Foreseeable Catastrophe
WeWork and The Growth-Survivability Threshold
In this article I talk about systems that reach out into their environment for new resources, but are unable to backfill their growth with sustainability. This is a common pattern throughout many fields of science, but is perhaps less recognized in other areas, such as business. I will show how the infamous WeWork fiasco of 2019 was a manifestation of this pattern in the world of business and VC investments. I will discuss the book The Cult of We¹ by Elliot Brown and Maureen Farrell to highlight these patterns.
Growing Properly
Growth is fundamental to survival. In order to adapt to one’s surroundings we must take-in resources and use them as means to grow. But this requires the new resources be used, and therein lies a core challenge to growth. If the system that is taking-in resources does not have the inner capability of using the new resources, the system heads towards catastrophe.
As an example of this pattern I am going to discuss a book called The Cult of We: WeWork, Adam Neumann, and the Startup Delusion. WeWork is an example of a system (organization) that took in too many resources, in the way of investment dollars, to run a sustainable business. Whereas more money raised is usually seen as a good thing for many startups, WeWork took this idea to the extreme, and passed a threshold that virtually guaranteed their demise (they are still a company, but with a far lower valuation and a highly damaged reputation).
WeWork was founded in 2010 in New York City by entrepreneur Adam Neumann. WeWork purchases real estate all around the world then subleases the square footage as office space. As a business model this makes a lot of sense. Various entrepreneurs and businesses who normally have remote workers can get an office atmosphere, by renting out the space for a period of time. It comes with WiFi, plugins, coffee and the atmosphere of a real office. Perhaps most importantly, it provides a collaborative environment where people can network.
We will go into the reasons behind WeWork’s demise throughout this article, but ultimately, an almost complete focus on growth rather than actual business led to a lack of strategy around achieving future profitability. Adam Neumann had the distinct ability to attract an absolute immense amount of investment dollars from venture capitalists and allowed a business to become far bigger than it actually was. I’ll explain later what I mean by “bigger than it actually was.”
What WeWork represents is a core problem with the startup culture, specifically what we have seen over the last 10 years in Silicon Valley; the bay area in California that is filled with venture capital (VC) money. The history of why so much VC money landed in the Bay area begins with Stanford University and Hewlett Packard, but we won’t go into all that history here. What I am more interested in talking about is the problem with a culture where there is more money than ideas.
There is a culture of growth in Silicon Valley, so much so that the goal itself seems to be growth and buyout more than sustainable business. As a quick background, there are 2 ways a company can look to become profitable; by “bootstrapping” their organization or by raising money through outside investors. Bootstrapping is when a company takes whatever revenue they make through doing business and feeds most of it back into the business itself. Revenue leads to marketing, hiring, and building whatever technology or service the company offers. The other route, raising money through outside investors, takes a very different approach. Rather than using whatever money is made to build-up the company the founders look for outside dollars to inject into the organization for growth. This way a company doesn’t have to wait around for game-changing money to roll in. By gathering money through “rounds” of fundraising, a startup can go from nothing to notable almost overnight.
We are talking about the outside investor route in this article, as this is the path WeWork took to go from a company worth nothing to a company worth more than most can fathom. And doing so in a relatively short amount of time.
There is nothing fundamentally wrong with raising money. Companies with great ideas want to supercharge those ideas into the market, and that can only happen with a large influx of cash. But this article is about systems whose growth rate is too fast, so the question is; is there such thing as raising too much money? The answer is yes, and to understand why, we will look at a number of common beliefs and problems that are baked into the startup culture, using the WeWork fiasco as the quintessential example of these issues.
Is there such thing as raising too much money?
A common mindset in Silicon Valley is the so-called “early mover advantage.” This is where companies look to move into markets rapidly, to establish their idea and product or service first, thereby attracting the market and keeping customers. Imagine being the first with the digital camera, or the first to stream movies over the internet at low cost. Getting in early, before there is much in the way of competition, seems like an intelligent thing to do in the world of business.
But chasing early growth can actually leave early movers vulnerable to competition from later entrants. As outlined in an article in Harvard Business Review, a lack of sufficient product and/or services at attractive prices, due to a mismatch between the business and an untested market, can make otherwise loyal customers jump ship².
The notion of early mover advantage is the kind of mindset that tempts a company to grow far faster than it should. In order to move quickly and dominate a section of the market requires a company to have the means to do so, and that means having the cash to move-in and dominate. But moving into markets too quickly can easily lead to an organization not having what it takes to actually operate within that environment.
