To Scale Or Not Scale?

I was at an event earlier this week with a room full of tech start-up and growth company COOs.

One word that was used often in conversation was "scaling". 

"As the business scales", "When you're scaling up", "scaling the business", "scaling the team", "bringing scale to the team"... these were all typical soundbites.

I've heard people use the term so much over the past few years.  In a start-up it's easier to talk about "growth" and "scale" than trickier subjects such as "revenue" and "profit".

So, to clear things up, just what is "scaling".

Well, in my opinion, it's something more than just "size".

It's about efficiency of resource utilisation.

Here's a simple example.  You have £100,000 in revenue.  You have 5 people.  You have 2 web servers.

What happens when you double the revenue?  Do you double the team and double the number of servers?  If you do, you are not scaling.  You are just growing. 

Scaling would mean that you doubled the revenue, but the team size and web servers did not need to double.  Maybe the team went to 6 people and the web servers stayed the same.  Now you're starting to scale.

Scaling come from the term "economies of scale". 

The more transactions that take place, the cost per transaction comes down.

So - are you scaling or growing?  Ideally both!

Thermodynamics, evolution, wealth and happiness

If I was to say to you that there's a fundamental foundation that links life, physics, wealth, happiness and effort, would you;
a) yawn?
b) laugh?
c) sit up and listen?

If c, read on. Recent reading and thinking has led me to the following conclusion;

Firstly, that the first and second law of thermodynamics hold the keys to the meaning of life. And secondly, progress and wealth are underpinned by an evolutionary mechanism that is universal.

Come again?

I guess I'll need to explain in more detail. I'm not sure I can do it in a single blog post, so bear with me as I  fire up a few synapses.

The first law of thermodynamics expresses that energy can be transformed, i.e. changed from one form to another, but cannot be created nor destroyed.

The second law of thermodynamics is an expression of the tendency that over time, differences in temperature, pressure, and chemical potential equilibrate in an isolated physical system.

i.e. - the universe has a finite amount of energy, the universe is an isolated physical system and energy will level out in this system.

The levelling out process is called entropy.  In it's most general sense one can regard entropy as the general decay that surrounds us.  A new car will eventually rust, a building will need new paint, food will rot, people grow old and stuff just generally falls apart.  New life however is sustained by the sun which provides energy for living creatures.

Life requires continued energy to be sustained otherwise it fades and dies. To stay alive, we need to eat and sleep.  (Doing nothing is not an option).  There's a certain amount of energy required to stay where we are; we have to keep walking forward to stand still.  Every day we need our 2 or 3 thousand calories of energy, we need to rejuvenate with our sleep.

If we do more than just stand still it requires effort.  If you want to be wealthy, it requires effort.  If you want to have a family and prolong your gene-pool, it requires effort.  There's effort required to stand still and yet more effort to more forward.

The effect of all of this extra effort is a temporary suspension of entropy.

We strive against a tide of entropy that surrounds us and the efforts we all make on a daily basis help drive humanity forward.  We have an inner drive and purpose to temporarily suspend entropy.  This drive, this striving, is the essence of life.  It gives us satisfaction, it gives us meaning and it gives us value.  I would even go so far as to suggest that it is the source of our happiness.

When considering the business landscape, you could see it in this way: businesses competing to create business models that temporarily deliver additional value.  Over time, new business models become the norm, become commoditised and so companies need to innovate (strive) to do more than stand still.  Those that succeed create wealth, those that don't decay and die.

Behind both humanity and business is a common evolutionary algorithm.  This evolutionary algorithm is a method to uncover (not by pre-determined means, but by trial and error), organism designs and business plan designs that are optimal for the environment in which they find themselves.

To make sense of life and to make sense of business, you could like me take the following view;

1. We are part of the fabric of life itself, iterations of the human species that are being continuously tweaked to be optimised for the environment we find ourselves in by an evolutionary method

2. We derive satisfaction (value) by striving to do more than to stand still and to suspend entropy as best we can

3. Businesses work by the same means, combining previous business knowledge into new business designs that can temporarily beat the competition (suspend entropy) and create value.  To win they must continuously innovate and embrace evolutionary methods in their architecture.

The laws of thermodynamics, together with an evolutionary mechanic are foundational in understanding the human need to strive and the business need to innovate.  One delivers satisfaction and happiness, the other value and wealth.  Businesses are but collections of humans so this should be no surprise.

If you are still reading this and wonder what I'm on to deliver such a stream of consciousness, there's two things you should know.  I once studied Theology and Religious Studies at University (but am currently an atheist) and that I've recently read "The Origin of Wealth" by Eric Beinhocker.  If you get a chance do read Beinhocker, it will help develop the thinking that I've scraped the surface of here.

Get Your Platform Shoes On

Finding a business model that scales is increasingly important in the modern world.

What does that mean, and how do we do it?

