MBA Mondays: Optimal Headcount At Various Stages
This is the third post in the MBA Mondays series on People. The number of people you have in your company at any time is a very important part of getting the company building process right. Too many and you will slow things down, burn through too much cash, and increase management overhead for no real benefit. Too few and you will be resource constrained and unable to grow as fast as you'd like.
I will say upfront that different types of businesses will require different employee bases and that my experience is really limited to software based businesses and within that sector, mostly consumer internet projects. So if you are working outside of the software business, I am not sure how useful this post will be.
I have a strong bias on this topic and that is that less is more. Time and time again I have seen the entrepreneur who wants to hire quickly fail and I have seen the entrepreneur that is a bit slow to hire succeed. If you took the time to corrrelate success in all of the venture investments my various firms have made over the years with one variable, it might be most highly correlated with a slow hiring ramp, at least in the first few years of company building. Being resource constrained can be a very good thing when you are just getting started. It forces you to focus on what's working and get to the rest of the vision later on.
I have tackled this topic of headcount before in the post on Burn Rate. This is what I said:
Building Product Stage – I would strongly recommend keeping the monthly burn below $50k per month at this stage. Most MVPs can be built by a team of three or four engineers, a product manager, and a designer. That's about $50k/month when you add in rent and other costs. I've seen teams take that number a bit higher, like to $75k/month. But once you get into that range, you are starting to burn cash faster than you should in this stage.
Building Usage Stage – I would recommend keeping the monthly burn below $100k per month at this stage. This is the stage after release, when you are focused in iterating the product, scaling the system for more users, and marketing the product to new users. This can be done by the same team that built the product with a few more engineers, a community manager, and maybe a few more dollars for this and that.
Building The Business Stage – This is when you've determined that your product market fit has been obtained and you now want to build a business around the product or service. You start to hire a management team, a revenue focused team, and some finance people. This is the time when you are investing in the team that will help you bring in revenues and eventually profits. I would recommend keeping the burn below $250k per month at this stage.
A good rule of thumb is multiply the number of people on the team by $10k to get the monthly burn. That is not the number you pay an employee. That is the "fully burdended" cost of a person including rent and other related costs. So if you use that mutiplier, my suggested team sizes are 5, 10, and 25 respectively for the three development stages listed above.
So 5 or less while you are building product, 10 or less when you are finding product/market fit, and 25 or less while you are working on generating revenues and locking down the business model. That's a rule of thumb for software based businesses that don't require a large direct sales force or some other significant labor cost.
Of course, there are all sorts of reasons why these numbers might not work for your business. This is just a "rule of thumb". You can use it as a baseline to think about whether or not you need those extra heads. But you might convince yourself that you do. And you may be right.
But above all else, restrain yourself from hiring early on. Just because you can does not mean you should. Team dynamics are easier in a small group. They get harder in a larger group. Things don't happen as quickly in larger groups. More management overhead is needed. All of these things work against you as a startup trying to get somewhere before someone else does. So hire slowly and wisely instead of quickly. You will be happy you did.
Great. Now I can relate to the question I raised on the last MBA Monday. It concerns hiring a third party development company to do a part, or the whole development of the MVP for example. Outsourcing.What you can get are experienced, trained professionals, that could build your product faster, cheaper and more efficiently. No hiring trouble. You make sure that well documented code is delivered, and that one or two of your own engineers are involved in the process from the day one, working together with the outsourcing company.What would be your view on this? is it a good approach. Has it been done. What are the results?
i don’t like this approach. i think companies need to build their own products
I am a bit confused. I must say I don’t have a clear opinion on this. In our local market it is a very common model. It is way cheaper and less riskier if the project needs to be completed quickly. This does relates to startup like businesses here, too.On the other hand I do value an internal team of sharks.Strange thing is that outsourcing is not a subject of any discussions, nor that I have seen any examples, good or bad. Outsourcing is just ignored. Maybe its just my ignorance though.
If there is one thing that correlates most highly with failure in my experience, it is outsourcing the creation of your product
good to hear. Thanks. Maybe you could share your experiences. I believe it would be a valuable story to tell. Maybe someone will be saved from disaster
Vitomir – I was a consultant (not IT capable) when we decided to startup, the first thing I did was learn to code and build the PoC myself – It took three years and it sucked like a Dyson. But now with a great IT lead (co-founder) who actually knows how to do what I did but does it properly, I can meet clients and I know what it costs to make what they want to happen actually take place.I think without this approach (although admittedly ours is a very technical market) we would have sunk many times over. Why ? – because when we started we had absolutely NO IDEA what people would pay for ! Only now are we getting signs of product market fit, and we are trying to stay really cynical about that too !
Experienced software developers can put together prototypes so quickly that it makes market testing a breeze. But, if you pay by the hour then business logic dictates they will take their good ole’ time.
Out sourcing the ditch digging often works. Core architecture…thats a no no.
Actually that can work well too. I do some object models for people. It saves them big dollars because I have so much experience I can see what to put where and why. This leads to core systems that lead junior programmers to easy tweak and polish a system.I actually learned to design and program using object oriented methods. So the whole world looks like one big object-diagram to me.
When you want to hang a picture on a wall you want to look at it and make minor adjustments as you notice them in real time. I have a very hard time writing a specification for something that I want to use software wise and waiting the time to implement it and then making changes. So I like to “move the picture” as I see fit adding and subtracting things that I can do myself. Have an idea for a feature needed? Just dig into the code and add it. Entry box not big enough? Just make it larger. No need to wait and cycle thorough the communications delay. Not to mention it’s fun!Obviously not everyone can do this themselves. But there is even a difference between a coder right in the same physical office vs. a coder located elsewhere vs. some team elsewhere that is working on other projects as well.Disclaimer: I’m not a programmer. But I know enough to put things together that do things that I need to do. It’s not a money thing. I just like the ability to tweak something.