If there are a lack of sufficient quality products or services to address whatever demand is waiting for you when you get there, you’re doing to be in trouble. This has to do with the internals of a system having what it needs to ensure it can survive in the larger environments. I’ll discuss more about this later, but keep in mind; it requires precisely zero knowledge of business or investments to understand that rapid growth is a system killer. These patterns are universal.
In fact, in the animal kingdom we know that organisms that grow too fast become highly fragile. Studies have shown that the best-nourished and fastest-growing bacteria are the first to die when deprived of food³. Organisms fed more than enough resources are primed for rapid growth and end-up wasting energy resources. The biological fitness that is crucial for survival needs a balance between growth and survivability.
In the WeWork example, Adam Neumann, the CEO of WeWork, became bent on taking massive amounts of cash from investors, focused almost entirely on the extreme rapid growth of his company. Such behavior meant his organization would not be able to backfill the rapid growth with a feasible business. I argue these red flags were obvious during the “growth” of their company; hindsight bias notwithstanding.
How do we know? I often frame things in terms of “computational tractability” since everything in life is a type of problem solving. If we are looking to survive in an environment we have to solve the problems of finding resources, using those resources, and producing outputs that assist in our survival. Life is computational in nature, and any system within life is either doing a good or poor job at solving its core problem. As such, we know that when a problem solving system depends on a number of parameters that grow too rapidly, with respect to the size of the system, the system will be unable to produce a solution to the problem.
When businesses are looking to enter new markets they must themselves be a system capable of solving the new problems that arise when they get there. Looking to enter and dominate a market fast and early, as promoted in startup culture, demands a business capable of doing this.
WeWork was founded in 2010, and imploded less than 10 years later, in 2019 when it went public. The “implosion” I am referring to is the loss in valuation that occurs when a company goes public and turns out to not be what investors thought it was. Doing an IPO (initial public offering) is just another step in a company’s path to increased growth. Going public means tapping into the massive money supply of the open markets. When anyone can potentially invest in your company your ability to raise money for operating and growing is massive. But going public also means increased scrutiny over the books of an organization. Nobody wants to invest in something that won’t eventually turn a profit.
In January 2019, prior to the IPO, WeWork’s valuation was stated at $47 billion, but by the time of the IPO the valuation had dropped to $10–12 billion; this is less than the $12.8 billion it had raised since 2010. $10–12 billion is still a lot of money, but nothing compared to $47 billion.
Too many resources occur in systems misplaced from their natural environments. A climate of overly-eager investors latching onto a narrative of “early mover advantage” given the successes of companies like Google and Facebook, sets the stage for some massive failures. In order to backfill growth the system needs internals that can produce the outputs necessary for survival. Pushing towards rapid growth cannot be the goal; rapid growth should be the byproduct. The internals of a system are the intricate set of dependencies that makes a system successful. Critically, these dependencies cannot be known specifically. Causal opacity precludes the ability to know how things are connected and why they need to be there.
Recall my conversation in a previous NonTrivial episode about coming across a small suburb off city limits. There is something almost magical about the place, with rustic awnings, winding pathways carved out organically, and a lively community. This unique atmosphere has survived, but whatever is in place to ensure its survivability cannot be recreated. This is because what keeps something alive cannot be seen. We can see the outward properties but we cannot know the internals.
Pushing towards rapid growth cannot be the goal; rapid growth should be the byproduct.
Taking in more resources than can be handled means passing some threshold which, once passed, guarantees the system’s collapse. For WeWork to match its rapid growth with real business would require a set of internal dependencies that grew over time. The human resources, the technologies, the various things that must take root in order for the system as a whole to survive.
The collapse of WeWork was inevitable. Not because anyone knows precisely what was missing, but because there was no evidence to suggest the internals of the business had taken root. Whatever set of things need to be in place for something to survive could not possibly have taken place during WeWork’s rampant growth.
We don’t have to pretend to know what the internals of a system need to be. We can operate on the surface, looking only to the properties of the systems in play. Similar to population growth models that look at the balance between resources and population growth. A population can explode in numbers, but can only sustain itself if the resources are available to support the increased number of people. Malthusianism, which is the idea that population growth is exponential while the growth of the food supply or other resources is linear, shows us that a slower rate of growth of the “internals” of a system relative to its expansion will inevitably lead to a “catastrophe.”
