The Evolution Of A Hypothetical Start-Up
I’ve been pretty busy lately on a couple of projects. As always, inspiration strikes at the strangest of times and I have been assembling some thoughts on the challenges faced by growing businesses, from the perspective of an investor who has followed a couple of reasonably large ones like Nearmap and Xero through their many evolutions.
I’ve been nibbling away at this post for about six months, although realistically it’s been probably four years in the making. You see some pretty interesting things in growing businesses, especially when senior executives get forced out. I guess this is a fanciful look at some of the challenges a growing business might run into.
An imaginary start-up
At the root of any start-up it seems intuitive that there is some problem that drives progress. A founder-type has an idea, usually to solve a problem that is so annoying and seemingly can’t be handled with any existing solutions. “I could do this so much better”, or “this problem shouldn’t exist.”
So you, Founder, get organised and work furiously on your idea. You don’t really know what you’re doing, but you know for sure where you don’t want to be (existing solutions) and so you go off in some other direction.
After a few weeks or months of work there is some incredulity “this actually works pretty well.” Yeah it’s ugly but it hits the nail on the head and the user just clicks a few buttons and their problem is actually solved. Now maybe all the idea needs is to be fleshed out a little.
So you get some seed or early stage venture funding. Emboldened by the money and also more than slightly intimidated at stewarding half a million dollars of someone else’s cash, you return to work towards your next milestone. Maybe there is some new equipment purchased, or a new skillset hired, or you get a salary.
A few months on from this, there is actually a working solution that is in the early stages of being sold to customers.
At this point, maybe there’s some more money invested. Or not. But the solution progresses, and before you know it there’s a new hire, or maybe your own office (or both).
Two years go by. Everyone is earning a salary, the business is ticking over, there’s a customer support person and a salesperson. There is starting to be a genuinely fun approach to work. A lot of the stress of bootstrapping has receded now that the business has meaningful revenues. The founders love working for themselves, making decisions and collaborating. Each finds it vaguely hilarious that they’re being paid to pursue their crazy idea. They still profess to have no idea what they’re doing, although an outside observer would recognise the beginnings of deep competence in their area of work.
Somewhere along the line, and sooner rather than later, the company becomes large enough that it hires staff that expect an organised working environment. You (read: CEO) start to realise that it is pretty damn annoying having to do all the busywork instead of just producing new features and new ideas.
It is even more annoying when decisions that you wanted to make get made without you (are you not the CEO?!) because you got annoyed by a trivial question last time and people didn’t want to interrupt you this time. You don’t realise what a pain in the ass maternity leave is until your chief back-end engineer needs six months off. And yes, your staff do expect to be paid on the same day every week.
Little of the overall atmosphere changes though. It’s still a fun place to work and there’s no real hierarchy. When your aerial mapping solution crashes, it’s because “the satellite is on holiday” not because part of your software is still running on dodgy code that you cobbled together at 3am a couple of years ago. (“Satellites have feelings too”).
Somewhere in there though, you hit 30 employees. The business is not yet profitable (although it is financially secure), and the CEO is now the Chief Errand Officer. There needs to be enough desks. Replacement monitors and cables need to be ordered. You need to find a new office to hold all the staff (it sure would be nice to have a window, but a hundred thousand dollars for an office is a lot of money…). In your rational moments you completely grasp that the cost of an office is approximately five per cent of your annual salary expense, but bootstrapping nailed rigorous cost discipline to your forehead and every dollar hurts.
Your ability to work on any of your big ideas is compromised by the fact that all decisions still seem to be running through you, including relatively trivial ones such as how should the sales pitch work and what does the company’s brand stand for? It is not intuitively obvious to you that the beliefs of the founders are de facto the company’s brand, and so you can’t understand why you are simultaneously annoyed by having to work on the sales pitch – yet you’re even more annoyed when work gets done on it without you, because it doesn’t align with how you think it should sound and what your vision of the company is all about.
