Slow and Steady Growth and Fostering Homegrown Talent Wins The Race
A lot of companies have put together 2023 budgets that look different than the ones they initially set out in 2022. Where investors used to place premiums on growth, they now place a premium on a company’s ability to control its own destiny (aka being cashflow positive, or close).
While the blistering growth of last year was exciting and fun to be a part of, it caused a lot of things to break. We now see growth plans being trimmed down in favor of mitigating burn. It turns out that building a business slowly is easier than building one quickly.
There are a lot of reasons this is true, but the one I find most interesting is talent development.
As a company grows, it needs to evolve. A founder can choose to either elevate employees in the firm to take on managerial and leadership roles, or they can make senior, lateral hires. While many firms have landed epic senior hires (including ours in certain cases), they’re harder to get right.
I am inspired by companies run by junior employees who, over a handful of years, have been promoted to senior positions. Blackstone is a great example, where many of the leaders in the company started their careers at the company straight out of college. This bias is also seen in most VC firms’ preferences to back founder-led companies and keep the founder in charge for as long as possible.
Some advantages of homegrown talent include the following:
Favored decision-making capability: Every company has its own decision-making style. When problems come up, there are often a lot of “right answers.” But there is usually only one “right answer” that is both right and also aligns with a company’s decision-making style. Junior hires learn the decision-making style of a company more easily because they’re not trying to override the teachings of their former employer. It’s the only style of decision-making they know. They’ve effectively been inculcated.
Knowledge of the front lines: Junior employees start on the ground floor. They know the nitty-gritty parts of the business. They’ve lived in the spreadsheets and the code, they’ve talked to customers, they’ve been yelled at by customers, and they know how the other employees think. This differs from senior executives who are lateral hires. These individuals typically have not worked that close to the ground floor of their new organization. Most of the information they have is summarized reports made by those junior employees. With this experience, homegrown talent can better empathize with what their reports are going through and can make decisions based on their first-hand accounts of the front line.
Better cultural Fits: When junior employees are promoted, they are almost definitionally cultural fits, because people who aren’t would have been managed out. Senior, lateral hires are not always cultural fits, and are hard to fire because doing so might set the company back.
Loyal culture of ownership: Homegrown talents are mission-driven, as opposed to mercenaries. Being at a business since the beginning of an employee’s career creates a sense of identity, loyalty, and a culture of ownership. This ownership culture means:
There is an army of homegrown employees looking out for the organization and ensuring quality control – because the quality of the business falters it’s a knock on their identity
Employee churn is lower, creating better continuity
When times get hard, these employees work harder
For all of these reasons, I’m biased toward backing and being a part of organizations that puts an emphasis on homegrown talent and whose people have committed themselves to learning new roles, evolving into them, and continuing to progress.
Speaking personally, CoVenture Holdings Company was only nine people in 2019. That’s 5 years after having started our business! And even then, it took me a few years to learn how to be an effective leader at that size. Last year we exceeded 20 and this year we’ll likely eclipse 30. My job today is way different today than it was last year or the one prior. It’s not easier or harder – it’s just different.
This steady growth has its benefits. If we had been growing at double the pace, I would have never had the chance to learn how to do my job well before seeing it evolve yet again. Where growing slowly has allowed us to hire slowly, the inverse is also true: we could have hired more aggressively and grown more aggressively, but growing too fast eliminates options.
However – when companies grow too fast, it messes up talent development. Employees are often placed into job roles that grow too fast.
For example: we always tried to ensure our fixed costs didn’t exceed ~33% of our fee-related revenues. Obviously, we don’t operate at 67% net margins since we have additional variable costs, but we tried to ensure base payroll, fixed operating expenses, etc., never become too high a percentage of our top line. This meant we often put arbitrary hiring constraints on ourselves. And it caused us to grow more slowly over the last couple of years than we otherwise would have – which felt painful when a lot of other firms were racing past us.
But it also meant that we were able to distribute profits. And maintaining that profit margin meant dividends during the good times, and optionality during the hard times. When markets started to get choppy in Q4-2021/Q1-2022 we were able to “raise cash” without giving up any equity. We froze dividends for a few quarters (which was painful) and reduced executive comp (which was also a little painful). But nothing compared to having to raise capital during a difficult market.
It’s not because we were geniuses. In fact, we felt like idiots for a few years when our “discipline” was causing us to miss a lot of big opportunities. But it’s partly because our investors allowed us to pursue whatever growth trajectory we felt was best for our own sensibilities.
Growing conservatively means we may not generate as much wealth as some of our competitors who are willing to take more risk. It almost certainly means there won’t be any one year where we earn more than anyone else does. Instead, we’re playing a different game: we’re trying to make a reasonable amount of money, every year, for as long as possible, while fostering homegrown talent.