There is all kinds of debate around the validity of Malthusianism as it pertains to the human population, but that’s not what I’m talking about here. As an analogy, population growth models capture the all-too-obvious statement that a system cannot grow indefinitely. There must be a set of inputs to that system that ensure increased growth is sustainable. If not, a “correction” will inevitably occur, forcing the system back to a sustainable level. Venture capitalists would do well to take note of growth models, before investing headlong into companies with exciting tag lines.
It’s important to realize that the “early mover advantage” is a narrative, not some fact. In other words, just because some companies grew rapidly and took over a market does not mean early moving was THE reason they survived. There is always survivorship bias. Losers have the same story as the winners.
Adam Neumann became enamoured with his own ability to raise money, making that his main goal. And the startup culture was there to throw all kinds of money at Adam and his business. It was the makings of a perfect storm. One that had far too many red flags to justify the investments. But to really understand why, we need to peer deeper into the mechanisms of systems, growth and sustainability.
External Dependencies, Feedback Loops and Survivability
As systems reach out for new resources they require something on the inside to backfill the growth. The backfill comes from some set of internals that must be present to ensure survivability.
WeWork didn’t have those internals because they placed growth above sustainability. Of course it’s fairly normal for a company to take losses in the first few years as it looks to expand and make a name for itself. This is just as true for bootstrapped organizations as it is for those who seek outside investments. But losses are expected to decrease over time. WeWork’s losses, as outlined in The Culture of We, had losses that were increasing over time.
Where do these losses come from? Spending on things needed to grow of course. But there are options here. For example, marketing is needed to spread the word, to raise brand awareness. But what should the marketing say? There are professionals who spend most of their waking hours on this problem, but something most of us would agree on is this: the messaging shouldn’t outright lie.
To be clear, any creative effort demands one’s reach exceeds its grasp. There is always a kind of rhetoric around one’s capabilities that makes it sound a little better than it is. But as a general rule, say whatever you want, but be sure to deliver. When the ability to deliver becomes strained under far-reaching messaging this is when organizations run into trouble. (The ongoing friction between salespeople and engineers on technology projects is a smaller example of this).
WeWork ingested resources because of messaging, not because of demonstrable success. Sure, it was, and is, a real company. Between 2010 and 2019 WeWork was genuinely purchasing real estate and filling space with real clients (so called “members”). But the purchasing of real estate was not indexed to the demand, rather it was indexed to Adam Neumann’s desire for growth.
Examples of massive purchases of new real estate with little to no idea of how to fill those new spaces is littered throughout the book, The Culture of We. This kind of behavior creates a bloat that eventually becomes a critical addiction to an organization; one that can never be satiated. As discussed throughout the book, the more real estate that was purchased or leased the more future obligations had to be fulfilled. If these obligations are not met it creates a massive deficit in the system. Without a sound business strategy on how to fill this void an organization moves from healthy debt to a runaway problem.
WeWork placed itself in the kind of position where further growth was needed to stay alive. There is a fundamental mechanism at play here that is worth exploring. When a system expands to fill its environment it creates new external dependencies. More “food” is needed to keep a bigger system alive. In the case of WeWork, the “food” was being used to reach into bigger and different markets, rather than ensuring what was already there could be sustainable. Rather than creating increased demand, WeWork created increased obligations to keep its machine alive. The only way to continue was to shift the target from “let’s build a better business” to “let’s keep growing.”
Once the target shifts to growth-at-all-costs the system enters a vicious feedback loop. WeWork was appearing bigger than it actually was based on valuation. A company’s valuation can be calculated in all kinds of ways, and distortions are common. We won’t go into the nitty gritty of company valuation but what I will say is this: a company’s valuation can easily be divorced from reality.
The reason valuation gets divorced from reality is that an investor’s influx of money alone can dramatically increase a company’s valuation. For example, when Adam Neumann took investments from SoftBank (in the billions) WeWork’s value went from $20 billion to $47 billion. That’s an increase of $27 billion from an investment alone. Not because the business was doing anything different, but because someone saw potential and invested.
This is a false signal in the system. It’s like refined sugar in the diet convincing you you’re taking in adequate nutrients when you’re not. There’s no reason for the body to go looking for actual food when something synthetic is satiating the primitive need.