What you’re describing is the maturing of a software product. You just don’t have a clear picture of everything you want upfront. So, you’re developing v1 then v2 then v3, etc.Many people and companies follow that same approach these days. They just poke around with something until they see interest from customers. It’s not a bad thing, it’s just a result of newer easier market testing brought about via the internet.Here’s an important question: Would you want airplane flight software developed using your method? Or would you prefer professional, well proven methods be used for that?
Fred is right. In the past the outsourcing industry had many problems. Mostly communication issues. This caused the model to be unproductive unless you were working with very professional teams. Problem was everyone was hiring the “low bidder” so they were mostly using unprofessional teams.These days software development has become more of an engineering discipline. This means you can have the products for your ideas created quite competently through outsourcing. There is no mystery here. Every industry must mature for it to become predictable, measurable, and systematically improvable.I’ve been in the IT field for 20 years with 15 of that in software development and I used to cringe when people said outsourcing. But, today it can be done just like you can outsource making shoes or shirts. The processes and procedures are very reliable today.But don’t learn to program. People will drive you nuts asking you to take a job with them doing programming work. If you are an entrepreneur be an entrepreneur. If you are a software engineer be a software engineer.
Outsourcing the product development is the worst thing you want to do. You can outsource some of your work when scaling up…. there could be a lots of pivoting you may have to do which never works well with outsourcing.Second and the most important thing outsourced team may not have that fire in the belly … passion for the product which is most important in startups initial years.Hope it helps.
Yup. Pivoting is a dead-end when dealing with outsourcing contracts.Personally I haven’t outsourced development ever, though I have been tempted.. even recently.Of course, outsourcing not in a way that you just pay for the product, but more like payed partnership approach. You just hire an experienced team to work with your team members.
Vitomir,We have taken up the product dev outsourcing as the test market for our service (Curating dev shops based on crowd (past customers) perspectives on the overall experience). We work with several startups (idea stage to late stage) and help them find agencies.In our experience, during idea stage outsourcing is not the right choice both for the entrepreneur and for the agency. There are simply too many moving parts (idea, market, requirements, launch priorities, schedules, skill etc) and the experience of the entrepreneur will tend towards being bad (often times for no mistake of the agencies).However if you build in significant technical debt into the equation (We are outsourcing only to build feature X to validate a specific hypothesis and we fully know we are going to dump the code out and build a new version ourselves later) and if you have past experience in outsourcing (as a customer or as a provider), then it is a good choice.Successes in early stage outsourcing are exceptions and are not for everyone. We turn down several such buy-side requests for finding dev agencies, even though its money for us. It simply isnt the best use of money for most entrepreneurs.Late stage or stages after providing the product-market fit is totally different and the success rates are higher.AshwinFounder – ContractIQ
i favor a general principle: the less internalized the team, the less internalized the product. meaning the more you are relying on contractors rather than a close-knit team, the more the product has to be rooted in open source systems in all regards: the more you need to use open software and give back to the open community, and build your model accordingly. this is what i use and it has enabled me to get to self-sustainability with no employees and very little capital. (however i have not been able to get on a growth track and have a product that is not technically impressive in any regard). i see many entrepreneurs try to outsource a product they plan to treat as a proprietary product. i see this as an endeavor with a very low probability.
I’ve used an external team to develop a new product line for an entirely new business unit. It’s possible, but it requires significantly more and better management, and the fire and passion of the external team ends when they mail their invoice and can’t be rekindled without a purchase order.There are a number of problems with the approach:a) When you attempt to internalise development no one feels any ownership.b) You retain minimal institutional knowledge.c) It can make changes slow and bureaucratic, right at the point you need change to be fast and frictionless.You can deal with these problems to some extent by having using in-house UX and at least one developer, but it’s still a poor facsimile of doing it yourself.There are a number of advantages to the approach:a) There might be a tax advantage in allocating your build to capex.b) You don’t need to (or minimally) increase headcount.c) The CFO probably loves it.All of the disadvantages are very real, and the advantages are extremely dependent on your specific circumstances.My advice is to err on the side of in-house unless outsourcing is the only way to get your product built.
Great advice…. i have seen big product built on a outsourced location (4- blocks away from my home). It was a hardware + firmware + internet + image processing product.The way they were operating was … only the Marketing (idea) guys resided in the market place… rest either moved to outsourced location OR hired at the outsourced location.Yes. It all depends. It was a product which required 15+ to start with….
I’m a strong believer that passion and fire is the secret ingredient…If your devs don’t have it for your project, they’ll just build stuff that ‘technically works’ based on your initial requirements/requests…but they won’t make smart decisions towards solving the ‘real problem’ that you are trying to address…this will make it expensive and difficult to properly evolve the software as the business evolves.This is what you get in most ‘mid-to-large company’ software projects…I don’t think it’s because the devs are any less skilled or intelligent, it’s just that they tend not to care that much, or have any real buy-in, about the true problems that the software they are building is attempting to solve…they tend to just want to make it ‘technically work’ and continue to collect the paycheck…This is all just my opinion/observations of course…
I think that’s a fair assessment.Another contributing factor in my view is that devs are seen as a cost centre, not a creative asset, and evaluate their own worth in this light. Very hard to ignite fire and passion under those circumstances.
The biggest challenge I see for the typical tech startup types contracting out their MVP is that you usually don’t know what your MVP will be until you build it. Outsourced teams and rapid, organic iteration typically don’t mix, it’s a culture clash – any decent outsourced engineering team will want you to have a very clear vision and documentation on what you want to build, or they can’t predict costs upfront.Besides, what happens if you do end up with a great MVP and decide to build your company around that? Now you have no clear idea of how long it may take you to iterate through a set of changes, since your only data points were dependent on an external team that may or may not be available on short notice next time you want something done.So, while there may be some situations where it makes sense for you to outsource your engineering up front (i.e. you already know exactly what you need, and you can predict revision cycles to your product), I would think those situations are few and far between when you’re talking about a startup focused on consumer internet products.
