Exponential Organizations
“Any company designed for success in the 20th century is doomed to failure in the 21st.” – David S. Rose
Throughout history, ownership was a perfect strategy for ensuring predictable returns; the more you owned, the more value you had, and the wealthier and more powerful you were. Companies and individuals who amassed capital, land, machinery, factories, and labor could generate significantly more value than those with less access to resources. This linear approach, based on economies of scale and the concept of Coase’s Law, has been the foundation for large corporations.
The equation was simple:
More Ownership → Larger Economies of Scale → More Value
By opening new locations, acquiring competitors, or expanding to new markets, these companies go – as Peter Thiel expresses it – from “1 to n”. They continue or copy things that already work, yielding them predictable returns and linear growth.
Many companies today persist with this linear approach, accepting that doubling output simply requires doubling resources. This “intuitive linear” way of doing business tells you that X amount of work takes Y amount of resources, and to get 2X, you need 2Y.
Lindy Businesses
The Lindy Effect, as described by Nassim Taleb, points to the staying power of time-tested businesses. The longer something has survived or has been around, the longer it is likely to continue to survive into the future.
Proven models have a lower risk. This is also why many large corporations and investment companies focus on M&A by acquiring and merging companies with a proven track record, and also why commercial banks are willingly financing these type of transactions – even if a ridiculously high leverage is involved.
Lindy companies have a low risk profile, but their upside is capped. The opposite of Lindy companies are exponential organizations. Instead of relying on physical assets, these companies thrive on information, ideas, and intellectual capital. As they leverage technology to innovate and create entirely new product categories and industries, they go – as Peter Thiel puts it – from “zero to one” – creating something entirely new that adds value to the world.
For example, many car companies only made slight iterative improvements to car designs each year. This is going from 1 to n. Then Tesla created the first compelling electric sports car. They went from zero to one and unlocked an enormous value creation. Similarly, the advent of smartphones or social media were zero to one moments, that gave birth to entire new industries.
Innovation from Within?
Going from Zero to One means doing something that has never been done before. This is in stark contrast to going from “1 to n”, which is continuing or copying things that already work.
Every time an ambitious employee tries to pursue something innovative within an existing linear organization, he faces the organization’s internal immune systems that reject disruptive ideas. The result? Teams are discouraged from taking the necessary risks. They must seek authorization and persuade risk-averse managers in HR, legal, accounting, and management, who are focused on the wrong attributes.
This kind of thinking manifests in organizations as sequential operations, hierarchical structures, short-term financial goals, incremental growth ambitions, risk aversion, inflexibility, and over-reliance on asset ownership. This mindset inhibits exponential innovation, as traditional companies focus on scaling through economies of scale and mergers, rather than embracing the potential of the new digital age.
These organizations often have “Innovation departments” may be set up, but often for the wrong motivations: to impress customers and shareholders while maintaining the status quo, rather than radically pursuing these ideas.
The default response to innovation in linear organizations is, therefore, “no.”
The New Rules
The era of large, operation-heavy companies is giving way to a new paradigm: the rise of platforms and ecosystems.
Exponentially developing technologies have introduced a new playbook for entrepreneurs, which Salim Ismail, an entrepreneur and the founding executive director of Singularity University, calls “The New Rules”. A playbook which enables entrepreneurs to start unique new businesses which grow at an unprecedented, exponential rate.
For example, TikTok reached a billion users in just five years, ChatGPT reached 100 million users in two months, and cloud security startup Wiz reached $100 million annualized revenue in 18 months.
These exponential organizations exhibit unique features and attributes that set them apart from traditional businesses.
Going from 1 to n – copying and continuing things that already work – will not cease to exist, yet if you are involved in such a business, it will feel as if your competition is racing away from you while your returns slide backwards, with margins shrinking in a field of ruthless competition among other low-differentiating, non-tech, non-AI-enabled businesses.
So, what makes an organization exponential?
The Exponential Organization
Salim Ismail, an entrepreneur and the founding executive director of Singularity University, coined the term "Exponential Organizations" to describe companies that leverage accelerating technologies to achieve a 10x performance increase over their non-exponential peers.