This is what happens when things seen on informational grounds are completely disconnected from the physicality of the system. The physicality of WeWork is its real estate. There are actual physical buildings being purchased that need to be filled. If this physicality is kept in mind then the business can make process improvements to address increased demand. But if the organization’s goal shifts purely to growth then there is no opportunity to improve process.
To keep growing, WeWork had to attract more investment dollars, and that meant appearing as though it was growing, by making larger purchases and buying more real estate. But that can only be done be attracting more investment dollars; hence the vicious feedback loop, that leads to a growth that is largely fictitious (purchasing real estate and filling its spaces are 2 different things).
This kind of growth is informational, not physical, and informational growth has no upper limit, since it’s not tethered to physical reality.
The external dependencies created from overly-rapid growth means the only way to stay alive is through continued expansion. If WeWork were to stop attracting investment dollars, the backfill required to address what had already been purchased or created would have to be fulfilled. In other words, for a growing system to avoid addressing its obligations, something that would likely kill it, it must side step those commitments via continued growth fed by an artificial signal in the network.
Informational growth has no upper limit, since it’s not tethered to physical reality.
There are no natural mechanisms in our world that favour growth absent survivability. Recall the bacteria example. The biological fitness that is crucial for the survival of a species requires a balance between growth and survivability.
In the bacteria study a minor shock was enough to collapse the system, making the organisms wholly unfit to survive their environment. This is true for companies as well. When the focus shifts purely to growth it sets the company up for extreme fragility, meaning the slightest shock can swipe the bottom out from under it.
The external dependency created from overly-rapid growth means the only way to stay alive is through continued expansion.
This is a common situation in software engineering. So-called “technical debt” is when we create subpar solutions in order to continually create. Technical tech is a necessity for genuine creativity. We must build things that are far from perfect, to act as placeholders, so we can expose our work to bigger and bigger environments. But if the technical debt becomes too large we place ourselves at risk of becoming extremely fragile in the face of shock. When something goes wrong, too much technical debt makes it impossible to debug the issue (the code is too messy to find the problem).
Taking the “early mover advantage” at face value, which is common in grow-fast cultures like Silicon Valley can easily become a recipe for disaster. If a company passes that threshold where they can no longer “debug the code” because of the “tech debt” they took on by focusing solely on growth, they will lose the ability to correct the system. The only “correction” will be the complete overhaul of the company itself, as happened with WeWork.
Adam Neumann put WeWork in a position whereby the company became incapable of solving the problems it needed to solve, to remain competitive and eventually produce real profits. Accepting endless investment dollars into the company meant the organization depended on a number of parameters that grew too rapidly with respect to the size of the system. In the end, you have to understand things in terms of computational tractability (even if you don’t want to call it that).
When a business enters a new market they must realize they are dramatically increasing the dimensionality of the problem, and higher-dimensional problems require higher-dimensional systems to solve them. Just as rules-based programming cannot solve problems like facial recognition, physical companies cannot solve the problem of information-level scalability and growth. In other words, you can’t pretend a real estate company is a tech company. You might be able to make them work together. But you cannot divorce the underlying physical reality from the informational aspects of the system.
Making rapid market domination the sole goal for companies like WeWork presents a host of red flags to anyone paying attention. But the temptation to be one of the biggest names around blinds us to such mechanisms.
VC money is not a problem in and of itself, but like any area of life, the problem comes when a powerful tool is placed in the wrong hands. Any tool used for good can easily become a tool for bad when idealism replaces rational thought. Too many resources injected into a system not built to handle them will always lead to disaster, unless the system can be refactored in time to become what it needs to be to survive.
The problem of overly-eager investors is not too surprising. Investors want to believe they are doing something other than making random bets, and that means latching onto some narrative about why certain organizations have promise over others. The problem is narratives are just that; stories we concoct in our mind about why something was successful. While some companies will grow rapidly and dominate a market, this does mean endless growth and extremely high growth rates are a valid approach.
A system needs the right internal structure to survive. Dependencies that cannot be known, but can knowingly take-root if the system is allowed to grow at a reasonable rate. These are opaque dependencies, and so as with any nontrivial situation, the decision is based on something simple; don’t grow too fast. Just as the small suburb off of city limits was carved out organically, helping ensure its survivability, so too must an organization grow at a reasonable rate.
