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On an investor call for Shanghai VP yesterday, the questions, as they so often do, centered around scalability; basically asking, "You've done a good job bringing your business to this point, but how will you be able to scale it to a size with a decent exit for us."

It's perhaps predictable that in a country of 1.3 billion a big concern for any investor is how can you grow your business to meet the market. What's perhaps less expected is the real shortage of people who are both aware of the scaling problem and equiped to handle the challenges of it.

For the company we're working with, their answer was to re-trench, slow their rapid growth for about two years while they built process and people infrastructure to grow in a more sustainable way for the long term. Now they've got the internal resources to build upon.

Sure it was a difficult choice, but I think it's proved to be the right one.

Unfortunately, so much of the Chinese economy (and its components) is focused on growth at any costs. And usually just at the top line too. This is inline with the way the government has incented managers at all levels for a long time. Maybe it has a parallel with the US markets forcing quarterly focus on public companies (and VCs on their portfolios too). But in the end it can lead to "getting ahead" of ourselves. Inevitably, some retrenchment is necessary. Look at real estate pricing in Shanghai for a case in point.

This balancing act between short term growth and long term sustainability is the challenge every organization faces and the judged success of the Chinese government's management of the national economy will be in large part based in how they continue to manage this balance.

February 7, 2006 at 06:55 AM in China, Strategic Ventures | Permalink


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