Good businesses should have a lot in common with trees. I’m not just saying this because I happen to have a couple of degrees in forestry, I’m saying it because in our current credit crunch times, trees are model that I strongly feel business should strive to emulate.
OK, I normally only write about start-ups, but this piece is more about a model of mature companies.
The problem is that generation after generation of investment driven selection has created the equivalent of fast-growing monocultures of annual weeds. Well, I say annual, but actually they tend to be triennial: funded in year one, boosted in year two, and exited in year three. Because the exits historically tended to be at a multiple of, say, 10 times the investment, it has clearly been financially rational for investors to pursue a strategy of the seeding and harvesting of ventures over a three year cycle as their expectations of returns were, say, 10/3 per year.
So this financially driven strategy has led business executives and entrepreneurs to focus their efforts on building businesses which fit the expectations of their investors, which were (to coin my own phrase), for fast-growing weeds.
Now that exits are on much lower multiples, and now that business people have an expectation of much longer periods between investment and final exit, I believe that it is time for entrepreneurs and their backers to look closely at the creation of longer term and more durable businesses which deliver value over much longer time frames, on a more steady and predictable basis. I am, basically, arguing that there is a case for building up a more diverse forest, with some mature specimen trees, rather than continuing to just cut the grass for hay.
Trees are extremely interesting organisms. They are very long-lived, and tend to dominate their local ecosystem. A mature tree not only displays the basic genetic makeup required to thrive in a particular niche, but each individual tree will be phenotypically fitted to the local niche and a very specific local environment. A tree will grow branches where there is light, roots where there is water and nutrients, and will change its shape, size, density and growth patterns to fit the available opportunities. We, as short-lived humans, tend to see trees as static objects. Viewed through the lens of a 200 year fast-forward movie, the tree is a rapidly changing and highly dynamic object in all 4 dimensions.
I would like to see more companies that behave as trees, their genetic makeup coming from the entrepreneur’s backers and the original business idea, and the business itself adapting to changes in the economic environment while still being recognizably the original idea.
Not only are trees plastic and adaptable over their own lifetimes, they have tremendous ability to absorb punishment. The bark of many trees is designed to shield them from fire, drought, or grazing damage. Most trees show a remarkable ability to recover from storm damage, bending and shaking with the wind, and occasionally shedding limbs, but within a few years having grown new branches and leaves to capture light while the scars on their trunks heal. The current economic recession is the equivalent of a storm for most businesses, and will rapidly select out those that are capable of absorbing damage and of healing afterwards. Businesses can and should invest in their own methods of absorbing damage.
Trees are able to react rapidly to take advantage of gaps or niches opening in their environment. They shed seeds that are sensitive to changes in light, moisture, or competition. They rapidly grow branches into regions where the light is more plentiful. They can sucker from their roots, lay new shoots where their branches touch the ground, and re-grow even if coppiced. Mature companies should ensure that they shed a few viable small businesses which can adapt to new niches, and that they continue to nurture within themselves new opportunities in embryonic form to take advantage of changes around them, even if those changes may take several years to manifest.
Trees have deep roots that channel resources and water to the main bole of the tree, and those same roots also act as a storage mechanism for vital nutrients and energy. Strong companies have deep roots, and to my thinking those roots are the engagement that the company has with its customers, suppliers, and investors.
Trees draw on a wide and deep pool of resources. Not just nutrients in the soil, and carbon in the air, but a huge variety of biological resources surrounding their roots, on the leaves, coating their seeds, and helping to pollinate their flowers. Trees are part of an ecosystem. A single oak tree may have 1,000 species associated with it above ground. Below the ground, and even more remarkably, a tree may be associated with almost the same biomass of bacterial and fungal partners. Many of which are not just commensual, but are actively in partnership (as with the mycorrhiza). Without those fungal partners, the tree is usually unable to reach sufficient resources of phosphorus, nitrogen, or water. A mature business should be viewed as an ecosystem, and the more fully integrated it is with its ecosystem of suppliers, distribution partners, service partners, and even the odd parasite and grazing pest, then the more likely it is to survive changes in its environment.
Trees recycle their own waste incredibly efficiently, the dead leaves, branches, or even the cause of their trunks. Good businesses should minimise the amount of nutrients – be that ideas, personnel, cash, or physical waste – that leave their own ecosystem.
Trees are sensitive to their environment: they flower when times are good, shed seed at the right time, and vary their growth rate according to the opportunity around them. Businesses should do the same thing. Patience is a virtue.
Trees modify the space around them have their own benefit: they trap, light, heat and water in the space around them. This benefits not just the tree, but the huge range of species which associate with it. Good businesses should aim to do the same thing by creating an environment in which benefits all in their ecosystem.
I can’t think of many businesses today that I would currently place in the category of being a good “tree”. I would like to think that Microsoft, Oracle, and IBM fit into those categories and I’d invite anyone reading this to suggest companies that were either trees or weeds with some justification.
Of course, for a brief period after a large tree falls, there is an opportunity for small weeds and shrubs to sprout. But I would like to think we all aim for our businesses to grow to magnificent and stately trees in their full maturity.
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