The problem with scalability.
Market Curve Episode XXXX
Welcome to Episode XXXX of Market Curve - a newsletter exploring the intersection of startups, marketing, sales, and everything in between.
Modern startups have one thing on their mind: growth and scalability. Naval famously said “in order to be wealthy, you have to give people what they want and you will have to give them that at scale”.
And it’s true. At least in part.
You do become wealthy if you achieve scalability but at what cost? I think understanding scalability is crucial to understanding capitalism and what it means to be a startup founder.
Let’s dive in, shall we?
The technical economic definition goes something like this:
Economies of scale work produce multiple units together at a large volume. The reason they do this is that it results in a lower marginal cost than producing them separately. So it’s cost-efficient to create multiple copies of the same product.
(Marginal cost: The marginal cost is the change in total production cost that comes from making or producing one additional unit)
Okay, so it’s cost-efficient. But what does it mean exactly?
It means that economies of scale use time as leverage for maximum impact. It means that for every unit time, there can be multiple units produced by keeping the cost of production constant. Now that’s some powerful s**t.
Let me explain.
Understanding Scalability from an engineering perspective.
In engineering terms, you can think of scalability as the output of leverage. The nature of levers is such that the length of the lever is directly proportional to the weight it can lift. If we equate weight to the problem that any startup solves, then you need a proportionately long lever to solve that problem.
In our case, this lever is time.
In my previous essay on PMF, I mentioned that time is one of the inputs that a product uses to manufacture a certain output. Without the efficient use of time, scalability cannot be reached.
For every unit of time, multiple functions have to be executed at the same time.
Example: Founder A does X task every day for B mins creating output Y. In those B mins, C task is also executed creating the same output Y. These simultaneous tasks executed per unit time can be performed either by (a) labor , (b) software or (c) a combination of both.
In all three situations, the output per unit time is 2Y. So as you can see, the impact has doubled and has increased by 100% for the same unit time of work done.
In this example, we used just two tasks - X and C. You can move up the ladder and add as many tasks as you need.
This follows the general work formula in Physics, where work done = force * displacement. This displacement is the number of tasks that we assign per unit time.
The greater the number of tasks, the more work is being done. This is because work is directly proportional to the displacement.
There is a tipping point, theoretically speaking, where the law of diminishing returns might come into effect but that’s a topic for another day.
Another thing also to keep in mind here is as you add more and more tasks per unit time, the impact that is created is exponential in nature. (While the marginal cost would change by very little)
This is important because an exponential curve is the north star metric for any kind of growth. And it’s because it can go as high as possible (theoretically of course) without limit. And the longer you do it, the more powerful it becomes thanks to the law of compounding.
So you can see why scalability is so sought after. It’s incredibly efficient.
Scalability’s been around since 800 BC.
Scalability isn’t just efficient in the business world. The idea of scalability is built into our entire societal structure on a very primal level.
Case on point. Language.
Has been around for centuries right?
Let’s look at an example.
The majority of the United States population today speaks English. But it has people coming there from all kinds of countries. You have Mexicans, Asians, Indians, Arabs you name it.
Each of these people have a specific language and a culture that they brought to the US with them. But if they were to function within the US and achieve “growth” as a country, they would need the help of scalability.
This means that for the Mexican to enter into a business relationship with an Arab, they had to have some common ground for communication. In this case, it was English. The same would hold true for an Indian man getting married to a Chinese woman.
This common ground enabled people to communicate in one channel that was common for the odd 300 million people living in the country. And that is one of the important reasons why capitalism in the USA thrived so much.
This example tells us two important qualities of scalability.
The first is that scalability requires commonality - some common elements that can be repurposed and recreated multiple times without too much effort.
In the software world, we can see that any piece of software can serve multiple people at the same time. The software is built once and can be sold a million times over without changing too much. Classic scalability. See how similar this is to the language example we saw earlier?
The second thing that we notice here is that scalability, though efficient, forced the Mexican to adapt to his new land and learn English in order to “grow”.
Now let’s say he goes to Silicon Valley, meets all kinds of people, and then begins dating a Chinese woman. They both are communicating in English and eventually they get married. Their kid also grows up learning English and the cycle continues.
The tragedy of the commons.
If you observed closely in the earlier example, you’ll see that the Mexican has to a large degree diluted his Mexican culture and the same has happened for the Chinese woman as well.
As generations pass, the cultures get more and more diluted. This is also one of the effects of scalability - dilution of individuality in favor of the “common good”.
Scalability works best if people have a common ground. This means it’s ripe for conformity bias to take hold. As you begin to add more and more people into a common channel, they let go of their individual elements and become part of the “herd”.
And history has shown that taming a herd is much easier and more efficient than taming an individual. Case on point: Adolf Hitler. Julius Caesar. The British colonization of India.
In the business world, you can see Instagram for example. People post things on their feed and try making friends. Thanks to the network effect, people keep coming back and become “followers” of someone or an idea that they connect with.
