Structures: Scaffolds for growth

 

     For many startups, the total rule is "lean, green, mean". Do what you most need to do, as fast as you can, with as little excess, or non-mandatory, work as possible. When I was co-founder of our company, it was not unusual to be working 80-hour weeks. We knew what we had to produce and we had a few methods to try to get it into the hands of people who would pay us for them. (We soon needed to expand that "marketing and sales" aspect of the business.)

     That is the basics of trade in a nutshell -- produce what is of value to others who will give back things of value to you.

     That works in a barter economy as well as in an industrialized, capitalistic, economy. It is also true within other viable economic systems. As the business, or economy, or government, grows it can often end up "abstracted" where it is difficult to say exactly what things of value are being exchanged.

     Leap ahead and start imagining a business that has thousands of people working to provide tens of thousands of things of value and having to keep track of a hundred thousand purchases and transactions. If it all works smoothly then it could be done in the same manner as when the trade was just between you and someone else -- that simple, basic, barter agreement.

     But this is reality. There are few one-to-one relationships between any person and any proceeding from start to finish. Person A does one part to process C and Person B does something different to process G which directly influences process C but A has no direct visibility to process G.

     Confusing? Absolutely. And this is still only a very simple situation. There needs to be some type of documentation -- method of communication -- between Person B and Person A that provides insight into relevant aspects of Process G without inundating Person A with all of the other knowledge and systems that Person B is handling.

     So, simple transactions have need of simple processes. High numbers of interrelated transactions, people, and processes have need of much better access to, and keeping track of, relevant information. How do you succeed in growing the business from simple to complex?

     The base answer is "structures" which can be loosely defined as ways to organize information about what is being done, (who/what/when/where/why) by the people who originate the information, to have it accessible to those who need to know that information. The other leg is "processes" -- which is involved with how that information is processed, saved, distributed, and otherwise not lost in the cascading effects of a successful large business.

     Processes can (and do) make use of various apps and programs. But without structures, the processes cannot do much of anything because they don't have the data with which to use those processes. Also, processes differ with every aspect of the business. A process for generating ideas. A process for estimating, and keeping track of, work. A process for manufacturing inventory and supply control chains. And so forth. But all of the processes rely on structures.

     The primary importance of determining just what information is needed for the business is that it remains approximately the same no matter how large the company gets. (Yes, as a business reaches certain growth points, new regulations may come into play.) This facilitates growth. The information has to be there but, when the company is small, it can be retained within various people's memories. Just like it seems to be true to a teenager, all employees of a startup are deemed to be immortal and those valuable data are always available.

     Absurd? Certainly. But it is so very easy to eliminate those items, that seem to not immediately affect the bottom line, when you are small, focused, and overworked. Resist. The data can be written on a large notepad or, for transitory data, on a white board. But get it written down. As the company grows, you are going to run out of room on those notepads or they will become too many to search through easily. So, you develop (or obtain) new processes and applications that help you to manage that data. But you already are used to getting, and documenting, that data. You are prepared for growth.

     