Make your MVP out of sticky notes first. The fuzzy parts don’t go away when you hire developers, they get 100x worse.
We actually built it on a sheet of A1 hanging on the wardrobe door of my partners daughters bedroom – She is only 5 and had lots of coloured pens which we used when she was at kindergarten. Hehehe – Mooouaahhahaha (WE MIGHT STOCK SOME REPLACEMENTS)Luke – the idea is very similar though – and that was honestly the start of toughest weeks work I have done in years. It was also three weeks before we got trial sign ups from four of the biggest 250 companies in the world !I like MP more than MVP – An MP may not be viable – but is has more chance of getting that way once you find out what is missing (and yes they will only tell you if you ask, but they love being heard )
It can work extremely well if done right. If you outsource it should be about outsourcing a highly professional, quality process of software development. I’ve been offering programming services for a while and it appears most start ups aren’t interested in outsourcing these days.If you are concerned about which approach to take. Hire a software consultant. I do consulting work and a consultant specializing in software development can save you a lot of time and money by helping you get the right start.One thing for sure… Don’t learn to program. People will drive you nuts wanting you to take a job programming for them. If you have to pick learning to program or outsourcing definitely go with outsourcing.
I bookmarked your post on Burn Rate. A great one to keep your thinking level.This discussion will invariably spur the ‘who to hire when’ debate. The one position that is on the cusp of the first two stages is the UX maven. Bring them on early or contract out in the beginning is a choice I see a lot of companies facing?
Makes sense what you say.
i think a lead designer is needed on the core startup team
How common is this Fred?
getting very common but not common enough. i’d say at least half of the teams we meet with have one on board.
UX MUST BE FOUNDER.UX IS NOT PAINT. UX IS UNDERSTAND WHAT TO BUILD.FOUND STARTUP WITHOUT UX IS PRAY TO GET LUCKY, MAYBE END UP WITH SOMETHING NOT BROKEN DOWN TO IT FOUNDATION.
you just got on my snackableavc tumblr log with that one 🙂
We got way lucky on this one, picking up a guy with killer design and engineering skills in the same package.
THAT HOW TO WIN.
Absolutely.How can you get anything done if everyone is learning the language libraries or figuring out how to draw an object-diagram to proof an idea.
JOB OF UX IS STOP ENGINEER FROM BUILD WRONG THING.HOW MUCH TIME YOU WANT TO WASTE WITH WRONG THING?
So, if I put this through the Dinosaur to Arnold dictionary, this reads:Job of UX is to ensure that the customer experiences the value of the idea in the most frictionless fashion possible.
now i can’t distinguish Arnold from FG except for the way keyboard is used :-).
UX GO ALL THE WAY DOWN INTO ENGINEERING. OR YOU DOING IT WRONG.
Absolutely! FG. It affects architecture, business logic layer… everything. That’s why it should be carefully thought out and designed first. And then part of each step throughout the evolution of the product.
customer experience IS the value proposition (well, at least 50% of it anyhow)
Arnold, one of the real mistakes that are made in Web applications and many other software projects is that there is an engineer and an “idea person”, so they start to build. But the engineer tends to build what s/he knows and that’s back-end. It’s imperative that the product be built from the front to the back, i.e. build the UI/UX first, the page logic, the navigation, the front-end experience, and then “hook up the wires” in the backside and database, etc. When done correctly, the back-end engineer will be much happier because s/he can see what needs to be built.Doing it the other way around produces a busy back-end person, followed by lots of code that gets thrown out as the UI/UX evolves.
Well said.In the last few months I’ve been involved with client and personal projects that started as you say, with the user/page logic.A world of difference in clarity of though, efficiency and cost.Amazing process of epiphany to move a spec to wires. Almost a revelation at times.
plenty, but most people don’t want to admit bad ux.
seriously, best comment EVER.my older brother is a civil engineer by education — said he was always so shocked that they were trained to build things for people and yet, so little of their education as engineers was ever about understanding people.
THERE ONLY TWO THINGS NEED TO LEARN.1. PHYSICS2. PEOPLEEVERYTHING ELSE JUST DETAILS.
I agree with your advice regarding staying lean in headcount. There is something kind of romantic about the early days of a new venture; the cramped, temporary workspace; everyone rolling up their sleeves and working cross-departmentally to give birth.
“Things don’t happen as quickly in larger groups.” So true, and the CEO should make sure they still do happen as quickly as possible. Light weight processes & short meetings rules can help keeping the company nimble.If a company is at 6-8 & still under $50K, but approaching the build usage stage, are they doing too much too early or is that a good sign?
Thats in the band
Now is the time to go for next round and make your employees earn those extra :-).(it won’t apply to the founders).
That’s in the works 🙂
You always need one to take care of the baby and one to go fetch the food. Keep that guy/gal always on the run 🙂 and good luck.
What’s been hardest for me is figuring out the right composition of the Team. Sr. to Jr. In particular skills. Thinking we would need a lot of one thing and realizing it’s another. When your small, hires and fires so dramatically affect everyone in the organization and building culture not only skill sets becomes key.
A lot depends I think on the skills of the founders.
Never hire/fire even the junior most when your team is small … consult everyone in the team before asking that person to go….OR have a meeting on “Fire or retain X” with all others involved.If it is an integrity issue … no second thought. That also … inform the rest of the team about what happened.P.S. I am no big time entrepreneur but I did that mistake in my first start-up. I fired 2-guys without telling the rest of the team why i fired or consulted them. Within 6-months it was a disaster.
Not sure I I agree with consulting people bc that could go bad really quick but there are ways to solicit feedback more generally vs. group think (which i’m not a fan of). I do agree that if you are going to let someone go, the WAY you do that is absolutely important. I’ve seen it done well, and i’ve seen it been a disaster.ps. when you are small, if someone is not performing you have no choice but to move on after you’ve tried everything to change that situation. It’s toxic to culture.
ask invidiually and reward people for coming forward.
lol i dunno why but the phrase Tattle tale comes to mind. The truth is, that when you are small, you know what’s going on. If you don’t, you probably suck as a leader.
