Atherosclerosis

Metabolic disease isn't something that affects only people.

What is a company?

It’s a simple question.

On the face of it, we might say that a company is a private-sector entity organized to provide a set of goods or services in exchange for a market price. That’s a decent high-level answer. It’s something we might expect from a high-school student. It’s correct, at least on its face.

There’s a lot more to it than that, though.

Let’s think about how companies start.

You get a few people in a room. They want to work together. They identify some problem or unmet need or inadequately met desire in the world and they decide that they will fix it. Or, they may have an idea for something that will create its own demand. Did anyone know they wanted TikTok before TikTok came along? Our band of brothers and sisters builds a widget, of some sort.

They start to talk to people about the thing. Do you have this problem? How significant is this for you? How would your life be different if this problem went away? How much would you pay to scratch this itch? What would a solution look like? What if the magic fix did this and this and this? What other things do you think the new world in which you don’t have this issue would look like?

Ideally, our entrepreneurs get potential clients to describe what they have built before it even comes up in conversation. The startup convinces the potential customer that the widget was his idea all along. How brilliant you are, Bob!

At least, that’s the plan.

Broadly speaking, our merry group may obtain different outcomes. The people who will deign to talk to them don’t have the problem our nascent company fixes. Or it could be that it’s not that big a deal. Or people have been living with the situation for so long that it’s like water to fish; they can’t imagine a different world. Our crew stumbles onto some people who really do have the problem, only to find out that most are unwilling to be the guinea pigs for a solution. What happens if it doesn’t work? Will the early adopter look bad? Will they have wasted some money? Will the client’s marginal reputational cost of failure exceed the expected marginal benefit of success?

Our startup needs to be nimble. It is the modern equivalent of boys in ancient Sparta. Either they toughen up or they get abandoned to die. So, it adapts. It changes its offering to reflect the feedback. Our team may change the widget so substantially based on the conversations they have had that we say they have “pivoted” to an entirely new line of business. They’re living on scraps while they scramble for the Big Break.

When they do start to get what the VC know-it-alls call “traction,” when our startup does finally find something that people want to buy and it starts to fly off the shelf, outstripping their capacity to supply, our budding enterprise enters the sweet spot of growth. It re-orients itself from trying to figure out what it wants to be when it grows up to sucking the marrow out of the bone.

With success comes money and comfort and luxury. They have resources to hire people and lease offices and expand. They have transitioned from the exploration phase to the exploitation phase. Our team have become masters of their universe in the multi-verse that is capitalism.

To be fair, companies that mature end up distributed across a spectrum defined by exploration at one end and exploitation at the other. This occurs for many reasons.

Companies are like people.

On one hand, you have people and firms addicted to the game. Think of them like the college athlete who transitions into an ultra-competitive Ironman athlete. They will not be content to sit on the couch, suckling on a beer, complaining about NFL referees who protect Patrick Mahomes. No, the people at this end of the spectrum need to be involved. They seek out new problems to solve. They reinvent themselves over and over again. Maybe they sell their now-mature enterprise so that they can startup a new firm. Maybe they run five businesses simultaneously while writing a novel and a Substack and investing their growing pile of gains. Maybe they never achieve success but they keep striving. They keep investing in the pursuit of capital gains.

On the other hand, you have people who think that this is what life’s about. You’re supposed to work hard when you’re young so you can relax when you’re older. They retire (really they withdraw) from active life to enjoy passively the finer things like travel, good food, and expensive toys the moment they obtain any kind of material comfort. Exercise for them means they go for a walk. They have opinions about everything, but most especially politics and other people. They live off of dividends.

I confess there may have been some cheap shots in these last two paragraphs.

The thing about living a rich, inactive lifestyle is that it begets disease. For most people, this manifests as atherosclerosis or cancer. It can also present as other ailments like gout or diabetes or whatever. Maybe they’re just fat. These are called “metabolic disorders.” Rich people problems, man.

Bureaucracy is organizational atherosclerosis. Atherosclerosis clogs the arteries. It leads to catastrophic events like heart attacks and strokes. It weakens the body. Bureaucracy does all of these things for the enterprise. Bankruptcy. Cyberattacks. Failed product launches.

This brings us back to the definition of a business.

A business is a private-sector entity that exists to solve problems (emphasis plural) for its customers. When investors place capital with a business, it’s because they want to participate in the value the firm generates for its customers today and in the future. The free cash flow the firm earns from its mature lines helps fund the necessary external resources for the development of new products, even as future prospects help attract new financial capital. A business is a set of overlapping products and the engineering, marketing, and management capabilities to find and develop new products and new markets.

