Very interesting discussion. Trying to understand this through numbers is very interesting as well as challenging! One reason is scaling happens in stages:
- Seeding: Has the company taken the right direction and do they have the right person to take it through? Are the investors, board are aware of the challenges ahead and do they provide enough support for the leader to formulate a strategy and build the core team before scaling up much later.
- Capturing their market, even if something else looks very attractive: Is the structure loose enough to make changes, but fast enough to go after opportunities. How is it innovating? how is its competency base expanding and culture of collaboration coming up?
- Institutionalizing the processes to continually improve gains: How many companies find a leader to take this forward? Creator still continuing means that either the current leader has to play a dual role or someone who grew along with the company will take this forward.
- How to carry two cultures in the company: innovating, fast, changing company with solid operations? How does a company known for making trucks diversify itself into apparently similar business of making cars and succeed?
These phases keep repeating over time and any company that does well in each cycle will become a super multi-bagger. I am sure many smart people working in TCS didn’t see it coming: fast growth and rapid implementation appears like chaos on the ground and the way that is managed is different from a steady business which is generally taught in business schools! That method becomes obvious in the hindsight!
One of the methods I use is to stay away from businesses that make non-business noises. Any business that is doing well will become diverse when scaled up; if diversity is their priority, customers, processes and people will not be. So are businesses that flaunt CSR/ESG: a successful business will not continue to be successful without diversity, social responsibility when it is scaled. One indicator could be how it appoints its leaders and what the company is trumpeting in the media.
Financial metrics at each stage:
- Below 100 Cr: Customer concentration is good. If 100 cr comes from 5 customers is better than it coming from 100 customers. A fleet operator being the largest customer is better for an automobile company than retail customers.
- Above 1000 crore: Top 10 customers shouldn’t cross 50% of the revenue. Number of customers added becomes an important criteria…
IPs are great, but we won’t have bandwidth to evaluate quality of IPs.
Apologies, if I took the discussion tangentially! All the best.
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