I am not saying group thinking … I am talking about … when the company is small … we should have the buy-in from every one when it comes to people (strategy, plan, money is different)… just explain every other team member why to fire someone… it has two benefitsi) Others also understand what is expected out of them (performance) OR what is the philosophy of the company.ii) If there is seriously a flaw in our decision (every one makes mistakes) it will come out in the discussion.And another thing … when we are a small company … it is not a group … it is us…
Yup. Its hard to have good advice on this because each situation is unique. But versatility of the team members is a huge advantage early on
I think you have to fill in pieces that need to be filled, when you know they need to be filled and see someone who can fill at least one of those pieces. The team will have to form itself.The direction/culture and strength of this team will be individual’s core values and work ethic, etc..
Right now for us, it’s a matter of, how many hrs can i work. How many full time jobs can i fill, before it becomes problematic to the business. Can’t let balls drop and prefer to be lean, but at some point you have to accept that people can individually only deliver so much and you have to bring on new resources.The other issue is when you are in a high growth phase, that onboarding takes effort and time. For what i do, we can’t just wait and then hire 10 pple all of a sudden bc we can’t handle that volume (that’s even if you can FIND 10 pple).All a careful dance. But regardless, it’s a good situation to find yourselves in. 🙂
Building the Business Stage: Outsourcing at this point can help preserve cash and also find talent. Determining the right business model requires imagination and a few times at bat before you can even begin to figure it out.Lots of companies seem to tank at this point because they don’t get enough at bats or shots so controlling cash is essential for survival.
I think your 50k-100k-250k per month boils down to $500-1MM for year or 2 years (like the idea stage ) and then 1MM-3MM let us see the revenue… scale with X MM based on revenue and forecastThat equation fits well with your investment thesis. Backing an idea + entrepreneur and stay with her/him for as long as you can because you believe in people than their ideas.Keep your burn-rate modest so that i can stay with you for long :-).
Volatility of the business is a key element to consider here.Assume your founder team (say the first 5) are prepared to forego salary in the early stage when the going gets rough. So during your ” Building Product Stage” – there is no threat of burn rate destroying the company especially with lean overhead structures.If ” building usage” implies doubling staff suddenly 50% of the overhead burden is “concrete”. In addition founder “fat reserves” may have been “burnt off”. Things are now not only lean, but getting mean.Assume your founders are most intimate with product and market (they had better be), then early sales success during building usage is more likely, and metrics are distorted by a “feel-good” factor (noting that almost by definition the perception of achieved product/ market fit” follows a sales success).As you scale from 5 – 25 the “concrete” overhead burden goes from 0% – 80% (or more). So unless you are adequately funded to handle volatility, or your volatility is naturally low, or you have a stellar sales team and very clear product / market fit (ideally a real step change) – this is where you crash and burn.Fred – though we are not quite there yet – we plan a brief pause for caution following our early adopter identification, we will use this for lining up funds (a good runway), tightening up metrics, and checking assumptions on retention. Why ? simply because even if we are suddenly exposed to competition, this is the place where angels fear to tread – And as they say “pride comes before a fall”.So I would ask – In your opinion if we are prepared to trade a little early growth for security is our position savvy or cowardly ? – The security achieved comes with no loss of control, but arguably hurts our early valuation (at a stage when it is anyway very hard to determine). How does this come over from a VC perspective (may not matter to me – but it might to other readers)?
Five founders foregoing comp for a year or two working fulltime? I would think this has to be a huge exception.
Only four of us full-time but for more than three years – All I can say is – We are ! When it happens (October this year ! ) – we will be doubtless be given the epithet “overnight success”. 🙂
Not really…. you found ‘another one’ here :-)Now (after 3.5 years) the things are little different after we got our PE funding.
Not so, these days.But more importantly it is great to see people working on their dreams without compensation. What a true success story it is to create a successful business from scratch. Those businesses have a product ready to go. Hopefully they have some sales which is excellent proof of concept. Those are marks of a great company ready for investment. Awesome!!!
Fred,Good and informative post. I think the recruitment process might endup being a lengthy process – My understanding is that it is good to start looking for new hires before you actually need them especially if you are looking for top talent to join.
you can be wildly profitable but if you burn through cash you will go out of business. But if you conserve cash and find ways to be more efficient you will be around for a long time. Growth at the cost of your capital is dangerous, and the easiest place to spend is on people. Conserve cash and be wise with money, especially if it is someone else’s because they really seem to care.
A fully-loaded cost of $10K per head is almost impossible to pull off, especially in the Bay area for professional hires (i.e. non YC founders)…..
Maybe not for engineers but add designers and community managers to the team and it starts to even out.
Personally I think you should strive for the smallest possible staff sized at all times. Here are some reasons 1)You are less likely to run out of money 2)The staff you have does not have a second to waste 3)Smaller technical groups are simply faster. a group of 5 will compete a project faster than a group of nine in my experience 4)If you have fewer people you can pay them more 5)People feel more involved
MORE ENGINEERS JUST LEAD TO WASTE MORE TIME ON WRONG FEATURES. STAY LEAN AS CAN LONG AS CAN.
More engineers also lead to more meetings which means lower efficiencies of those you have.
I hate meetings.
VOLTRON HAVE IT RIGHT.5 IS RIGHT SIZE FOR TEAM.MORE THAN 5? MORE THAN ONE TEAM.
don’t forget to hire a few old-timers when you’re building you’re team. #goceltics
NECKBEARDS = SCOTTY. ENTERPRISE WITHOUT SCOTTY IS JUST A SHIP.
ME NOT YOUR GOOGLE.
Indeed, and one would certainly hope that after 23 years I’d managed to find my way around the net.My point, dear dino, is that neckbeard was, is, and will always be a pejorative unbefitting of the great man. Scotty, a 20+ year veteran of Starfleet when posted to USS Enterprise, was, in the parlance of his engineering kin, a greybeard.
OWN IT, NOT HIDE FROM IT.
lol omg you are killing me today. my 59 year old hubbie and chief creative officer for my digital company is gonna love that one.
The window of competitive advantage for the 20 something crowd is way overhyped and has essentially closed.
Aye, Laddie. How abouts you join me in a round of Romulan Ale?
IT GOOD IDEA, EXCEPT ALREADY DRINKED IT ALL.ATE THE ROMULANS TOO. CRUNCHY.
ON OTHER FORELIMB, WHEN FIND ROCKSTAR, IGNORE NUMBERS, HIRE IMMEDIATELY.
Yeah I was going to say the same but w/o the use of the word rockstar.
Brilliant, is the word I use
Having hired team member #4 this last weekend (to do community management and a few other things), I’m really excited to be so far ahead of the curve on this framework. It gives us a lot of chances to figure out the things we don’t know yet.
congrats on this hire!
We’re excited! Best description is “young, hungry and ready to build a great company.”
I’ll see what we can do about the ‘thirsty and hungry’ part in NY in a few weeks!
you said ‘great company’ and not ”great product’….likey.
Great products build great companies. Definitely the most important means to the end, but not the end in itself!
Yep 110%… I likey your bigger dream when small.
Congrats, great words to describe your 4th hire. Good luck scaling
Any chance you making it back east one of these days?
I am! Could probably fit in another coffee meeting. Email me – aklein AT riskalyze.com.
Is the 4th hire generally (and specifically) a small options grant employee? The work is attractive in a tiny team, and a bit of a gravity well so a little equity goes a long way.
I couldn’t speak to this generally. For us, we don’t draw a bright line between “large” and “small” but simply scaled down the size of the grant for a team member joining us in Year 2.I expect we’ll continue to scale down the total grant size for Year 3 people and perhaps it will stabilize there.
my background is community building, so i totally get the importance of this for a startup looking to break through the noise. Truthfully, I think any startup that doesn’t understand and invest in community building is totally hosed. i haven’t raised money yet, but know a community builder is on my list for somewhere between employee #4-7 so am already on the lookout for potential candidates
Yep. A very important piece.
Assuming you have 5 (building the product stage). Do you have someone doing work on business development (opportunities/prospects/partnerships) at this stage or are they only developing the product? I am interested to know specifically how sales/marketing is bootstrapped in a small team.
BY NOT NEED IT.
Well, in my personal experience it pay off. Both co-founders were developers doing business. It was selling desktop software.
Don’t agree.Problem is not everyone is going to build a better mousetrap that everyone flocks to and if that’s the case they might not know it until it’s to late.Keep in mind also that biz dev, sales, marketing are ways to create barriers to entry for the competition.If I lock up a particular customer it’s going to be harder for your salesperson to get in the door.Of course you could also argue in that if I educate a particular customer it will be easier for you to get in the door but not if I make that customer my “friend” and keep in close contact. Have you ever done this? I have I’ve sold to companies, individuals and purchasing departments.
ME TALKING ABOUT SMALL TEAM, FAST SCALE. IF KNOW NAME OF CUSTOMER, YOU DOING IT WRONG.
“IF KNOW NAME OF CUSTOMER, YOU DOING IT WRONG.”Umm… You should rethink that. Different market segments requre different relationships. One of the most important factors when creating a marketing and advertising strategy is whether or not you know the names of your customers.
I think it depends on your product…in my experience, b2b works best if sell then build (most profit for least amount of work I mean)…while b2c almost always has to be build then sell ( kickstarter.com is the first place I’ve seen it start to shift away from this requirement).
If you have a small team, the CEO should be able to lead product, biz dev, sales/marketing etc. This is key. This where I see many startups fail even with some great tech talent.
It depends about what kind of the project you are working on and current stage of the project, but generally less is always better! One old Slavic proverb says: “With a lots of midwifes child must become clumsy”.
Never measure success by headcount or cars in the parking lot
This is a great read.Michael Lazerow’s note on the Buddy Media sale to CRM. http://www.buddymedia.com/n…
Indeed, thanks for sharing
So smart. Social CRM company of the future.First Radian6. Now Buddy media.Think i know where they might go next.
Seed stage math is still very tight.$500k raise.$30k misc expenses to get up and running$50k p/m burnYou don’t get much of a run-rate. Need to be raising again by month 6.
maybe we need to rethink seed rounds…..
He does say that he recommends keeping it *below* $50K. It’s tight at the high end.
Having no money at different points, the struggle, has allowed my ideas evolve further and further and the end result being better, more thorough ideas and nuanced decisions.Whether by pivoting in minor ways or advancing where plans can lead and using that as a guiding metric – it all leads to a better holistic understanding of where I want to go, and has helped me feel more comfortable with when and where things need to happen.The only unlimited resource I have had is my mind – and I try to take care of that pretty well.Whenever I have found additional money I know exactly what next is going to happen. I really know where I am going now, though not fully sure when they all can happen, but they don’t all need to happen any time soon for my overall plans to be successful.It’s been an interesting cycle; Creative expansion followed by priority pruning.
In a 2 person team (programmer/business person) what activities should be outsourced early on (years 1 – 3, per say)?
Hard to say without knowing your business and its structure, but anything that is non-core to building your product, understanding your market and developing key strategic relationships, or outside the skill-sets of founders. And a general rule of thumb I use, activities which require less than 50-75% full time efforts. That’s based on the assumption that you are putting in 10-14 hour days on core activities. Also note, really think about what you are outsourcing and if it even needs to be done at all. Often times at your stage lot of stuff can wait.