A business then is not a company that makes cars or delivers packages or whatever. It is a way of doing things. It is a system. It is a set of knowledge and processes and people in a complex dance engaged in the generation of value. No two businesses are exactly the same. No individual company is the same over time.

Look at Nokia. A pulp mill. Then electricity generation. Then rubber production. Then telecommuncations equipment.

Or Wipro. One of India’s largest IT services companies started as Western India Vegetable Products Ltd.

Bureaucracy saps the energy of the firm, milking the existing lines, diverting resources that could be employed to find these new and future opportunities.

A bureaucratic firm is one that is bad when it comes to generating new business lines after some initial success with its first successful product; it morphs into sclerotic mediocrity after a period of success in breaking new products.

A bureaucratic firm is one that stops trying.

Just as the purpose of a system is what it does, it doesn’t take much to assess the level of bureaucracy in an organization from the outside.

The purpose of a bureaucratic business is to redirect productive resources to administrative frictions, many of which contribute little or nothing to the generation of value (if they don’t impair it actively). The intention may be to deliver value to its stakeholders. But the purpose is the reality of wasted time and energy.

Look at Google. What a tremendous business this was when they first started. Search in the days of Yahoo! and AltaVista was preposterously bad. Google Search on the other hand was based on an intuitive, proven concept. Let’s rank things by the number of citations, just like we do with academic publications. Let’s present search results in order of impact, as opposed to just throwing up a bunch of links in seemingly random order.

Google was brilliant at managing the balance between commerce and function. To pay for everything, they took advertising and placed it strategically around the search results. They were careful not to kill the Golden Goose. Someone or some team within the firm appears to have been evangelical about protecting the integrity of the search results; too many ads and the whole project and all its goodwill would disappear.

The project threw off epic amounts of cash.

The company had two choices. Behind Door A, Google could keep the cash and re-invest it in other projects that would pay off, creating exponential growth proportional to the level of ever-rising investment and leveraging their expertise as designers, engineers, and marketers. Behind Door B, Google could return the cash to the firm’s owners. Keep in mind that, because of their preposterous, explosive success, the governance of Google was, shall we say, sub-optimal. To allow the founders to enjoy Croesus-like personal riches while maintaining control, the company had a dual-class share structure. This allowed the founders to sell billions of dollars in equity while staying on top. They brought in a CEO who was a grown-up having run companies like Novell. They gave their employees time back to pursue ideas.

Why is it that so many of their investments didn’t pan out with market dominance? Why is it that Amazon made cloud computing a thing and Google a distant third? Why is it that they do not appear to be the leaders in AI despite having published much of the pure research everyone else is exploiting including the original Transformers paper? Why are their user interfaces so uniformly crappy and un-beautiful?

In recent years, Google has murdered the Golden Goose by ignoring the risk that too much advertising, presented in too rapacious a way, would be the end of it. That this is happening with the disruption of competitors built using AI technology Google invented originally is just beautiful irony. This was auto-cannibalization on the installment plan.

Five years ago, it would have been absurd to ask the question, “Does Google need to exist?” But now? Today, AI looks set to eat their lunch.

Google is Millennial IBM. It is middle-aged and terrified of getting laid off. It is fat. It bet $20 on the Chiefs in the office pool.

How the hell did that descent into mediocrity happen so quickly?

Did their DNA get exposed to some pernicious radiation early on?

How about Apple? When was the last time they did anything revolutionary? Once the Jobs product pipeline played out and Jony Ive saw the writing on the wall, the accountants have been in charge. Why is the multiple on this thing so much higher today than it was when Jobs was running the show? It’s because Jobs put in place the App Store, even as he took big steps to keep the iPhone a walled garden. Everything else is just window dressing.

But, seriously, where’s the growth? Where’s the innovation? Where’s the sizzle?

You know what a real company looks like? As much as it pains me to say it, Meta is a real company. They take risks. They reinvent themselves. They adapt to the times. Zuckerberg is brilliant, but that’s not his true genius. His greatest strength is his breathless hunger. He wants to win. He’s an athlete, not a Dad bod.

Meta may end up being the biggest winner from AI. Their derisory metaverse crap? Nobody really talks about that much these days. Who knows? Maybe it will be a thing one day? Maybe I will have hair again.

Meta just announced a set of layoffs of about 3,600 people or 5% of the workforce.

None of these things is happening in a vacuum. We’re only beginning to see the impact of the cultural shift from the election. If I was younger, I would talk about vibes. The DOGE effort may succeed or fail. But it’s sending a strong message.

All kinds of organizations are ditching the bureaucratic nonsense.