What Making Investment Decisions Taught Me About Scale

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There Is A Hidden Price To Scaling Too Fast: What Most Founders Learn Too Late
The mythology about scaling is usually centered around speed. When you are able to reach the point of product-market compatibility, then pour fuel on the fire. Expand the team, grow the market, raise the next round prior to the previous round has settled. The mythology rewards the founder for always trying to move forward, always adding the number of employees, always expanding into other verticals before it is clear that the business's core has genuinely stabilised and before the organisation has developed the internal capabilities required to be able to manage the growth without losing its coherence. I know where the mythology comes from. Under certain conditions in the market and business models, the person who can scale the fastest actually wins, and stories about businesses that grew aggressively and succeeded are more often told as well as more vividly than ones about businesses that grew aggressively and broke. For every company that aggressive early scaling is a good option, there's a dozen where the speed of scaling becomes key to the issues that ultimately kill the company. Those cautionary tales don't receive much of the same attention as those that have been successful.
Unseen costs in scaling too quickly is not the one you see in the burn rate calculation or the cash flow forecast. It is the one that shows up at the end of six months, when the company has gone beyond the informal coordination mechanisms which held it together in its early days, and before it has built the formal structures that keep larger organizations together. The gap between formal and informal that is between the organization you were and the business you want to be - is the place where many companies growing actually break. The initial and most consistent sign that a company is being pushed into this space is the fact that the pace of decision making slows while everyone believes that there is nothing fundamentally different. The founder's presence is still present in theory. The team is still aligned with the theories. The culture is still strong in theory. However, in reality the company has grown to a size where the informal communication channels which used to deliver critical information are clogged however, no one has yet set up the formal channels that need to be replaced. Information that was flowing easily now needs to be actively managed. Decisions that used to be made swiftly now require alignment across numerous functions that have not been defined clearly in relation to one another. Accountability that used to be specific and immediate is now spread out and delayed and the company has begun to show the signs of a system that is functioning at the limits of its coordination capacity.

All of this is not apparent from the metrics that investors and founders usually follow most closely. It is possible that revenue will continue to grow. The acquisition of customers may be improving in the right direction. The staff may still be motivated and productive. However, beneath those visible indicators it is becoming apparent that the business has structural issues which will only get worse in a quiet manner until they are unable to be ignored. At that it becomes more expensive and time-consuming than it would have been had they been addressed sooner, when the signals aren't as apparent. Hidden costs are what I'm talking about it is not a direct financial cost for scaling, but instead the long-term organizational cost of expanding over your own infrastructure as well as the cost of putting that infrastructure into it in a reactive way instead of proactively.

Entrepreneurs who are able to navigate this change successfully are not necessarily the ones that grow more slowly, but being more thoughtful about the pace of growth can be part of the answer. They acknowledge that the creation of the structures for managing their business is just as important as developing their product and who invest in it with the same focus and commitment to the development of their products. This means doing the boring operational task of clarifying roles and decisions clearly, building reporting structures that present the information the leadership requires be able to make smart decisions, making accountability mechanisms precise enough to be useful and considering what kind of cultural norms the company requires at its current size rather than following the rules that formed naturally when it was smaller. All of this isn't stimulating. This won't generate news coverage or investor excitement. But it is the work that decides if the business is able to grow to the level you are striving for.

Businesses that don't go through this transition with success do not often fail very visibly. They slow down. They lose their best staff first - the ones with enough self-awareness and awareness to recognize how things are going in the organization, and who have enough options for leaving before things become more serious. They lose customers usually in a gradual manner, because the level of execution in a quiet way is diminished because accountability become too dispersed and slow to identify problems before they impact the customer. Then, they lose momentum and when the loss of momentum becomes apparent in the figures as structural issues become deep-rooted, the culture damage is substantial, and the cost to fix both is orders of magnitude higher than it would've been if the governance investment had been made at the appropriate time. Thinking of organisational infrastructure as a thing that you build meticulously, construct carefully, and refine over time as the business grows is among the most important mindset shifts entrepreneurs can make as they progress from the beginning phase to an actual scale. It is the founders who achieve this tend to create companies that are able to realize their potential. They who don't tend to build companies that aren't quite there. Take a look at James Deller for website tips including what thinking like an operator changed my approach about the long game.