– doing your taxes- any on-premises IT or servers…use the cloud exclusivelyOther than that, I’d seriously figure out if you can ignore and NOT do anything else but build product.And if the business person isn’t any good at shaping the product towards product/market fit, I think you’ve honestly got a problem. I’m nowhere close to as good of a coder as the rest of my team, but I’m neck-deep in the product.
“…use the cloud exclusively”Not sure how much of a blanket statement was intended there, but I’ll suggest that not all projects are best suited to “cloud” services. Best to carefully analyze the needs; fully understand the pros and cons of using cloud storage and web services; consider costs of leaving the service when it’s time to manage your own data centers, security issues if they apply to your project, etc. Some will be better to have dedicated servers, with redundancy and dev on cloud services – or some other hybrid setup.Here’s an interesting perspective (including the comments): http://justcramer.com/2012/… It just all depends, so it’s important to weigh it all. :)Agree with your comment though, Aaron (just not a fan of “cloud solves all” meme, so point it out some, even though I doubt you meant it that way. :)cc: @Bertrood:disqus
My point is much more simple. In a two person startup, you have zero time to spend doing IT or managing on-premises servers. Just my opinion, which doesn’t make it absolutely correct. 😉
No argument at all, and I agree about “on premises servers”; and in many cases cloud services are an ideal solution. Robert didn’t specify the product, etc. I’ve had great luck with quality managed hosting of dedicated servers (which is also “outsourcing”), and have an aversion to the cloud for certain projects, so simply suggest that everyone learn to weigh all the factors. 🙂
I had read that justcramer.com blog post as well as the HN thread.The answer of course also depends on the knowledge and qualifications of the team members. The HN thread fails to recognize the “it depends factor” (and this happens frequently) and answer strictly in a vacuum of which is better in maybe a consumer reports type of way.A Honda may be “in general” a better car than a Kia. But if the kia dealer is located a mile from your house and the Honda dealer is 75 miles away the Kia may be a better choice.Likewise if you know Unix admin and how to rack a server in colo and have been doing it for years you would waste plenty of time just trying to get acclimated to EC2 or Heroku or whatever. Php is better for most web project than Perl would be the conventional wisdom but not if you’ve spent 7 years and already know Perl.
Larry, I could not agree more. In tech as in life, “it depends” is almost always the right “answer”. There are numerous discussions (rants really) about how Ruby on Rails is the solution; or Java sucks; or MongoDB is the best, etc, etc. In reality, it depends on so many factors: what are the product requirements?; what are the skill-strengths of the team?; what’s the market?; budget?; time-frame?; security issues?; and on and on.We can learn from the experiences shared by others, but the value of that information still results in “it depends”. 🙂
The people who that impress me the most are people who ask numerous questions. They want to know not just the answer but the reason behind the answer. That way they can adjust their thinking for any slight variations in the change of circumstance. Same with giving people advice. You need to ask questions to give the correct answer.I think math and engineering types tend to see things in black and white. I don’t to me it’s all shades of gray and varies based on the circumstance.In the printing business people would always have job deadlines. But it was important to know the reason for the deadline. Knowing that they needed cards printed on Thursday because there was an event on Friday required more priority if the event was the next week. You can’t miss a deadline like that.Tip: When you have a contractor working on anything (a house repair, a software project) make up a deadline that is believable. Saying “we are having a party on Saturday” is going to give the contractor a reason to make sure he gets the job done for you vs. take on another project and make you wait. Works wonders.
Agreed, Larry. The conversation should include questions to better understand the goals and requirements.
Good answer… This is what we’re doing, and the knees deep product guy is me, the non programmer. Any value in outsourcing the development of biz analytics?
I’d say you do that. As the product guy, your job is to define “what game are we playing” and “how do we keep score?”And I think, if I understand your question correctly, that’s the keeping score part.
As the sole founder and lead designer and UX, I strive to stay doing what I enjoy with the least people involved, run the leanest way. I don’t want to run a company, I want to design brand vision iterated through products. I don’t want to produce and distribute the physical part of what I do – I want to license to partners.The only person I really need at this stage is tech, and maybe the coolness of my MVP means he stays on to CTO. Maybe I get someone to do all my outreach so I can stay designing. If that person managed the licensing that would be optimal. Hustler/hacker/designer.
“Hustler/hacker/designer.”And my newest best friend! I love the way you think. I’ve struggled for years to get funding for all kinds of projects to build great companies and make great products. Quite a lot of wasted time.But, the more exposure I get to very wealthy people the more I see a recurring attitude:- Legally grab the value of your idea.- Hire others to do the work.- Move to the next idea.Keep some things in mind:- If a skill is considered labor make sure you don’t have that skill.- If it’s too complicated to have someone else build then “teaching” the customer what it is will be too expensive.
@CynthiaSchames is where I heard hacker/hustler/designer. Love [email protected] raised the term “performance management” here recently. I have been all over that idea as it relates to keeping my performance moving, and protecting the time where I add real value by designing product/idea and refine UX of that, versus do things others could do for me. Light and lean helps me be fast and smart.
“…versus do things others could do for me.”Another great one I’ve seen more and more.I agree. Here’s my thought. So, let’s say I have an idea for a software product. Do I want it to be a great product or a lousy one? Well, if it’s worth doing it’s worth doing right. So I want it to be a great product.Next thing I have to ask myself is, “Am I the best programmer I can find?” If so, then I jump right on it. (As a side note: I’m not a good programmer people, please stop asking me to write code. I hire programmers for that now.)If I know better programmers who love to code it would better for me to hire them to build the product. My time is better spent on marketing/sales/promotion.
Have you all seen Steve Blank’s StartUp Genome report? It goes into this very kind of benchmarking in detail based upon a big study they’re doing. It certainly supports Fred’s thesis that smaller teams are more successful.I’m participating in the study, and the custom reports that I receive – tailored to my startup – are serious red meat for a founder. I can’t begin to describe how valuable.
That sounds intriguing and useful. Is there a link you could share, please?
