Growth is often seen as synonymous with success in business. A company that expands rapidly, increases revenue, and captures market share is generally celebrated as a triumph of entrepreneurship and innovation. But beneath this enthusiasm lies a deceptive truth: not all growth is good, and much of it can, paradoxically, destroy long-term value for the very people who own the business.
When a business produces more free cash flow year after year by selling more goods or services that people value and willingly pay for, that is genuine growth. And in the big picture, it is the engine that powers our collective prosperity.
But in the modern business world, particularly in public markets and venture-backed startups, growth is often pursued for reasons that have little to do with long-term value creation. The incentives that shape executive decision-making tend to reward short-term results and share price performance, even when these come at the expense of future cash flows and operational resilience.
In public companies, where executives’ incentives are often tied to things like near-term share price and EBITDA performance, and where investors rarely look beyond the next year or two, there is little reason for them to think far ahead. From their perspective, it makes perfect sense to chase quick and easy wins, even if they come with longer-term consequences. That can mean cutting investment in research and development, deferring critical capital expenditure, slashing headcount, chasing unsustainable revenue growth, making ill-considered acquisitions, or taking on too much debt.
All of these can create the appearance of growth, at least if you focus on a preferred set of narrow metrics. But more often than not, they weaken resilience, reduce efficiency, and erode long-term earnings power.
There is also a strong incentive to tell big, bold stories. A well-crafted narrative alone can do wonders for the share price, at least for a while. This is especially true in the startup world, where founders often build businesses not to run them long term for the cash they produce, but to sell them quickly. In that model, success is measured by the ability to attract attention and funding, not by the ability to generate profits.
Little wonder, then, that founders often prioritise optics over substance. If you can show decent user and revenue growth, little else tends to matter, so long as the company can be flipped to a larger firm or taken public at an inflated valuation. The business might be fundamentally unsound, but by the time that becomes clear, it is someone else’s problem.
All of this reflects a profound misalignment between appearances and substance. Rather than engines of enduring value creation, these businesses become vehicles for wealth extraction by insiders. Shareholders are not people to be served, but simply exit liquidity for mercenary executives who are here for a good time, not a long time.
By contrast, a truly valuable business is one you would be content to own indefinitely. It produces reliable cash flows, serves real customer needs, and reinvests wisely. Its value lies not in what someone else might pay for it, but in what it produces over time. This used to be the goal of business building. Today, not so much.
Ultimately, the problem lies in incentives. When decision-makers are rewarded for short-term metrics, they will pursue short-term strategies. Not because they are evil, but because they are rational and (like most of us) self-interested.
Show me the incentive, Munger used to say, and I will show you the outcome.
All of this would be bad enough if flawed remuneration structures were the only problem. But when you combine those incentives with the structural advantages that larger companies enjoy — easier and cheaper access to credit, and friends in high places among regulators and politicians — you can end up with all manner of capital misallocation and wealth destruction.
It’s not clear how we might correct all of this, but as investors we should at least be alert to it, and strive to avoid it. When growth becomes an end in itself, divorced from substance, it ceases to be a force for good. But when it is grounded in durable real value creation, it really is a thing of beauty — not only because of what it can deliver to society, but in how it can significantly boost your wealth.
Fortunately, though they may be the exception to the wider rule, there are far-sighted leaders who genuinely strive to build something of lasting and growing value. Who prioritise substance over story, and measure success not in quarters but over decades. They will still make mistakes and face unexpected setbacks, but the direction of travel is always towards strengthening the foundations of long-term growth. And over time, that really does tend to show.
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