There is no hard rule for knowing where this threshold is; it is a balance that must be checked regularly against ego, and the temptation to dominate. It takes a mature CEO of any company to not let blind ambition obfuscate otherwise obvious red flags.
As with the “Malthusianistic” warnings of potential population die-off, there is great wisdom in attending to one’s ability to meet the increasing demands of rapid growth. WeWork had a linear business that was acting as a nonlinear one. WeWork’s rebranding of its company as a technology startup divorced it from the physical, all too linear, reality of a real estate company with limited growing potential.
Catastrophic Failure
A continual reach into new environments leaves a company with the choice to either regularly refactor the organization to handle the growth, or risk passing the point of no return, where collapse becomes inevitable. You cannot take that which works on a small scale and operate it at larger scales. Increased dimensionality demands changes to the makeup of the system.
WeWork never made the changes necessary because it didn’t focus enough on the business itself. It wanted the growth, but didn’t want to put in the work to get there. Business is not about investments, not ultimately. It’s about creating something that delivers real value.
The VC culture does a lot to work against natural growth. Many investors are not thinking about how systems work at a fundamental level, they just know they want a return. In the case of WeWork, we aren’t talking about investors who made bets on a bad strategy, they made bets on no strategy. They made bets on rhetoric and allure alone.
By the time WeWork went public there was no chance for early mover advantage because there was barely a real business in place, at least at the level they promoted themselves. Reality will eventually make you “show your books” and you better be ready when it does. Again, there is nothing wrong with taking losses, and acting outside your comfort zone. But if you push your reach beyond your ability to backfill the artificial scale you placed yourself at you’ll be in trouble.
Avoiding catastrophe isn’t about having the right foundation before embarking. Such naïveté can itself lead to catastrophe. Survivability isn’t about having the right stuff upfront, it’s about having the right process that brings the right stuff at the right time. Any analysis of a company worthy of investment should look at its ability to adapt, not its current makeup, and surely not its hype.
Adam Neumann was forced to resign from his own company. It was a decision that was made to save the company from its own founder. This isn’t unheard of. Uber’s former CEO and co-founder Travis Kalanick resigned under pressure from public reports of the company’s unethical corporate culture. Groupon’s Andrew Mason, Blackberry’s Mike Lazaridis, Etsy’s Rob Kalin, Yahoo’s Jerry Yang, and of course Apple’s Steve Jobs all either decided to, or were forced to, leave because their decisions at the time didn’t suit the new scale and public exposure of the company.
I like to say “what gets you there isn’t what keeps you there.” The kind of personality that allows something to grow and expand into new possibilities is often counter to the personality that allows things to remain operational at scale. There is a needed chaos to bring about change and embark on new frontiers, but at some point those new frontiers must be tamed into something more akin to a well-oiled machine. Anyone who has worked with both small and large companies can see the stark difference. In fact, both sides of the equation often admire each other; smaller companies wanting the size and influence of larger competitors, and large companies wishing they had the scrappy creativity of their smaller rivals.
There is a point where the ability to solve the problem at hand is no longer tractable. A different scale requires a different machine, one able to handle the level of complexity. WeWork treating itself as a technology company when it was in fact a real estate company ensured WeWork could never solve the problem of becoming profitable at such large scales. The deflation of its once high valuation is a consequence of handing too much power to a company that did not have the internals to operate at that level.
Entering new markets with no ability to serve them leaves massive gaps in the economy. Thousands of workers are betting their livelihoods on a company that is meant to do something real. The tendrils of the organizations are reaching into all parts of the market, thanks to billions in investment dollars. These are the external dependencies I discussed earlier. When the system collapses these dependencies are still there with nothing to address the needs. Employees expecting stock option payoffs, building owners expecting tenants, etc. The collapse isn’t confined to just the system itself, rather there is a cascade of destruction that branches out. This is something more investors need to be aware of; making a bet on a company is ultimately making a bet with many people’s lives.
To lose 27 billion isn’t money just going up in smoke. Whatever commitments were tied to that 27 billion are left standing. There is a lot of damage left in the wake of poor decision making, especially ones bent on acquiring such massive scale. There are real lives tied to companies and their growth and this can be easy to forget when everything is viewed through the lens of ROI.
