The Case for Growth at Investment Firms

Conventional wisdom says that funds shouldn’t grow, because growth of fund size is the leading cause of worse returns.

It’s also assumed that growing a fund or firm in size is done for two reasons:

• Management fee/economic greed

• The aesthetic of scale

I think that’s often true, and I think growing too quickly is definitionally bad. The word “too” implies that.

But I think there’s a third reason to grow at the right speed.

It’s because in general, the best investors in the world are ambitious. In general, ambitious people want to expand and grow their careers. They can either do that by rising up in their organization to take on a greater scope of work, or leaving.

It’s probably better to retain ambitious people as they grow. Making senior lateral hires is riskier than growing organic talent. And talent grown organically grows at a compounding rate. Not only do these people become better professionals, but they are native to the organization they have grown up in (they understand the decision-making styles, they have social capital so they can get things done quickly, they have been granted increasing amounts of responsibility, they know where to find stuff, they know the resources the firm brings to bear, and so on).

Retaining ambitious talent can either happen by:

• Grow the firm at the pace the existing talent is ready to take on further responsibility

• Not growing, and therefore allowing those ambitious people to take away scope and seniority from others at the firm (this might lead to politics and in-fighting)

• Convincing an ambitious person they should not be ambitious and bamboozling them into not growing their careers (seems like a crappy and hard way to do it)

Growing a firm at the right speed allows ambitious people to take on more work and responsibility, without stealing it from others. Which leads to both retention and a lack of in-fighting.

This isn’t a perfect argument:

• Ambition can be dangerous: especially misguided ambition, or impatient ambition.

• With scale comes complexity: meetings of 10+ people are almost always less productive than those with 4-5

• The larger an organization, the more processes have to be implemented, the larger number of people who have to approve decisions becomes, and rules get set in place to control risk and mitigate the harm to others in the organization if one actor makes a mistake

• And so on… the problems with scale are probably better addressed in its own book as opposed to a section of a blog post

But in short, I think there is a lack of nuance in the argument as to whether or not firms should grow. Some firms like USV, Benchmark, and others have proved exceptions to the rule. But I find it hard to learn from exceptions (I find Elon Musk fascinating, but struggle to attempt emulation because he’s such an exception). I think these anomalies get over-generalized and applied to every other firm while ignoring great franchises like Bessemer, General Atlantic, Sequoia, and others who have grown (imperfectly) but probably more sustainably.

I’m not arguing for either one, I’m just posing that there is a third, talent-oriented reason to grow that is often ignored.

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