Mistaking Growth for Development

Today’s post is dedicated to one of my favorite Systems Thinkers, Russell Ackoff. He was the proponent of the ideas central to this post: The lens of growth vs development.

I’ll take this lens to the Tech. startup scene in Silicon Valley and to large corporations and articulate how they typically mistake growth for development with some examples.

Organizational psychology is a fascinating field. The late Charlie Munger had to say a few things about the importance of incentives in organizations. Before I quote him, we must note that the concept of “blame” doesn’t make sense when organizations are viewed as complex adaptive system with purposeful actors.

As Morgan Housel often reminds us that there is a saying in the Social Services circles (these are the folks that deal with the kids who tend to have behavioral and social issues throughout life):

Similarly in an organizational setting, people's actions, even those that seem irrational or puzzling, often have a logical basis when viewed through their unique experiences and circumstances (including their position/department in the organization).

As an executive or a founder, if you have a worldview that (most) people (that went through your hiring process) are individually good, then look at the incentives (and incentive-caused-bias) at play in order to explain their collective dysfunctional behavior.

Here is a pertinent quote from Russell Ackoff about the lens of growth vs development:

A lot of people found it curious how Apple didn’t do any mass layoffs like the other Tech. giants in the recent past. Well, that’s because they didn’t go through a hiring spree during the pandemic (unlike the other tech giants) in the first place. Before we speculate about that, let’s first start with a pertinent quote from Steve Jobs:

Jobs understood the focus needed on long-term viability. With that context, let’s look at how the incentive structures, organizational design, policies, etc. are setup at Apple - click this link and watch the video (1 min 27 sec) to hear what Tim Cook had to say about that.

Tim Cook curiously says that there is only one ‘Profit & Loss’ (P&L) for Apple - at the company level. Jobs understood that local optimization of P&L may be detrimental to the whole company. If iPhone had to cannibalize iPod, so be it! Local efficiencies don’t guarantee global effectiveness.

Now compare that to how your organization is setup with different budgets, cost centers, P&Ls, etc. Now think about how hiring budget is calculated/funded/justified in your organization. Can the variables that determine it create a spike - say like during the pandemic when many turned to online - from shopping to entertainment?

With that thought for you to chew on, let me shift to discussing the lens of growth vs development on the tech. startup scene (colored by my living in the Silicon Valley for the past 15 years)…

Before I get to this topic, I’d like to set the stage by recollecting an old wisdom from the East about starting a new businesses. I was born and raised in Tamil Nadu, India. As luck would have it, Tamil is one of the two longest-surviving classical languages in India, along with Sanskrit, attested since c. 300 BCE. Old Tamil literature is full of terrific insights, especially about human behavior - a lot of Lindy ideas.

A popular one is Thirukkural (or Kural) - a classic Tamil language text, divided into three books with aphoristic teachings on Virtue, Wealth and Love - 1,330 short couplets, or kurals, of seven words each. That’s it!

Here’s is what the old text says about starting a business:

It loosely translates to

I always used to wonder about the meaning of that verse and why he so, from my childhood days. But, I got my answers in Silicon Valley.

The mistake of confusing growth with development is committed by many Venture Capitalists (VCs) and thereby the founders that work with them. Not all VCs behave this way, but this behavior continues as late as the current AI mania…

Let’s see what David Holz, the founder of Midjourney has to say:

The premature death of so many businesses is caused because of premature growth. Venture Capitalists don’t get this and push for growth at all costs. Pursuing growth is a strategic move that can lead to success or early demise. The latter unfortunately is true in most cases.

Here is Sridhar Vembu, the Founder of Zoho, on this topic:

Many entrepreneurs and venture capitalists that work in “pre-hypergrowth” startups don't understand the difference between growth and development. They end up focussing on the wrong things which eventually puts them in a position in which they see no other option but to do something drastic like layoffs or go bankrupt when things go south. The insatiable quest for growth in customers, quarterly revenue or profit margin is a common phenomenon. Let’s now look at a case study.

Sahil Lavingia’s blog post, "Reflecting on My Failure to Build a Billion-Dollar Company," is a candid account of how premature scaling nearly led to the collapse of Gumroad.

Lavingia followed the traditional Silicon Valley playbook, raising $8 million in venture capital early on and rapidly expanding Gumroad’s team. He assumed that rapid scaling was necessary to meet investor expectations and achieve "unicorn" status (a valuation of over $1 billion).

But, in 2015, Gumroad failed to secure a Series B funding round, leading to financial strain. Lavingia had to lay off 75% of his staff, including close friends, and restructure the company. This was a deeply painful process for him personally and professionally.

After downsizing, Lavingia shifted Gumroad’s focus from hypergrowth to sustainability. He abandoned the goal of building a billion-dollar company and instead concentrated on serving Gumroad’s core audience—independent creators—and achieving profitability.

Lavingia realized that market dynamics from the startup ecosystem often dictate growth rates more than product innovation. He instead embraced a more pragmatic approach, focusing on steady improvements and aligning with the needs of existing users rather than chasing exponential growth. The turnaround was spectacular!

Lavingia openly shares his journey, including failures, in the post linked above. His transparency is commendable. Read the full post to learn more about the turnaround and more importantly the shift in his perspective about what “success” is.

If you are a budding entrepreneur and would like to start a business, work towards funding it yourself. Start tinkering on the side if you have a corporate job. Experiment and fail - learn from it.

Before you take VC money, understand that you are just one among their hundreds of different bets. The way they make their big bucks is from a SMALL number of VERY successful bets that have asymmetric payoff.

The very process of taking money from others (when their focus is on making more money rather than solving the problem you are passionate about), creates mis-alignment of incentives.

But, if you already have a business up and running and think that you are in “pre-hypergrowth” phase, listen to what Jason Fried, who started and runs 37signals (a proud non-serial entrepreneur) has to say on this topic… Here is the excerpt from his book, 'Rework':

Small is Beautiful! I think NOW is the time for more small businesses! More multi-billion dollar businesses but with just a handful of employees - all of who can tap dance to work. More human-centric businesses! More variety!

Tremendous explosion in innovation and productivity in the 21st century will be unleashed not just by improvements in technology (think AI), but more importantly by improvements in psychology!

Research about effective organization has made a lot of progress in the past few decades. But, mainstream is still stuck with mechanistic paradigms. Many entrepreneurs chase the wrong things and lose their pace of innovation over time as they grow.

If you are interested in learning about these ideas join the Cyb3rSyn Community - the first online community that promotes multidisciplinary thinking for technology professionals.

It is a community that brings systems thinkers and cyberneticians (with their books/training/course/tools) together with tech practitioners, executives and entrepreneurs for cross-pollination of ideas and learning.

Now, for premium-tier newsletter and community members, I’ll take the lens of ‘growth vs development’ to large corporations: