What Are Business Inflection Points and How To Manage Them
This article seeks to provide a clear definition of what an inflection point in a company actually looks like, how to measure it, risk in the context of inflection points, and what to do when one happens as it applies to the average business.
A few weeks ago one of my business partners asked me the question “How can we dial the risk up? I am willing to [take more risk] if you are”.
As imperfectly as one can build a company, he had correctly observed, in the colloquial business language that everyone uses, that there is clear opportunity for growth within our company. The questions that followed in our conversation were (A) when is growth going to occur, the form of investment needed (B) how is growth capitalized (C) how is it defined and (D) what is the vector for risk that is clear and quantifiable so that we can apply and measure the inputs of capital and labor against the opportunity to generate a return and calibrate to get expected results. What follows below is a revisiting of that conversation and our process in clear and unambiguous language.
What is the appropriate definition of an inflection point?
An inflection point in a business context is defined as any shift inside of a business where the measurable demands of the business outstrip what a generalist employee can provide and require a specialist. And where a generalist no longer serves the functions of the firm, inhibits growth.
In a business setting, this definition is necessarily fluid. Inflection points can occur regularly or episodically. Employees are not robots; people can learn new skills and grow into roles. Otherwise how are experts produced? Necessarily then the definition assumes a skill and experience gap large enough to measure the output or lack of output as clearly and measurably impacting revenue or earnings of the business. This impact can also be measured by what it costs the business to not have the expertise on the team, most often this is the best way to measure inflection points, as the absence of the skill or person.
What does an inflection point look like?
An inflection point looks like an unambiguous, measurable growth opportunity where a business needs to hire a specialist for a function of its operations.
When we first started our company, our independent director cited compliance as a need more times than I could count. As we grow, our compliance requirements are growing and so I fully expect to hear this word on repeat.
Our growing compliance needs are a perfect example of inverse decision making when applied to a business need. Businesses should avoid hiring specialists if the ROI on that hire is negative or unclear.
How do you measure an inflection point? When does an inflection point occur?
The how and when for inflection points are tightly coupled.
An inflection point is when a business grows to a stage where it needs capabilities beyond what it can provide or train internally, and it becomes more cost-effective—considering opportunity cost—to acquire those capabilities through external hires or vendors.
To continue the analogy from before, the vendors and team members we hire for compliance needs have a crystal clear ROI. Our asset base goes up by X; our compliance needs and cost go up by Y and Z to service that asset base. Easily measurable.
Companies that face uncertain decisions, or decisions that are difficult and without a measurable ROI for bringing in a specialist are almost always better off not hiring in the moment. Instead they should wait, perhaps test with a vendor or vendors on a short term basis, gather more data or train their management or employees instead. The best investment after all is in yourself; your own education should theoretically last your entire lifetime. It is rare that investment returns last a lifetime.
Big businesses and small businesses face the same question constantly. Small businesses feel the pain of inflection points regularly, big companies can experience them on a grand scale when the market shifts beneath them. Making an employee change can be axiomatic in a company's life. For teams that care about the people they hire it can mean gut wrenching decisions that are in the best interest of the business and every other employee that remains with the company.
Startups are perhaps the easiest lenses to understand inflection points:
Early in a company's life, you need people who are like Swiss Army knives—generalists who can handle a wide variety of tasks and adapt quickly as the company pivots and changes direction. But as the company grows and roles become more defined, you need to bring in specialists—people who are the best in the world at one thing, like a sniper or a surgeon, to solve specific, high-stakes problems.
– Hard Things about Hard Things, Ben Horowitz
Risk in the context of inflection point growth:
Risk is when your company hires (A) the wrong person, (B) fails to integrate him, (C) hires at wrong time.
Failing to integrate can mean failure to train, provide adequate resources, set expectations for a role, or even failure to scope a role adequately for the need of the business into the future.
While we have no statistical measure to back up this claim. We have observed time and again that when it comes to growth, everything comes down to people. The Cobb–Douglas production function views labor and capital as the only two inputs. Almost always inflection points are labor inputs, fundamental skills missing in a business.
As an aside, everyone in the company shares the same perspective on risk that I wrote about elsewhere. Risk in our context is generally more probabilistic. Absolute risk, carefully considered comes from not knowing what you are doing, ignorance of a thing or speculation.