The biggest investor in WeWork was Masayoshi Son, the Japanese billionaire technology entrepreneur who founded SoftBank. Masayoshi Son created a $100 billion Vision Fund, which was intended to invest in emerging technologies like AI, robotics and IoT. The book The Cult of We discusses various anecdotes about Masayoshi which could make its own interesting book. Masayoshi Son was perhaps even more aggressive than Adam, and acted as his mentor throughout much of WeWork’s rapid growth. In one meeting, a 5 minute car ride, Masayoshi Son agreed to invest 4.4 billion into WeWork. It is these kinds of numbers that cannot possibly be handled by a company without a genuine scalable business model. As a side note, Masayoshi Son has the distinction of losing the most money in history; about $70 billion during the dot com crash of 2000.
It is personalities like Masayoshi Son’s and Adam Neumann’s that push forward relentless growth. Companies can benefit from these archetypes, but they become dangerous and unwieldy when the constraints are completely removed. This is just another obvious pattern. Complete autonomy never converges to good solutions. Neither does overbearing control. As with any individual or society, the key is to learn where to strike the balance between order and chaos.
A good way to view this is in terms of the ratio between external and internal dependencies. The bottom falls out of systems once the external dependencies outweigh the internal dependencies. In the case of WeWork the external dependencies were all the agreements and obligations the company made in pursuit of its growth, whereas the internal dependencies were whatever took root in terms of a real organization that delivers value. The following figure depicts this concept.
Due to the causal opacity of internal dependencies (the things a system depends on to ultimately survive its environment) it is too easy to grow beyond your ability to sustain the growth. There is no fundamental analysis that will reveal whether an organization has what it takes to ultimately survive a given growth rate. What can be done is to look at what an organization has already survived and assess a reasonable rate of growth from that.
Was WeWork surviving genuine market stressors? No, at least not the kind that should accompany such a large valuation. Its survivability wasn’t being tested, since it was placed in an artificial setting by a hyper-inflated valuation. Just as we cannot recreate the success of some long-lived suburb, we cannot look to large successful companies and merely recreate their success. This is the fundamental flaw with the study of successful companies in order to devise one’s own approach. The set of dependencies that make something successful cannot be known, and even if they could, it is a statistical impossibility that what worked for one company is going to work for another. This requires nothing more than an understanding of how systems survive in complex environments.
When the guts of an organization have not taken root in lockstep with its rate of growth the bottom falls out. The external to internal dependency ratio dictates where that threshold lies, and due to epistemic uncertainty, we cannot be precise in our choosing of where to strike that balance. Slower is (ultimately) faster for a reason.
It is the informational aspect of digital money that separates it from physical reality. It is this separation that allows individuals to see billions come and go. But there is a real cost to making such bets, because whatever external dependencies were created by the investment have physical counterparts that don’t evaporate like digital money does. Again, real lives are tied to the physical pieces tethered to the vaporous investments made by investors.
In the case of WeWork this was even more pronounced, compared to investments in genuine software companies. Software still has physical dependencies, like buildings that house workers and manufacturing plants that meet the demand for processing chips. But WeWork was/is an actual physical business, meaning the collapse of the investment had much larger consequences.
Another example of this scenario is the infamous Theranos fiasco, another privately held company whose actual business reflected nothing of the massive investments and hype that followed it. The “science” behind Theranos was pure fiction, which anyone with even an undergraduate in chemistry could have told you, yet they raised $945 million from high-profile investors. Even more serious than WeWork, Theranos was fully a physical company, as it was in healthcare, meaning people’s actual health were tied to the hopes and dreams of this company. Dragging these kinds of dependencies down with you because you decided to brand your company as if it were a software company is morally and ethically irresponsible. But to investors this was nothing more than a downtick in a diversified portfolio.
Full blown collapses like WeWork and Theranos cannot simply be chalked up to making “bad bets.” The red flags are obvious to those with even a cursory understanding of how systems work. But common sense gets sidelined when people have an agenda, and the prospect of making billions can derail even the best of us.
Whatever you look to create, remember that the environment is always there to take more. It has no cap on growth, especially when what you build is deemed purely informational. The reality is that there is always a physical aspect to what you do, and the minute you forget that is the moment you’re setting yourself up for catastrophe. There is no system that can grow indefinitely. Nature always resets its balance.
Founders seeking outside investments should be held to a ratio between their focus on growth and their focus on the engine that is meant to drive it. A ratio too out of whack is an immediate red flag for an inability to drive future profits. Bootstrapping suffers far less from such out-of-whack ratios since the system is self-regulated by a natural flow of supply and demand. Bootstrapped companies can only grow at a rate that matches their ability to drive real revenue. This is not to downplay external investments, but to highlight the distinct difference between the 2 approaches to growing business.
