The Ethics of Scale: Legal Boundaries of Hypergrowth in Venture-Backed Startups

hypergrowth; venture capital; business ethics; risk imposition; corporate accountability; organisational control; judgment-proofing; startup governance

This growth is generally talked about as a strategy that some businesses undertake at the wrong level and the associated failures are blamed on the nature of specific founders. In this paper, I propose that the pathologies of scale are not dispositional but structural, and are the result of three mechanisms that are neither intentional nor a matter of will. The first is the variance mandate – the optimal level of firm risk from a venture fund perspective is higher than under a founder perspective, and higher still than if a third-party had to decide, because the outcomes for the firm are concentrated at both extremes of the range, and it doesn't have to accept the risk. The second is control dilution; if the number of employees grows exponentially, then the percentage of staff with any significant tenure is a mathematical function of the rate of growth and under that growth regime, a firm with an annual growth rate of 2 is in constant transition, with a majority of workers in it being there for less than a year, and the informal norms that replaced process no longer pass through it. The third is harm scaling: an error rate that is ethically unremarkable when it is made on a thousand users is not the same when it is made on a hundred million when the users do not choose to be there. We then discuss the poor nature of the legal boundary as a constraint on hypergrowth, in that the legal instruments it embodies are ex post and enforced on a case-by-case basis, while growth is exponential, which means the accountability gap expands mechanically. Seven propositions are provided, along with an analytical protocol. No artificial statistics are given.