Monday, January 09, 2017

Tools for Titans #33 : The Rule of 3 and 10.

Phil Libin is the founder of Evernote and its executive chairman.

There is only one point in this write-up which is about the Rule of 3 and 10. Phil learnt this from Hiroshi Mikitani who is the founder and CEO of Rakuten.

The theory is quite simple.

If you build a company, expect everything to break every time you grow 3x or 10x its size. Actually as 10 is very close to 3 x 3, it's possibly reasonable to argue that everything breaks when your organization triples in size.

This idea was created to caution founders who run growing companies who may suddenly find themselves with outmoded systems and processes when their company grows too fast. The opposite applies to larger companies which might be wasting too much time on innovation initiatives when the next growth milestone may be years away.

Several points are missing from this write-up.

As the idea is Japanese is origin, Phil should have appreciated that some forms of innovation are incremental in nature. Large companies can invest in incremental improvements like TQM which could result in massive profit upgrades in spite of not growing at break-neck speeds.

Finally, an investment portfolio scales way better than individual companies. Unless your investment strategy goes into the billions which prevent you from investing meaningfully in Singapore small caps, you can generally employ the same ETF or dividends strategy as you move from $100,000 to $1,000,000 or even $10,000,000.

Although Tim Ferriss subsequently invites readers to ask themselves how they are complicit in creating conditions that they do not want, I find that this rule of thumb is not as useful when applied at a personal level.

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