The overall report can be downloaded at http://blog.startupcompass….and if you sign up to share your startup info with them, they’ll send you customized reports. These guys are getting a lot of attention on AngelList, I’ve noticed. But of course they would 🙂
Maybe the simplest but the most valuable post I’ve read in quite some time
Wow. Thanks for sharing that. Made my day.
Fred – I agree that this is a top 10 FW post! It is like a pot of virtual gold for anyone actively in year one of a startup.
Well, I was going to read further before posting on the original topic. But, you beat me to it.It’s a nice layout for someone who wants to build a business that can either become a “quick flip” or a mid-term sell. While I was reading Fred’s post I was thinking he’s hit it really well.
Fred, do you have any parallel numbers for B2B SaaS startups? Interested to see how a direct sales team would skew some of these numbers.
I dont. But figure 3-5 sales heads in the first year of revenue
Fred – I agree that this is a top 10 FW post! It is like a pot of virtual gold for anyone actively in year of a startup.
One of your best posts! @FakeGrimlock:disqus and @fredwilson:disqus are on the money re UX at beginning and that UX also has to have enough confidence so that ego doesn’t get in way when modification to market fit issues come about.Otherwise, I love how everyone is producing experiences proving the fewer=more position.
Yep. The best way to grow headcount optimally is to bootstrap. 🙂
What about the rationale that if you don’t find product market fit a larger dev team will help you iterate faster? Is that a falsehood?
Larger dev teams seldom help you iterate faster (nine women baby one month etc). A larger dev team lets you build more features at once, but if you haven’t found product market fit yet, you probably should be focusing not broadening your product’s features.
The nine women ideal only goes so far.Ponder this:One women alone at home having a baby. One women at the hospital with a professional staff delivering a baby.
Still holds.Nine women can’t make a baby in one month because after n=1, the nth woman has nothing to contribute that would speed up the process. Likewise, for a classic MVP of “baby out, mother and baby both alive and healthy”, the nth doctor after n=1 doesn’t have much to contribute either in terms of speeding up the process. They will definitely add value (mostly through increased comfort/safety, and likely subject to diminishing returns as n increases), but that value will be outside the scope of your MVP.Incidentally, the edge case n=0 doctors seems irrelevant, as that’s the equivalent of building your app yourself if you’ve never written code – from an efficiency perspective you just wouldn’t do it if you could at all avoid it.
The “nine women one month” example doesn’t strictly come from a question of how much a team member contributes. It comes from an anlysis of overhead increase due to team size.The lesson being taught is that the time to completion isn’t reduced by an amount equal to the quotient (bear with me as I’m not a mathmajician).So, it means that if your time to completion is 40 man hours of work and you have 4 people on the team you won’t get done in 10 hours (40 / 4). The reason is because of the overhead brought about via communication, managment, etc. among team members.Larger software teams definitely help you iterate faster. You just don’t iterate twice as fast with two people or three times as fast with three people.All this is common knowledge among professional software developers. It appears I’ve thrown you off based on my way of explaining. I should have been less ambiguous. My bad.
Yes, agreed completely. I was latching onto the edge-case nature of the examples (i.e. not much to contribute past n=1), but the nine women is really a simplification of assimilation time for new members and management/direction overhead for larger teams. Your point is valid, a functional larger team will of course outperform a functional smaller team at the same project, all other things being equal.I should have called out more explicitly the context of an early startup, that was my mindset with the comment. There is a minimum amount of engineers you will need to crank out an initial product in a given timeframe, and a maximum amount of engineers you can keep focused on the right thing at any given time without expanding the management layer. So while you could accelerate the project’s timeframe with a larger team, that will actually take longer to build, and like that Brooks guy says, things will take more not less time in the short-term. This is something I’ve had more experiences with – both witnessing it and being first-hand involved – than I care to count, but I suspect almost anyone who’s worked in a software team can relate to some extent.
Sounds right. But it isnt in my experience.
Product designers help you iterate faster, not developers. Developers help you scale faster.
As always Fred you leave out marketing. So you start with engineers but no one gauging the marketability of what they’re building? Not even at stage two? A community manager is important but this is a very different skill set that typically requires oversight by whomever defines the message. This not, IMHO, inconsequential. Reputation is the business.
“mar·ket·a·ble adj. 1. Fit to be offered for sale, as in a market: marketable produce. 2. In demand by buyers or employers; salable: marketable goods; marketable skills.”If you’re a scrappy internet consumer product startup with five employees, and your founder(s) don’t have a clear idea — or aren’t already on a mission to find out — what exactly is in demand by the buyers you want to target, I think you’re in trouble. Doesn’t sound like something you should be relying on a hire for, at such an early stage. As for gauging and guiding how that’s being translated into product by the engineers, well, that’s what your Product Manager is for.
You know my opinion on that. But i am not getting into that debate again.
I agree with your post when it comes to making money. See some previous topics on this blog pertaining to how Apple has become so successful.But keep in mind the “neato” factor. If you can bang out a bunch of neato things really fast you can “test the market” with the actual product. Then it’s simply a numbers game as to hitting a home run.
Is the “Building Product Stage” even relevant anymore? Everyone I talk to tells me one needs both a working product and traction with users to even get a seed investment of, say $300K-$500K.Maybe a definition is in order here: what work, precisely, will already have been done when the company first enters the “Building Product Stage” and starts spending (max) $50,000/month?
Building product stage is often bootstrapped or friends and family money.
Excellent questions. Ones that I rarely see anwers to. And of the rare answers I see, no two are ever the same.
Great UX vs Great Product ? Year 1?
Great UX and Great Product is one in the same, no?
Craiglist, years 1-5.
Are you suggesting Craigslist has a bad UX or is a bad product ?
Shitty-looking UI, but simple and straightforward, easy to post easy to read. And arguably successful in great part because it referenced the feeling of looking up a newspaper or magazine classified section. In my book that’s great UX.
