As I continue to learn through work and from reading other companies that I follow, I recognize a trend that is pervasive even in the most high-tech of companies. At some point in your growth, scaling is no longer a friend.
The best businesses scale synergistically, the worse ruins the business.
This is tricky.
In the beginning, we’re taught to “do things that don’t scale.” The question is at what point is it worthwhile to continue investing when you see signs that the scaling issue isn’t optimizing and that scaling is a real problem when the rate of revenue change is << rate of operating expenses?
The hopes and dreams of scaling is great on paper, but not found in evidence. Companies that have a hard time weening off of feeling revenue from marketing, sales and other expenses means it’s unclear (at best) when they can close the spigot. This is especially important for those that are not yet free cash flow positive.
Of course the flip side is Nick Sleep’s Scale Economic Shared, which is the only way that we can ensure in the long term that the value achieved from scaling operations is used to then fuel the scaling even more. Any other fuel used is not as good (in my opinion). These inferior sources of fuel to drive scale are transitory, one-time, illusory and not-durable.
This is what Chamath Palihapitiya has mentioned in his inaugural letter to shareholders for Social Capital where he writes:
We’ve reached a point today with ad spend in tech that feels metaphorically similar. Startups spend almost 40 cents of every VC dollar on Google, Facebook, and Amazon.
Social Capital Shareholder Letter 2018
I see the signs in a lot of companies that I own and that I follow. What I’m not sure is how much longer this can go on?