Public versus Private -- Corporate choices

     There is almost always great excitement when a brand recognized company initiates an Initial Public Offering (IPO). We look at the public stock indices and it is sometimes difficult to remember that Google (Alphabet) was once a private company or Facebook or Amazon or ... It is possible that there exists a company that began as a public corporation but I am unaware of it.
     There are still a lot of companies that are privately owned. Occasionally, a public company will move back to private ownership (they do this by buying back all stock that has been publicly issued). This movement in both directions indicates that each has its pluses and minuses.
     I am not an economist or a lawyer and cannot tell you all of the ins and outs of what is applicable. There are two general sets of regulations. One set is applicable to both private and public corporations. This set is primarily concerned with safety, health, and wellbeing (financial, social, and others) of employees. OSHA (the Occupational Safety and Health Administration) oversees much of this in the U.S. There are also general accounting, environmental, and other laws which apply to all corporations.
     The other set of regulations cover the security of stockholders -- those people within the general population who have invested their money in the fortunes of the public corporation. Naturally, since there are no public owners (and are not available for "trading") of private corporate stock, these regulations do not apply to private corporations. This means that private companies have a lot more flexibility in how they use their internal money -- but, depending on size and other factors, may have to treat their employees similarly to that of a public corporation.
     What is the attraction of "going public"? As a former small company owner, I can only tell you my views. The first is "exit strategy" -- what do you have once you have left the company. Within a private company, whatever my share of ownership may be, my share has no formal valuation. (If it is the target of being acquired by another company then an informal, estimated, valuation will indeed be made.) I have 40% of Company ABC. If it is private then that is 40% of ??? If an offer is made to acquire the company for $10 million, then my 40% is effectively worth $4 million -- but only if someone pays that. In a similar fashion, an IPO will indicate -- selling X% of the company divided into Y initial shares priced at $Z -- how much my share of the company is worth (once again, assuming someone wants to buy it -- it is not a "liquid" asset).
     The second attraction is to bring in additional money (capital) into the corporation for future desires. I have a store that has an estimated (it is still private) value of $2 million based on $200,000 net yearly profits. I want to open a second store but I do not have enough actual money in the bank to do such. Loans for private corporations are largely based on personal assets of the primary owners -- so that may not be attractive. But, if I sell 49% (common to not have the initial offering be a majority of the ownership) of the store, in stock, to people for $1 million then I have money available to purchase/build a second store and, if the faith that the stockholders have placed in me is valid, I can hope to soon have two stores, each worth $2 million for $4 million total. And those wise and brave investors have stock now worth $2 million -- a 100% increase in their investment.
     An in-between of private and public is venture investment. They often will insist on getting a majority of the company (almost definitely so if a second round of investment is needed) but the investment is similar to that of public stockholders except that it is still within the private regulations and restrictions of access. The venture company hopes to double their money -- or triple or quadruple. They expect to do this within a finite period of time (say two or three years) and the easiest way for them to realize their profits is to then take the private company public -- or to ready them for an acquisition event. So, venture capital investment is often a route to an IPO. The primary difference is the possibility of rapidly building up value before public regulations take hold.
     It should not be needed to be said -- but I'll say it anyway. In the case of investors -- public or private -- not all investments go well. Investors have a bit more protection within public corporations. A venture capitalist will spread their risk -- $10 million spread between 4 companies. One goes bankrupt, two increase their value a little bit (say 10%), and one doubles their investment.  This means (depending on division of investment) that they make a good, but not great, return on their investment. If that successful investment triples their investment then they have made a much larger profit (once again, depending on division of investment). They don't expect every investment to work out but, to stay in business and make the profits they want, the average return needs to be attractive.
     So why would anyone want to stay private? Well, besides avoiding public regulations, there are also stockholder expectations. Some stockholders can be very patient (such as for Amazon which took many years before it showed a profit -- but its stock value kept rising anyway). Most want some type of increase of value (dividend, rising stock value) every quarter. If it stays level (or goes down) for a couple of quarters "short term investors" are likely to start looking around for a "better" investment. Companies hope for primarily "long term investors" but publicly traded means that almost anyone can invest.
     This short-term requirement leads into "next quarter development plans". Long-term development plans, and investment, must be kept limited as the short-term development plans must succeed to keep up the investor interest and stock value. If the company returns to private then they still are expected to make a profit but they can put much more effort, and resources, into longer range plans.
     If you plan to privately run a company for the rest of your life and then pass it along to your children, then there are few reasons to go public. In-N-Out is a good example of such a private company. If you want to leave and go on to your next great venture, then public is the direction to head -- with, perhaps, the assistance of a venture capital company to increase your value first. Every founder, or set of founders, has their own dream and priorities. Best of luck in following your particular dreams!