Scale Kills Quality: Big is the Enemy of Great

In the mid-2000s when I started going to Russia, I discovered this amazing coffee place in Moscow called Coffeemania. At the time, it was a well designed atmosphere, with friendly staff, great crowd & delicious food and coffee. But over time they expanded and grew from 2 locations to 50+ locations across the city and even at the airport. Literally everything declined. I obviously stopped going. I saw this with multiple stores across the globe. I think we have all experienced this in our lives.

Why does this happen? Scale is where you make the really big money. It’s very easy, as you expand and scale, you have to add in processes & policies, you dumb down everything for the average or lower than average intelligence person to run and work at. You can open up access to more people. But this is at the expense of diluting the wonderful experience & service you used to provide. This is always why pretty much all the major chain stores and buffets suck. And perhaps this is the reason I much prefer boutiques and craft restaurants and food and clothes. Also why I much prefer the craft culture of Japan & Taiwan, a place full of unique stores & restaurants versus the retail monoculture of the United States.

This makes me think about companies as they scale. Literally described by Guy Kawasaki: “It’s depressing to watch a mean, lean, fighting machine of a company deteriorate into mediocracy. In Silicon Valley we call this process the “bozo explosion.”

Source: https://guykawasaki.com/how_to_prevent_/

I remember how amazing almost everyone was when I joined Yahoo! When it was below 3000 people. At 5,000 people, the quality of people was still amazing. But wow did it change when it hit 10,000 people, and I do not mean in a good way. When we hit 15,000+ people it was an admittedly mediocre place. The quality level of people just goes down as the filters get expanded. I do ascribe some of this to my Jungle/Dirt Road/Freeway process that happens in growing companies.

(Source: https://hardfork.substack.com/p/the-jungle-the-dirt-road-and-the).

But one of the end results of this growth is you just end up with so many not so awesome people looking for a cushy place to work. Frankly, look at the deterioration of the once great HP, Intel and depending on who you ask in Silicon Valley even Google & Facebook.

This happens on the money management side too. I’ve been tracking Venture capital and startup investing for a long time. It’s so much easier returning a smaller fund than a big fund. I’ve seen previously amazing startup investors and VC funds deliver outstanding returns. But this changes quickly as they scale up to much larger fund sizes. More companies, bigger investments, different stages. Everything changes including their returns as their strategy changes. What worked before will not work anymore. Also frankly focus & incentives change. It becomes less of a returns game and more of an AUM (Assets Under Management) game where the management fees are the priority (whether consciously or unconsciously). Pretty common in Private equity Funds, Hedge funds and mutual funds too.

Startups are almost always able to outmaneuver big and well resourced competitors. Angel investors and emerging venture fund managers usually outperform established VC funds. This is why elite special forces operate in small teams and groups. This is why Amazon keeps “Two pizza teams”.

Small is beautiful! And don’t let anyone tell you otherwise.