Silicon Valley culture has brought us much in the way of innovation. Much of that innovation would not have been possible without large external investments. But outside funds immediately place a company into a very different set of system dynamics that need to be respected to avoid catastrophe.
Since WeWork’s implosion, the temperature in Silicon Valley has calmed down, with investments no longer approaching such extreme levels. But things tend to work as a pendulum, and there is little reason to believe we won’t once again see a culture of massive funding, under a slightly different narrative I’m sure. The point is, as long as founders and investors ignore basic properties of how systems work in complex environments, these mistakes will happen.
Outside funds immediately place a company into a very different set of system dynamics that need to be respected to avoid catastrophe.
How to Grow While Avoiding Catastrophe
So how can we avoid passing the growth-survivability threshold in our creative endeavors? Because this isn’t just for building companies, this is for any creative effort. We must extend beyond our current capabilities to grow, to learn, to bring new things into this world. But if we become too focused on our growth it can seal our fate towards never making real progress.
Limit the resources we invite-in as fuel. Like a modern diet too flush with calories, we should not act as though more is always better. There is a dose that works well, and a dose that kills you.
Don’t try to outcompete everyone else. Winning over others should only be a byproduct of focusing on what does and doesn’t work.
Ask if your endeavour is likely to be profitable in the future, whether this means money or some other kind of return, like fulfillment or making a difference. Are you creating things that have some future-proof aspect to them? This is less about being predictive, and more about creating things that have the capacity to backfill future demand. The ability to adapt. How easily can you change what you are making?
Instead of latching onto narratives like “early mover advantage” think more about the properties of the things you build. Recall in a previous NonTrivial episode where I discussed how The Pattern is Not the Path. Even if early movers have some kind of advantage (highly debatable) the pool of early movers must have had something about their organization that made them ready to take on their markets. It’s about survivability, not moving quickly.
It is far more likely that overly-rapid growth will cause your company to become fragile in the face of inevitable shocks. There is always a “hunger phase” and just like bacteria that grow too quickly your rapid growth may be setting you up for irreversible failure.
Founders have the most say. This means their personality is tied directly to what does and does not get done. There needs to be a balance between the creative benefits of chaos and its ability to destroy. Understand the stark advantages that come from working under the right restrictions.
Everything in life can be framed in terms of problem solving. We are problem-solving machines, with the ability to navigate complex environments and devise solutions. But there are situations that make problems intractable, and we saw an example of that with WeWork. The complete focus on growth made it so WeWork was trying to solve the wrong problem. It caused their external dependencies to dramatically outpace their internal capacity to deliver, making their efforts ultimately futile. Whatever your decisions in life, make sure you’re attempting to solve the right problem, and that you’re using your natural ability to do so, not some narrative that masquerades as a recipe for success.
With growth comes new environments and new stressors. Entering a new or bigger market while pretending to be something you are not spells disaster. Keep in mind that WeWork wasn’t simply reaching beyond its grasp, it was pretending to be a digital company when it was in fact a physical one. The physical constraints of a system will always have the final say, no matter how informational you’d like to view your creation.
Don’t view the success of a company in terms of its valuation. These numbers can be calculated in all kinds of ways, and as we saw with WeWork, companies can have massive valuations while doing barely anything real in terms of business. Valuation is tied to hype, ignorance, and overly-eager investors more than anything else.
We often hear the difference between careless risk and calculated risk. But truly calculated risk means using what is known, not latching onto the kind of loose narratives littered throughout the business section of a bookstore. You reduce risk of failure by demonstrating sustainability, not growth. And sustainability happens when companies repeatedly backfill the risk they take-on with actual, deliverable value.
Let the roots of your creativity emerge over time. Don’t pretend to know what makes something successful, only to supercharge those false ingredients and inevitably implode. Instead, respect the high-level properties that are known about things that work. Deep patterns that have remained invariant throughout the ages. This doesn’t guarantee success, but it does dramatically increase your odds of building something that lasts.
And finally, the red flags that signal future demise are not all that mysterious. Learn about nature, systems, complexity, even philosophy before MBA-style business knowledge. If you want to know a thing, don’t look at it directly, but note its universal properties. You don’t need to be an “expert” in something to see the universal patterns it exhibits.