First of all, scaling. I'm using scaling in the broadest sense. In my definition, it's a case of where revenues per unit grow faster than cost per unit. An example would be; say I need 2 programmers and 3 web servers to make 1,000 online sales a day. If I do 10 times as many sales, I don't want to spend 10 times as much on programmers and servers. So instead of 20 programmers and 30 servers, maybe I can do it with 3 programmers and 4 web servers. The cost of doing business gets more efficient the more volume I add.

This is a particularly important concept for tech-media companies, because often in a start-up mode they are running at a loss. They are still investable businesses though because if the sales and marketing bring the volumes, not only do you get to a point where the company starts to break even, but the growth in profitability thereafter is extremely impressive.

Secondly, the modern world. Increasingly we are seeing business models that transcend borders. They can be run primarily from one central location with small local teams for international presence. Not just in tech (Google, Facebook, Amazon, eBay), but also in telephony (Vodafone, Orange, Nokia, HTC), consumer electronics (Sony, Samsung, Apple) and supermarkets (Wal-Mart/Asda, Carrefour, Tesco). A business model that scales has a huge advantage over one that doesn't when competing on world stage.

So, if scale is important to compete in the modern world, how should we think about business investments into this environment?

I always ask myself, "is this a platform business?"

If the answer is yes, I'm interested. If no, you'll need to work hard to get my interest.

A platform. Not 1970's funky shoes, but a prism through which to view to judge almost any business investment.

A platform is a place where supply and demand are aggregated. Lots of buyers connect to lots of sellers through a central marketplace or hub.

There are platforms all around you.

iTunes: Hundreds of millions of music consumers connected to almost every music publisher
Google: Millions of searchers connected to millions of advertisers
eBay: Millions of private sellers connected to millions of buyers
And there's more... Autotrader, Match.com, Amazon - and of course Livebookings (my day job) - where we connect millions of diners to thousands of restaurants.

These are all platforms. The more supply you add, the more interesting you are to buyers. The more buyers you can provide access to (consumers), the more interesting you are to sellers. You gain market power - because the owner of the marketplace can charge people for attending the marketplace and for transactions that happen in the marketplace.

In any business model like this, the potential is exciting. The keys to success are; seeding the platform with sufficient product to get consumers interested, have a diminishing cost of sale by adding more inventory over time and having inherent viral effects that customers create more customers. That's all about execution. Having a great idea is one thing - doing it is always harder.

To get past that "is this a good idea?" phase, I always ask myself, "does this solve a real need", "is this a platform" and "will it scale?".

Then - I get my platform shoes on - and go for a boogie.

The Economics of Happiness

What's the best use of your money? Would you buy a coffee for £2 from a coffee shop, or buy a teapot for £1 from a road-side stall?

My wife and I were on holiday with the kids recently in a seaside town in Cornwall. After a lovely afternoon at the beach we were walking back to our rented house and we saw a table outside a house with some second hand goods for sale. No-one was at the stand, not even the owner, and there was an honesty box for purchases.

My wife spotted a white porcelain teapot. Plain, white. A teapot. She said, "I really like this, let's get it, it's only £1". I said "A teapot, what do you want a teapot for? We don't even drink tea, and if we give it to visitors we already have a silver teapot we can use".

"I like it - okay?! It's only £1, what's it to you? It will look lovely on the shelf in the new kitchen". I don't know why, but I still resisted. I just hated the idea of owning another object that would need to be moved, cleaned. Perhaps I have a less is more approach to belongings - the more stuff you have, the bigger burden it creates on maintaining that stuff, and it can actually be a cause of unhappiness. That's why I didn't see the point of a £1 teapot that we would never use. It wasn't the cost, it was the space.

My wife said, "I don't complain when you buy a £2 cup of coffee!" (It's true, I like coffee, and I buy one or two a day - that's quite an expensive habit - maybe smoking would be cheaper.) "So why are you kicking up a fuss about a £1 teapot?"

At this point I figured that it was a good time to just lie down and buy the teapot. I realised that it would give her some degree of happiness and that an argument wouldn't help either of us. Mental trade-off made, we bought the teapot.

It did get me thinking though. If you have a choice, is it better to spend your money on things or experiences? Or - give your money away? It seems to me that good experiences mature like good wine. They get better and better in our memories because we filter out the worst bits. Things/objects on the other hand rarely get better, they get worse. They deteriorate, they need repairing. Something better soon comes along and our joy on the thing that was "new" fades quickly. We get used to things and want more. Then - they need disposing of.

Experiences it seems are an investment - they mature. Things on the other hand are like throwing money away. The only alteration to this principle that makes sense to me concerns things that are bought in order to enjoy experiences. Skis, bikes and boats come into this category for me.

I had a lovely coffee that morning on holiday, sitting on the harbour wall and soaking up the atmosphere. In many ways it was one highlight of my holiday. I wonder how my £2 investment will pay off against the £1 teapot? Time will tell.