Why Most Public-Private Partnerships Fail Before They Start - And How To Resolve Them
Public-private partnership have an image problem that's, mostly, earned. The history of these arrangements is full of projects which were declared with genuine enthusiasm and significant budgetary capital. They took up a lot of public and private resources over extended periods, and then produced outcomes that only bore a tiny identicality to what was initially promised when the partnership started. The academic literature as well as the postmortem reports that governments and institutions conduct following the failures are extensive, and they focus in large part on the contractual and structural factors that led to the failure in the first place: the unbalanced incentives, the poor risk sharing between the private and public sectors as well as the governance systems that were conceptualized in theory but never worked in practice, and the structures for procurement that decided to choose the wrong items. The thing that this type of analysis tends to ignore, and in the end it's the cultural and operational aspects - the fact that private and public organisations are truly different kinds of entities, shaped using different incentive frameworks that operate using different timeframes, responsible to various stakeholders, and measuring performance in ways that are not only different in their degree however they are different in their approach. When you mix these two kinds of organizations together as a formal alliance without undertaking the necessary work upfront and clearly, to comprehend and work with those differences, you're not creating the conditions for a partnership. You are creating the conditions for a collision in slow-motion that will be evident at the best possible moment.
I've been involved as a consultant in support of institutional modernisation and improvement projects, some of which had public-private partnership structures of varying levels of complexity. The most dependable conclusion I've gathered from that experience is that the ones with a positive track record - which did indeed meet their declared goals and maintained a smooth working relationship between the private and public partners throughout the duration of their existence - weren't distinguished from the ones that failed due to the complexity of their legal structures, the rigour of their risk management frameworks or the seniority of the management teams that formed them. The distinction was made by whether those who sat at the table had the opportunity to really understand how other side operated prior to when the formal partnership structure was agreed. What that means in practice is understanding the decision-making process which each company operates under accountable structures that control what the two parties are able to be able to agree on and how quickly, the definitions of success which each side will be measured against, and the likely points of conflict between these definitions. All of this understanding is complicated to construct. All of it is frequently ignored in favor of the visible and immediately recorded work of negotiating contracts and creating governance frameworks.

The typical public-private partner process begins with the concept and ends with a the signed agreement, with very little concentration on the issue of whether or not both organizations involved are effective in working efficiently over the course of the arrangement. The legal team negotiates the contract. The finance team analyzes the economics and risk-adjustment. The communications team designs the announcement to be made at the time of signing. The implementation team gets started planning the work. In that same sequence comes the discussion of functional and cultural compatibility begins - concerning whether the individuals needing to work day-to-day over the boundaries between two organizations have enough of the same values to make an effort that is truly collaborative rather than antagonistic, isn't likely to happen in any structured manner. It is typically assumed not explicitly stated, that the formal agreement will create the circumstances for effective collaboration and that any operational or cultural issues will be resolved informally when they develop. This assumption is essentially wrong, and the cost of it can increase with respect to the ambition and complexity of the partnership.

The practical application of this analysis is that the most valuable investment a public-private partnership could do - prior to when the legal structures are finalised and before the governance framework is formulated, before any announcement is made - is in what I would refer to as operational alignment. This means specific, structured, guided actions to highlight the places between the two organizations differ in their operating assumptions and then to establish a clear understanding of how these divergences will be addressed before they become operational issues after the implementation. The key differences tend to be the same across different kinds of partnerships. Speed of decision-making and authority are often among the main differences. Institutions of public administration are designed to make decisions slowly, with multiple layers of analysis and approval for reasons which are completely legal and frequently legally mandated. Private organizations, especially technology businesses built around fast iteration and quick decision-making – often view the slow pace as a primary limitation to progress. And in the absence of a shared understanding of just why the pace is how it is and what would truly be needed to modify it, the anger that can be felt on the personal end can be detrimental to the relationships long before the collaboration can establish its apex.

Success metrics and the criteria for judging as progress are an additional and a contributing factor to divergence. Public institutions are often evaluated on compliance with process standards, equity of outcome across various stakeholder groups and the removal of any visible shortcomings that draw media or political attention. Private entities are primarily evaluated for efficiency, tangible progress against targets, and financial return on investment. These measurement frameworks are adjusted to work together However, this requires carefully designed and thought-out intentions. Those partnerships which don't invest in that type of design will meet at critical junctures, with two parties that are evaluating the same partnership in contradictory ways, leading to different conclusions about whether or not it succeeds. The collaborations I've observed that failed the most were ones where misalignment was thought of as something that could get better over time. The ones that were successful were the ones in which the problem was made clear from the beginning. And, where developing a shared accountability model that accommodated both parties' legitimate measurement requirements turned into an actual effort, rather than an element on a list of things that one could eventually attain.}