Monday, August 9, 2010

The Growth Mystique: A Silicon Valley Parable

1st in a series on Strategic Growth

Once upon a time, a man wandering through Silicon Valley found a starving baby.  Wanting to help, the man took the baby home and fed it.  The baby was ravenous and required more and more food until one day, the baby was no longer a baby but a strapping 6'5" 290 pound teenager.  Hmm, wondered the man, maybe he could play football?  So he contacted a local football team and sure enough the teen proved to be perfect for their offensive line.  The team signed the teen to a multimillion dollar contract and gave the man a nice contract to develop more offensive lineman.

Thrilled that he had found the recipe for growing offensive linemen, the man rushed out to round up starving babies and force feed them to get them to grow.  Unfortunately, some died from the force feeding.  Some got fat and lounged around not doing much.  Others turned into perfectly ordinary young men, fine for most things, but not football.  However, a few of the babies did indeed turn into strapping successful football players such that the man was able to make a nice living taking money form football teams and using it to buy food to feed the babies.

The man's reputation for growing offensive linemen grew and he began to be sought out by boys wanting to be football players.  Inundated with applicants and trying to improve his success rate, the man began to conduct due diligence on the boys for growth potential based on his understanding of the formula for growing football players.  But the boys were smart and became adept at convincing the man that they were "scalable" provided that they had access to massive amounts of food.  As the man gained experience, fewer boys died from force feeding, but overall some boys just got fat, others turned into ordinary young men, and a few turned into strapping successful football players just like before.

Before long, other people began to copy the man by seeking out relationships with football teams and collecting children to feed with much the same results.  Consultants sprang up aimed at helping aspiring boys enter the force feeding programs of the man and his competitors.  Pretty soon the area gained a reputation for growing football players, not just offensive linemen, but defensive linemen, quarterbacks, and running backs too.  Boys from all over flocked to the area for a chance to be grown into football players.

And what about the ordinary young men?  A few died in utter despair.  Some continued to try to secure food from the man's competitors with some of the more golden tongued even succeeding, but it rarely changed the results and most remained ordinary young men.  Others, their dreams dashed, just drifted away.

But a few figured out that there was nothing wrong with being ordinary, at least in the height and weight dimension, and discovered other things they could do outside of football, which didn't require huge amounts of food, and for which they were well suited.  And they lived happily ever after.

OK, so Aesop I'm not, but perhaps you see my point.  Living in Silicon Valley, it's easy to get caught up in the growth mystique.  This is the land of the fast growth, scalable startup, from Apple to Zynga(1).  Silicon Valley is all about the scrappy entrepreneur with the big idea, who assembles a world class team, which living on Ramen in a garage, attracts venture capital, and hyper-grows the company in 5-7 years straight to an IPO (or at least an acquisition by Google).  Fame!  Fortune!  The crowd goes wild!!!

The only problem with this picture is that most startups will turn out to be ordinary young men and our view of ordinary is skewed.  Silicon Valley is probably the only place in the world where a company with $50 million in sales growing at 15-20% per year(2) and a 10% net margin is viewed as underperforming(3).

The problem with succumbing to the growth mystique is that it can be damaging to what could otherwise be a perfectly good business - one that meets a real need for customers, provides good jobs and opportunities for people, strengthens communities, and provides a fair return to investors.  The problem is not with scalability;  it is my observation that designing a business to be scalable almost always improves it.  The problem is with the expected growth rate.  While fast growth requires scalability, scalability is not the same as fast growth.

The growth mystique automatically assumes that fast growth is desirable.  Now this may be true, and we'll discuss some of the reasons in next week's post, but it tends to gloss over the problems associated with fast growth such as:
  • Fast growth is cash intensive - Not only will you need to invest ahead in terms of people and infrastructure, but often just the growth in working capital alone required to float the business can be significant.  This almost certainly means raising institutional money, either in the form of equity or debt.  Fundraising can be a significant drain of management time and resources that will be diverted from the core business.  If you're raising cash via equity, the founders will almost certainly experience significant dilution with some loss of control.  If you're raising cash via debt, management freedom will likely be constrained by covenants.  The money ain't free.
  • Fast growth is demanding in terms of hiring and people management... - Sometimes more than cash, finding enough of the right people can be the constraint.  As workload piles up, the temptation to fill a position with any warm body can cause one to sacrifice on the quality of hire which can create greater management issues.  A larger organization usually requires more formal structures and overhead to manage.  And if the company is growing quickly, there is a higher likelihood of reorganizations which disrupt lines of communications and workflow coordination.
  • ...and stresses business systems... - Which means that you either need to overbuild systems, which can be expensive and cumbersome until you grow into them or that you'll be playing patch-up/catch-up with your existing undersized processes with the potential for increasing mistakes and dropped balls.
  • ...often leading to customer service and quality issues - and losing customers is a sure way to put a cramp in your growth.
  • Fast growth is intolerant of faults - When you're in fast growth mode, your company is more exposed to blowing up in the face of an external shock or operational hiccup, just like blowing a tire driving at 30 mph is a lot less of an issue than blowing one while driving at 200 mph.
In addition to these problems, fast growth can strategically weaken a company by keeping it from developing effective long term sustainable competitive advantages (i.e. barriers to entry) other than 1st mover or largest share.  This locks the company into a Red Queen's Race where it is forced to run ever faster just to stay in place.

So don't just assume that your business should be fast growth.  While this might very well be the case, it's important to understand the reasons why.  On the flip side, don't assume that you should pursue a controlled growth strategy;  it might not be an option.  Again, it's important to understand the reasons why.

Next week:  The Rationale Behind Fast Growth

(1)  And from B to Y:  Brocade Communications, Cisco, Dionex, eBay, Facebook, Google, H-P, Intel, Juniper Networks, KLA, Lam Research, McAfee, Nvdia, Oracle, Plantronics, Quantum, Rambus, Symantec, Twitter, Ultratech, VMWare, Webex (now Cisco), Xilinx, and Yahoo.
(2) This means it will take the company 4-5 years (gasp! horror!) to double sales.
(3)  If you own such a company and would like to sell it, please give me a call!


  1. Great points. I am looking forward to next week's post to hear the flip side: Why it *is* important to grow fast...

    One addition/comment: The fast-growth hits big-companies as well, though it disguise itself sometimes in different names, like 'meeting the numbers' etc, and has different ramifications at times, like layoffs. For example, HP cutting-jobs due to half-a-point below analysts expectations (for the rate of growth expected in the computer industry). Or the goals set for divisions/groups in big companies. Moreover, the groups that do not grow 'fast enough', but make the bread-and-butter for the rest of the company, have bad reputation as the 'milking cow' (i guess in contrast to a 'race-cow'?). In short, i think the fast-growth is neither unique to silicon-valley nor to the high-tech, but probably can be associated with the 'instant' culture, on all it's different faces.

  2. Good observation Zachi and I've been on the receiving end of this as well.

  3. Haha, I *love* this parable. So true, and even when you sorta know what's coming next it's still hilarious to read.

    Isn't it ironic that having tons of money to grow your business makes it difficult to have faults?

    P.S. My company doubled in sales and profits annually for 6 years, all bootstrapped, and companies like Balsamiq Studios is doing better than that, so even big growth is possible without (that kind of ) money.

  4. nice job on both the article and A to Z companies ;)

  5. Wow Jason! Thanks for sharing this. I clearly need to revise my thinking about what is possible on a bootstrap!