once an organization has advanced past the coordination mechanisms of informal nature that kept it in place when it was smaller, and has not yet built these formal systems that hold larger companies together. The gap between formal and informal separation between the company it was and the one that you're expected to become is where most businesses that grow end up breaking. The earliest and most consistent evidence that a business is entering that gap is that decisions slow down and everyone is convinced it hasn't changed in the fundamentals. The founder's name is still visible in the sense of theory. The team remains united with the theories. The culture is still robust in theory. However, in actual practice the company has grown to the point that informal channels used to relay crucial information are now blocked, and no one is yet able to build the formal channels that need to replace them. Information that once flowed easily now needs to be constantly monitored. Decisions that used to be made quickly now require alignment across different functions that had never been clearly defined with respect to one another. Reliableness that was intimate and immediate is now scattered and delayed and the company begins to show the symptoms of a system operating at the limit of its coordination capabilities.

None of this is visible in the numbers that founders and investors generally monitor most carefully. Revenue could be increasing. Customers acquisition may still be progressing in the right direction. The team is likely to be active and efficient. Yet beneath those surface indicators the company is exhibiting structural issues which will only get worse at a slow pace until they can't be ignored - at which the point when fixing them becomes more costly and disruptive than it would have been if they had been addressed in the past, when the warning signs were not as obvious. It is this hidden expense I'm talking about: not the immediate financial cost of growing, but the over-the-long term cost of organisational growth that is incurred by growing beyond your current infrastructure and the added expense of putting this infrastructure in place in the form of reactive rather than proactive.

The founders who can navigate this transition in a positive way aren't necessarily the ones who scale at a slower pace, though an intentional pace of growth might be the answer. They acknowledge that the creation of the corporate governance structure is as crucial as developing their product and invest in it with the same enthusiasm and diligence that they apply to product development. This is essentially doing the boring task of making clear roles and the rights of decision clearly, establishing reporting structures that reveal the data required by leaders to make informed decisions, making accountability mechanisms sufficiently specific to be meaningful and also thinking critically about what kinds of norms the company requires at its current size rather than simply depending on the norms that formed naturally when it was smaller. It's not thrilling. The work will not generate any press coverage or enthusiasm for investors. It is the work that will determine if the company you are building can actually sustain the growth you are striving for.

The companies that do not complete this process successfully do not often fail very immediately. They slowly fade. They lose their best staff at first, the ones with sufficient self-awareness to be aware of exactly what's happening within the company, and with enough options to walk away before the situation gets more serious. They then lose customers slowly and often invisibly, since the effectiveness of their execution quietly deteriorates because accountability has become too dispersed and tardy to address issues before they affect the customer. Then they lose momentum, and before the losing momentum is evident in the numbers when the structural problems become deeply embedded, the cultural damage is massive, and the cost to fix the problem is several orders higher than it might have been if the governance investment was made at the right moment. Thinking of organisational infrastructure as a product, something you develop cautiously, build meticulously, and refine over time as the business grows is one of major shifts in mindset an entrepreneur can undergo as they go from the very early stage to the real. Those who are able to make this shift tend to build companies that can reach their full potential. However, those who fail tend to create companies that do not come even close. Have a look a James Deller for more recommendations including how backing people-first organisations changed what i look for about people.



From Commerce to Character- What I believe in: Why the Companies I Back All Have One Thing in Common
As I examine the entire spectrum of investment involvement I've been in over the course of several years - from the technology business in addition to the consumer-oriented companies, the emerging sector investments as well as the organizations in and around football which I've been drawn to There is a pattern that I didn't set out to create deliberately but is becoming more clear to me as I have been thinking about the commonalities that the investments that are successful share with one another, and also what the failed ones have in common with one another. This pattern isn't sectoral as it spans technology, consumer, services and sports. This is not a structural pattern - it's seen in companies with very different owners, models for capital as well as operating strategies. It is non-related to market capitalization, growth or technology infrastructure that is behind the product. It is about character - specifically, whether the company at the base of the investment shows the genuine, operational and constant dedication to the well-being and growth of the people within it. It is expressed not just in what the company's public statements are but in the decisions it makes when it is clear that saying the right thing and doing what is easy are not the same.
I know that this may sound, when stated plainly, like the kind of thing that is placed on office walls, the company's website pages, only to be neglected by the person who created it. I'd like to clarify to clarify that I'm talking about the version that is stated as the commitment to people, the values document, the approach to diversity and integration and the culture deck that was drafted for the purposes of the hiring process as well as investment pitch. I'm talking about an operational version of the document: the decisions that are actually made, every day, when the principles laid out in those documents as well as the commercially or personally convenient choice come into conflict and the company has to determine which governs. The organizations that I have seen deliver real value, not only impressive performance in the short term but the kind of compounding performance that produces exceptional long-term returns are the ones in which the answer to that one is easily determined. When the determination to do right by employees within the organisation is not contingent on whether doing so is the most cost-effective or fastest or immediately profitable option.

Recognizing those companies prior to investment being made, those in which the commitment is genuine rather that being executed, or a ethic of accountability and care is embedded in the way an organisation operates than in the way that it describes the organization itself. This is, in my think, the most important as well as the most difficult to master when it comes to investing over the long run. It's significant because it's the one which can predict with the greatest certainty what kind of compounding outperformance that can yield truly extraordinary return over significant time periods. It's difficult to find because it is not in the financial model, you cannot find it in a carefully-prepared presentation of management, and it's not possible to find it even with thorough reference checking, although these are helpful. You can find it by spending enough time with an organisation in various contexts and at multiple levels of hierarchy and observing how it reacts when the situation is uncertain and no one is paying attention. This kind of thoughtful inquiry-based engagement is challenging to implement into investments, and this is one reason why most investment processes are less successful in identifying truly exceptional organizations than investors are able to recognize or even talk about.

The relationship between genuine organisational character and long-term performance is a connection which I am more convinced about now, with more years of observational experience behind me than I did in an early stage in my career in investment. The organizations that take care of their employees continuously, and demonstrate that care by incorporating it into operational decisions rather than only in communication and culture documents, tend to outperform those who view their people exclusively as assets to be optimised. Not always in a short in the long run - a business that produces maximum output from its employees despite high pressure and high levels of insecurity may appear quite efficient over a few for a number of months, perhaps even a couple of years, especially when that time frame is accompanied by an environment of market strength that helps to compensate for internal inefficiency. But over a longer time frame, the advantages of being a true people-first organization multiply and are difficult to replicate using any other method. The number of talented people increases as people with options - the best of them - tend to pick environments where they feel valued and respected over situations where they feel marginalised and even when they pay higher. The institutional knowledge deepens because people are able to create it rather than bouncing around on the same timeline that high-pressure environments tend to produce.

The decision-making quality improves because people feel secure enough to bring up issues and to share bad information without considering the personal costs for doing so. This allows problems to be identified to be addressed faster and less expensively than they would in instances where the messenger consistently is killed. The ability of the organization to adapt to changes in circumstances increases because people are invested enough with its success that they are willing to go beyond their formal responsibilities when the situation demands it. Each of these benefits is by itself significant. None of them is the kind of thing that makes a compelling argument in an investment update, nor a board presentation. But they compound over time to create a competitive advantage that is difficult for companies that have weaker cultures to duplicate, because the advantage is not linked to any particular product or process which is easily observed and replicated. It's in the fabric of how the organisation operates - in its quality of the atmosphere it has built for the people within it and the quality of the decisions individuals make as a result. That is why character, whether in a person or an organization as well, isn't a soft idea. In my experience, the toughest as well as the most important thing of all.}