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Entropy and Startup Growth

Every startup aims to grow, stabilise, and eventually become profitable. But are new companies sealing their own doom even as they take steps to ensure their survival?

The Growth Imperative

The fundamental step towards profitability is growth. No one will dispute that fact. Neglect this and your startup is certainly headed for early demise. The inability to sustain growth will cause operations to stagnate. This, in turn, could lead to a torrent of problems that include the lowering of quality standards, the erosion of customer service, fading company morale, and many others. At this stage, you can expect revenues to dip dangerously and profits to disappear. All that’s left is for the ground to open up and swallow the company!

On the other hand, pursue company growth and good things are in store for your startup. Resources become more accessible, sales opportunities become easier to spot, you can expand your product line, and take the necessary steps to acquire new customers. Growth enhances the company’s credibility, opening up more opportunities as it increases its supply base. This enhances stability and gives you the confidence to take the initial steps towards facing up to your competitors and dominating your markets.

And the fun doesn’t stop there. Credibility with suppliers and markets generates the leverage to negotiate better deals – with vendors, lessors, creditors, etc. Tangible growth creates the company image that attracts the best talent. It also helps provide the buffer to withstand economic fluctuations and uncertainties in the marketplace. Simply put, it’s the gift that keeps on giving.

And yet, for all its appeal and the benefits it offers, growth is not without its dark side.

Enter, Entropy

A German physicist named Rudolph Clausius first introduced the term “entropy” way back in 1865. The term is a key feature of the second law of thermodynamics. It indicates the level of chaos within a closed system. To put it simply, in terms even I can understand, you can think of entropy as the level of disorder of any system. The level of entropy, or the amount of disorder, of a system left on its own tends to increase irreversibly over time. In other words, things tend to go from orderly to chaotic. Life, for example, tends to get more complicated as time goes by.

But now, enough of the Physics lecture. What does this have to do with growing a startup? Simply this: What holds true for the entire universe seems to apply to startup businesses as well.  While growth is a good thing for any business, it also introduces factors of chaos and disorder. If unchecked, these factors could result in the company’s inevitable failure.

Chaos and the Startup Company

A growing company must introduce corresponding levels of complexity within its structure and operations. Teams need to expand. Resources need to be acquired and allocated strategically. Processes need to be developed and put in place to govern how it operates. But at the same time, this creates the potential problems. Each additional level is a potential point of failure. These are the points where growing pains eventually appear. Lack of alignment among members of the organisation become evident. Miscommunication increasingly takes place between people and departments. Processes fail. The culture starts unraveling and falling apart. We’ve seen this happen too many times to startups that started out with so much promise.

The thing is, this is a natural part of the deal. It’s entropy in the business system. And it’s built into the company, whether you like it or not. Every single company that has started up is required to deal with it. The companies that recognise the impending chaos, prepare for it, execute despite it – these are the ones that are eventually left standing.

Escaping Entropy

Entropy is a natural, inherent feature of every single system, man-made or otherwise, in the world. It governs the entire universe, as far as we know. So, there is no escaping it. But there are ways to delay its inevitable takeover. The scientific definition itself gives us some measure of hope. Entropy takes place naturally and irreversibly in any system to which no energy is further applied. Infuse the system with energy and you stave off, albeit temporarily, the onset of entropy.

In a business system, particularly in a startup company, what does this mean? Energy infusion, in business terms, equates to continuous review, planning, and execution of processes that consider the points of failure described earlier and provide solutions to address the causes of these breakdowns. It involves crafting a sound communication strategy that is open, transparent, and aligned with various stakeholder interests across the company. It means planning for growth. Or more precisely, it requires planning for the downsides of growth.

It’s recognising and accepting that your company starts to unravel the moment it is established. Then, doing what it takes to delay the inevitable as long as possible.

This piece was written by our Head of People, Mustafa Shreet.

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