Solving Inflection points require risk taking. As it relates to the risk from growth both in life and inside of a company, there are two quotes I am very fond of and share them below:
“Everything in life has some risk, and what you have to actually learn to do is how to navigate it.”
– Reid Hoffman
“Security is mostly a superstition. It does not exist in nature, nor do the children of men as a whole experience it. Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure, or nothing.”
– Helen Keller, The Open Door
How to overcome inflection points:
Almost always in an inflection point, the problem and the solution come down to people and the skills they have at present measured against their capacity to develop needed future skills in the timeframe needed by the company. We use a simple mental model as part of our strategy, structure, talent, and rewards framework internally and inside of investee companies:
- Index all of the skills the company will need to reach its Big Hairy Audacious Goal (BHAG)
- Map the skills to what the company actually has today and define the gap(s)
- Define the ROI (actual dollar output) from acquiring each skillset, potentially shedding generalists
- Repeat as needed
If the results are clear, the next step is to hire, fire, or both. For two of our companies, I update this model perhaps as frequently as every two months.
Authors Note - it can also be deeply painful when you know what you need but you can't afford it yet!
Minimum Inflection Point Criteria for Retaining a Person or Vendor when there is a measurable, unambiguous skill gap on team that produces an ROI:
- Hiring for specific expertise in the problem you are trying to solve - you want someone who has solved the problem before
- The person is disproportionally better than you at the skill and gives you and the company leverage by owning that arena
- The person is and can continue to be world class at the skill
Inflection Point Hiring Guide:
Inflection points and needs differ. As a result we have sought to put together a universal hiring guide based on philosophical elements that are unlikely to change in the future.
Screen for a few obvious things:
- Character: Integrity, work ethic, and humility and ownership mentality are non-negotiable
- Cultural Fit: Hire for the culture you want to build, not just the one you have
- Capabilities: Look for potential to grow and take on new challenges, not just past achievements
- Specific Skills and Experience: Important, but less so if the first three gates are met, since skills can be developed
Hire for Strength, Not for Lack of Weakness
• Hire people for their standout specific strengths, not just because they have no obvious weaknesses. The goal is to add productive, high-impact individuals to your team, not just those who are inoffensive or merely competent.
“I’d learned the hard way that when hiring executives, one should follow Colin Powell’s instructions and hire for specific strengths rather than lack of weakness.” - Ben Horowitz
• Prioritize candidates who can deliver exceptional value in key areas, even if they aren’t perfect in every respect.
Be Strategic, Not Opportunistic
• Map their role to the future of the company at its BHAG.
• Don’t hire because someone is available. Instead, hiring should be strategic, focusing on what the company truly needs for long-term success.
• Vet aggressively and be a harsh judge of people. key hires, especially executives, can make or break a company. The wrong hire can have ripple effects that take years to fix.
Hire Executives for Leverage
• When hiring senior leaders, Ben Horowitz advises that they should give the CEO leverage. In other words, only hire executives who are better than you at their domain, so you can delegate confidently and free up your own time. This is also the definition of competence.
• If you constantly second-guess an executive or feel you could do their job better, you’re not getting the leverage you need, and the hire isn’t truly effective.
Mission-Driven, Team-Oriented Hires
• Look for candidates who are ambitious for the team and company, not just themselves. Mission-driven employees who prioritize collective success over personal advancement tend to be more effective in entrepreneurial environments. Can the person put others before themselves?
Understand the Job Before Hiring
• Especially for executives, you should deeply understand the requirements of the role before making a hire. This often means doing the job yourself temporarily to grasp what is truly needed.
Make Manageability a Standard, Set Clear Expectations
Talented individuals can be difficult to work with; it’s even harder to manage them as the company evolves. Sometimes, great hires can develop a sense of entitlement or make unreasonable demands, which can disrupt team dynamics and culture. Hire for humility and set standards for demeanor across the company. Remove jerks and toxic people immediately. Always seek to have clear communication, especially during tough times like layoffs or organizational changes.
Summary Table of Mental Model for Inflection Point Hiring:
In summary:
When an inflection point happens in your business, know the dollar ROI on the hire and then hire people or vendors for their unique strengths, be strategic and intentional, ensure they fit the desired culture, and—especially for executives—only bring in those who can truly give you leverage. The hardest challenges often come after the hire, in managing people and maintaining trust and culture through inevitable ups and downs.