Social media has amplified this to a great degree. One of the consequences of this scalability function is that it is created using cultural parasitism.
Cultural Parasitism is when an idea is circulated just so it can reach the “herd” faster and easily. This propagation of an idea is not concerned with the truth. It is only created so it can transmit faster.
For example, if an influencer makes a claim that the world is polarized then the content is not created on the basis of whether that statement is true or not. It is created so it can transmit faster and gain “virality”.
The more contentious the topic, the more sensationalized it is, the better probability it has of reaching the said virality.
Journalists did that all the time and still do. A Morning Brew senior executive wrote an essay a while back where he said that “the future of all companies is to become a media company”.
And while that may be true, it is worth remembering the effects of this change. If all companies follow the journalism/media company route, the truth will be diluted thanks to the effects of scale. (remember dilution is a consequence of scale?)
There are some things scale can’t buy.
Another observation worth noting is that some economies of scale are harder to attain. For example, passion is hard to scale. So is persuasion.
How do you scale a founder’s passion to build a million-dollar business? How can you create multiple passion elements in a single unit time? You can’t. (Hint: It’s incentives).
Likewise, you can’t scale human relationships. Social media attempted to do that and I think it has failed. We are connected on paper but disconnected where it actually matters.
So we can observe that intangible elements are harder to scale than tangible elements. A tube of toothpaste is easier to replicate than creating another friend for the same unit of time invested.
Intangible things by their very nature are very personal and private. It requires a “custom” offering to make the transaction as impactful as its tangible counterpart.
For example, if I send a well-written personalized cold email to a founder, there’s a good chance he might reply. But that’s not the case if I send him a bulk email en masse. This is because the founder intrinsically believes that some things can’t be done at scale. In this case, personal relationships.
And here’s why economies of scale fail here. If I try and send personalised emails to every founder, I’m spending more time writing one email. This means my marginal cost increases which means it becomes more expensive to the founder and is no longer efficient for me to invest in.
Tangible elements, on the other hand, are quantifiable and measurable. A sales CRM will boost office productivity and can directly translate to revenue. And this “value” generated can be measured. It is also impersonal, unlike its intangible counterpart.
Well so the question then becomes how do companies use the positive effects of scale and reduce the negative effects of it?
How to use economies of scale mindfully.
Well for starters, companies should focus their energies more on the tangible elements. Operating on intangibles is inefficient at best and catastrophic at worst.
The second thing that companies should begin operating from a place where growth and scalability are deliberate measures and not something that just has to be done. This behavior (of scaling at all costs) in itself is a result of the scalable economy we find ourselves in.
The third thing that companies can do is find tangible problems that could be solved using economies of scale. Yes, I said tangible.
Since tangible elements are harder to scale and require more energy, it will be more efficient use of resources if it is invested in a tangible problem that needs solving - like climate change.
If the positive effects of scalability extend to impacting as many people in per unit time, then finding problems that meet that would be a good starting point.
Global problems like water shortage, food supply, and environmental pollution are good examples of where economies of scale would have the most positive impact.
The fourth thing is not to use the economies of scale in areas where basic human primal emotions and desires are at play. Domains such as social media for example.
Companies should draw a line in the exponential graph somewhere and not keep growing. And even if they are, they should be mindful of the first and second-order consequences of this exponential curve and have checks and balances in place to mitigate the negative first and second-order consequences that follow.
Granted, most companies would not do the third thing mostly because it does not make economic sense to invest time and resources into building checks and balances.
It is counter-intuitive because it goes against the whole incentive structure that is inherent in capitalism. But that is a structural problem inherently and admittedly investing time into checks and balances would be a stop-gap solution and would not fix the root problem.
I’m not sure what the long-term solution is but I’m trying my bit to understand how the system actually works.
Being a startup founder, I believe it is my responsibility to understand the great online game I’m playing and question the rules at the very least.
As a former lawyer, I was taught to question existing laws and regulations. Just because something is legal does not mean it is right.
After all, Hitler was legally right to execute the Holocaust. It was only when those laws were questioned and the effects of his actions analyzed did we go and change the laws and create the UN charter that ended up banning genocide.
This line of reasoning though great is worth noting that this is posteriori knowledge in Kantian terms. Where we reach a conclusion based on a combination of reason and actual experience.
And this could have been avoided (in hindsight) with an apriori knowledge - one where reason was enough to forecast and predict what the consequences were of the actions.
I hope that we do not make the same mistake with capitalism and its effects, in particular, scalability and growth at all costs kind of approach. We are on the verge of creating a new world order and being mindful of this is very important.
After all, we should be responsible for the kind of capitalistic future we are building. For both founders and employees alike.
My goal is to try and write more consistently on this newsletter and write mindful content that stands out from the noise. So I’m considering making this a monthly newsletter. I love being a startup founder and I love writing on this stuff, so thanks for joining along for the ride.
As always, you can follow me on Twitter where I build my startup in public with complete transparency and share my lessons on business, learning, sales, and everything in between.
See you soon :)
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