His definition of an exponential organization, as printed in his book “Exponential Organizations 2.0” is the following:
“An exponential organization is a purpose-driven, agile, and scalable organization that uses accelerating technologies to digitize, dematerialize, democratize, and demonetize its products and services, resulting in a 10x performance increase over its non-exponential-organization peers.”
Exponential organizations are distinguished by their ability to harness three transformative aspects. Firstly, these organizations engage with accelerating technologies that are growing at an exponential rate. Unlike the past, where only a handful of technologies such as the internet were advancing rapidly and enabling new business models, today's landscape is vastly different. Thanks to advancements in artificial intelligence, we are now witnessing more than a dozen technologies simultaneously accelerating, each opening new avenues for innovation and growth.
Secondly, the phenomenon of technology convergence marks a significant characteristic of exponential organizations. Artificial intelligence serves as a prime example of this, not only accelerating the development of other technologies, but also acting as a catalyst for the convergence of various other technological domains. This convergence often results in the creation of novel solutions that were once beyond our imagination. For instance, the integration of deep learning AI with advanced robotics and genome sequencing has the potential to revolutionize cancer trials, leading to breakthroughs at a pace and scale previously unattainable.
Lastly, the cost collapse of advanced technologies is a critical factor contributing to the rise of exponential organizations. The rapid demonetization of technologies, whether it be AI, sensors, or other cutting-edge tools, is dramatically reducing costs and, in turn, democratizing access to these technologies. This cost collapse not only makes these technologies more accessible to a broader audience but also serves as a catalyst for the exponential growth of organizations that effectively leverage these advancements. As a result, exponential organizations are not only redefining the boundaries of what is possible, but also reshaping the competitive landscape in which they operate.
Characteristics of Exponential Companies
Salim Ismail identified key outward and inward-facing characteristics that distinguish exponential organizations from their peers. He categorizes these characteristics into outward-facing characteristics and inward-facing characteristics.
The SCALE Framework: Outward-Facing Characteristics
Ismail calls the outward-facing characteristics "SCALE," an acronym that encapsulates the following elements:
Staff on Demand: Exponential organizations leverage external workers rather than hiring full-time employees. This approach allows them to access specialized talent on a project basis, reducing overhead costs and increasing flexibility. For example, companies like Upwork and Fiverr have built platforms that connect businesses with freelancers from around the world, enabling them to tap into a global talent pool on demand. Uber transformed global transport by tapping into a vast network of independent drivers.
Community and Crowd: Exponential organizations attract, engage, and leverage communities and the crowd. They understand the power of network effects and harness the collective intelligence and resources of their user base. Wikipedia, for instance, is a prime example of a crowdsourced platform that relies on the contributions of millions of volunteers to create and maintain its vast repository of knowledge. Kickstarter serves as another example, where a vibrant community of backers funds creative projects, propelling them from ideas to reality.
AI & Algorithms: Leveraging AI and algorithms is a hallmark of exponential organizations. They use these technologies to obtain new insights, automate processes, and enhance decision-making. Companies like Netflix and Amazon rely heavily on AI-powered recommendation systems to personalize their offerings and improve customer experiences.
Leveraged Assets: Exponential organizations access, share, rent, or outsource assets to remain nimble and minimize capital expenditures. Instead of owning physical assets, they leverage existing resources through sharing economies or on-demand models. Airbnb, for example, has disrupted the hospitality industry by leveraging the existing assets of homeowners and creating a platform for short-term rentals.
Engagement: Exponential organizations leverage outside interest through gamification, digital reputation systems, incentive programs, and crypto economies to create network effects and positive feedback loops. Companies like Duolingo and Fitbit have successfully gamified language learning and fitness tracking, respectively, fostering engagement, and user loyalty.
The IDEAS Framework: Inward-Facing Characteristics
Ismail calls the inward-facing characteristics "IDEAS," which stands for:
Interfaces: Exponential organizations embrace different ways of interacting, processing, and automating. They adopt user-friendly interfaces and seamless experiences across multiple platforms and devices. Amazon’s use of its API ecosystem allows developers to create a wide array of applications, expanding its service reach.