How do I know if I need a large direct sales force? Let’s say I’m offering a reference data API.
The way I understand it (I have some experience with b2b saas), it’s a matter of evaluating the amount of institutional friction you’ll have to overcome in order to get a client to adopt your solution. This is likely dependent, among other factors, on the amount of $$ you’re looking to get from each client.
Quite a few of the comments thus far (this is comment #202) seem to suggest to err to the side of small, and only hire when absolutely necessary. Obviously, that makes perfect sense. That said, what is the rule of thumb total team hours per week? Over how many weeks? In other words, 2, 3 or 4 people can be highly productive at (say) 70+ hours per week. But eventually – inspiring market conditions or not – that level of performance (?) could become counter-productive, yes?Agreed. It’s going to vary from team to team and moment to moment. But much like this article, I’m curious about a rule of thumb or thumbs.
I think what’s missing in this conversation is the long term vision. In saying this, I acknowledge that at start-up stage, you need to survive long enough to get your proof of concept off the ground. So, its hard to think beyond that. However, start-ups that make it do have a long term vision, even if it is rudimentary. In that vision, you can see the business model. And by business model I mean what are you selling? Who is buying it. And how will you sell it? Wrapped in this will also be the “business” family that encases this company. This should be the driver for size and growth.For example, your vision may be creating a product to a certain stage then monetizing it by selling it to a larger organization that can truly launch it. In this vision, your company could very well be a true virtual organization comprised of subject matter experts with strong project management capabilities that manages an outsourced workforce. Growth then is the addition of talent as the product scales up to a given point for selling it. Compensation and incentives would be structured to align with the business model. Recruiting would articulate aligned messaging. Potential employees would know what they are committing to and self select to be a part of this organization.Yes, this example sounds a bit like pie in the sky. However, this example pretty closely matches to a real life company in my neighborhood. It sold successfully and was a much sought after work place. They were able to attract really great seasoned people.What I have seen in start up companies is that the first hires become the cornerstone of the company either by anointing or by default so choosing well is important. Also, from those employees’ perspective, it is confusing for them as the company grows, i.e. are they founders, will they be taken care of and what is their role going forward. Having all this well understood and communicated makes the dynamic growth periods alot easier to manage for everyone especially if retention is important.
Belated comment, but there is another segment of entrepreneurs who are not spending $50k/month on an MVP. Some of us build MVP’s for less than $2,000. And for NYC specifically, the process and costs of the logistical side are ambiguous and/or costly. I really wish Rachel Sterne (Chief Digital Officer for NYC) or Mike Bloomberg would do something about this. For all the insights MBA Monday and other places give us on strategy, the hardest part for many of us is just logistically starting up. Sadly, the best site that describes the entire process is a non-NYC-gov site, here: http://www.citmedialaw.org/…. My concern is with Step #3 — advertising in newspapers for 6 months. There is no indication of how much that will cost, but i have heard it can be as much as $2,000. Who has that kind of money sitting around? Certainly not a smart college kid who’s paying student loans. If NYC wants to make entrepreneurship easy, get rid of this antiquated requirement which:a. Subsidizes the dying newspaper industryb. Is completely un-digital and i have no idea how much it will costc. Isn’t even detailed well on any NYC gov website and the link to the recorders of the county doesn’t even take you to a recorder list for NYC counties.But major props to the folks who have $50/k month to burn on an MVP – that is AWESOME!
I’ve got a very cool Hiring Plan template I use when building financial models, showing about 60 different startup job titles and salaries. You just plug in when you expect to hire X the quantity and it calcs your cost….very useful for scenario analysis and coming up with monthly burn rate.Email me if you want a copy (free, but please give attribution if you publish etc) nathan <at> venturearchetypes dotcom
I agree with Fred. I believe the answer is both, too.
I think that hiring, just like any other skill takes repetition to be done well. The more you hire or work on hiring, the better you get at it.
There is a big difference between first hand experience … that oouch … and listening to advice. I too have my own ‘oouch’ moments.I am not getting that 3 to 15 ratio … I would have been comfortable putting 5 to 15.
Did the biggest issues arise from getting a round and ramping to get to market or hitting a market updraft and ramping to keep on top of demand?Different strokes with individual dynamics.
This is something I am concerned about as well. For my own plans I can see the next 6-12 months continuing to be preparation work for the bigger picture.More planning, organization – Getting ducks in a row, things prepared. Dominos lined up, so when you’re ready to knock them over – you’ll be able and prepared to respond.You’ll have everything ready and then hire the people needed to take on the workload.Costs are less then, waste is less. You can under-hire to maintain that everyone has work to do for many months to come.I know I could get much more money than I am asking for though -i) I don’t want more money than I need initially – because of this very reason of having more money than I know what to do with / currently am capable of safely managing,ii) it allows me to aim further to make the company more valuable with the smaller amount of money – so further money I fundraise is at a better value.
“..avoiding hiring managers and keep it flat….”Truer words were never spoken! I read some of the job titles today and it seems that everyone is a “manager” with a staff of none. Or companies are seeking “team members” who have an “entrepreneurial” drive, passion, and or outlook.Can’t help but believe that “team” and “entrepreneurial” at two of the most over used words in any discussion today.I like to say I am looking for the “GIT-R-DONE” person…
Yes, yes, yes. Hiring in response to investment = bad. Hire because of market conditions. Not what you hope but what you see. I have learned that from experience which is the result of bad judgement as well.
3 is really a small number … unless you have people like gawk.it
Right – it would be very case by case specific. I certainly will have reserves mostly because if I can maintain costs within the money available for a longer runway and increase the value of the company, then I will do that.
both you and @kagilandam:disqus are too kind…there really are very many devs. with just as many (or more) skills than I…I suspect my activity and volume makes me appear better than I really am (btw – I don’t mind that appearance at all!) 😉
You’re better than you appear. Modesty will suit you after your second large exit.