Dashboards: Exponential organizations make real-time information and employee metrics based on Objectives and Key Results (OKRs) accessible to anyone internally, enabling short feedback loops. This transparency and data-driven approach foster accountability and continuous improvement.
Experimentation: Exponential organizations embrace the lean startup methodology in all departments, encouraging new ideas, processes, and a culture that enables rapid validated learning. Spotify’s agile development process, where new features are rapidly prototyped and tested, exemplifies this commitment to continuous innovation.
Autonomy: Exponential organizations have flat structures that allow individual employees or teams to operate independently and effectively. This autonomy fosters agility, innovation, and a sense of ownership among employees. Valve, a gaming company, operates without a formal hierarchy, empowering employees to select projects that align with their skills and interests.
Social Technologies: Exponential organizations leverage peer-to-peer collaborative tools for transparent, real-time conversations within the organization. These social technologies facilitate knowledge sharing, collaboration, and a sense of community among employees.
The Impact of Exponential Organizations
In his second book, "Exponential Organizations 2.0," Salim Ismail presents an analysis he performed on Fortune 100 companies, ranking them in terms of their exponential business models based on flexibility, scalability, and agility. In his follow-up analysis, he assessed the performance of these companies – between 2014 and 2021, the top 10 most exponential-friendly companies demonstrated:
2.6 times higher revenue growth
6.8 times higher profitability
11.7 times higher return on assets
40 times higher total shareholder return (CAGR)
Salim and his team also examined smaller companies (startups and scale-ups) and found equally compelling results:
80% of his top 100 list generated positive shareholder returns
26% average annualized growth in valuation
46.6% jump in valuation for startups and scale-ups
Investing & Building Exponential Organizations
As we can see, the exponential age of business, past achievements and current metrics no longer guarantee future success. The question is not whether an organization is "exponential-ready"—it is a requirement.
The SCALE and IDEA frameworks serve as a useful forward-looking lense. They are indicators that help entrepreneurs build and investors discern whether a business possesses the intrinsic attributes necessary for thriving in the exponential age. It is not a checklist. It is a tool to understand and establish the foundational mindset that drives innovation and disruption.
For investors, this means evaluating a potential investment from an entirely new perspective that extends beyond surface-level metrics: Does the company merely aspire to compete within existing markets, or does it possess the ambition to create entirely new ones?
As Peter Thiel underlines, true innovation stems from doing something nobody else is doing, creating value in ways that were previously unimaginable.
Peter Thiel also states, over and over again, that “the next Mark Zuckerberg won’t build a Facebook,” and that “the next Bill Gates won’t build Microsoft”. The true essence of identifying exponential organizations lies not in replicating past successes, but in anticipating the unprecedented. It is not about finding the next Facebook or Google, it is about discovering ventures that share the SCALE and IDEA characteristics and, while doing so, chart unexplored territories to define the next frontier of innovation and progress.
The necessary mindset shift entails fostering a culture that prioritizes risk-taking, dismantles rigid hierarchical structures, and sets its sights on long-term, transformative objectives over immediate financial gains. It requires a dedicated effort to uncover and cultivate areas of innovation within the company, offering the necessary resources and backing to teams bold enough to undertake risky, groundbreaking projects. Moreover, it involves forming alliances with visionary entrepreneurs who show a readiness to challenge the existing order, utilizing their distinctive capabilities to propel the company towards remarkable exponential growth and innovation.
We are entering an age of billion-dollar startups and trillion-dollar corporations. For entrepreneurs, the goal is to build them. For investors, the goal is to identify and invest in them.
For entrepreneurs, grasping the operational dynamics of exponential organizations is key to building the future's leading companies. This understanding not only enables them to innovate, but also to thrive in the rapidly evolving business landscape.
Investors, by familiarizing themselves with the workings of these organizations, can more easily spot opportunities for exponential growth, regardless of their stage, ranging from pre-discovery and pre-seed to IPO or beyond.