You’re smart though, and you gradually realise that the key executives are the bottlenecks on the organisation. A decision follows to push authority down to people that are closer to the problem and better equipped to deal with it. You implement a system where things come to you for approval, rather than you being personally involved in their actual creation.
At around the same time, you’re starting to hire actual professionals. It’s no longer young employees, early in their career, willing to take a gamble on a start-up. You’ve lured away a Salesforce executive to take business to the next level. You got a product manager from Microsoft. These employees almost subconsciously set about bringing your organisation up to the required standard.
Some are more vocal than others.
You’re bluntly informed that it’s grotesquely inappropriate for your automatic street-mapping solution to be taking pictures of children playing unsupervised in front of their house. OK, you’ve known for a while that it’s a little weird, but now you’re faced with a strident employee emphasizing that it’s a Big Deal that needs to be solved right now. You accept their feedback politely and privately disagree. It’s nearly impossible to keep all competing interests in check and some things need to take second (or fifth) place. It’s been a problem for two years – surely it can wait a little longer? There’s been no negative feedback. None of your customers seem to be complaining. It’s just part and parcel of creating a new system – of course there will be flaws. Everything can be fixed in time. It’s much more important to make sure that users can actually login – there’s been some serious problems with the latest iPhone update.
It’s hard for you to get motivated to fix the issue. Not that you don’t think it’s a problem, or that you don’t respect the employee – not at all. It’s just there are so many other responsibilities on your plate, you’re trying to juggle revenue, if your users can’t login you can’t generate revenue – the risk of regulatory response over the privacy invasion seems trivial. You’re right about that too – the average cost of improbable but high-impact events is quite low (but a few individual companies will go out of business). A couple of your staff have children. A few others like to solve problems. One of your subordinates, with a little wider perspective and a little more time on her hands (by dint of not being the CEO), gets an ad-hoc working group to look into the issue.
It’s a multidisciplinary problem but the company is still small enough and well-run enough that it is not completely siloed. Your subordinate gathers a few people, and they sit down and fix the problem. With no executive oversight it’s fixed almost before anyone notices the absence of the staff involved. You hear a week later that a fix is being rolled out. This is a key tipping point for any leader. Your authority has been undermined by being cut out of the loop on that decision. (If you think about it, it’s not entirely clear that you were even undermined – people knew you had other priorities and decided to solve the problem for you – but the way you react will be telling). Some CEOs will kind of be vaguely surprised that it got solved without their input and mumble something like “oh good” before moving onto the next issue. The very best and brightest leaders will realise at this point that their job is building systems of people that build systems – and not being personally involved in the operation of each system.
A small handful of bad leaders will stamp and scream and insist that they should be part every key product decision – doing long term damage to the organisation and their credibility in the process.
Somewhere in there, in between these issues and dozens of others like them, the influx of professionals moulds your little start-up into a world-class organisation. You might only have eighty employees but they’re all motivated and the blossoming professionalism – which has almost imperceptibly stamped out a thousand little brushfires and plugged innumerable leaky buckets along the way – has changed your life. You don’t even realise it, but the numbers look good and the organisation is humming.
Imagine you’re one of the best and brightest CEOs. You devote serious time to designing an organisation that can operate without you. It’s the only way to achieve real scale. Except now – you start to realise that you’re dispensable. You’re not, but with your absence no longer a problem (and in some cases, strongly preferred) for the day-to-day operation of the business’ divisions, it sure feels that way.
It never gets any easier to hear employees talking dispassionately about the – your – business. It’s worse when you realise that 95% of the business is operating as though you don’t exist, and a majority of the key decisions on things like sales, security, HR, and so on get made without your input. You know can interject whenever you want, and people admire and respect your input. But there’s only so many things you can cover, so you (mostly) devote yourself to a certain narrow sphere of excellence. Maybe you spend a little more time on Twitter than previously. You tweet about your sweet new mountain bike and your travels through the hills of New Zealand. You take a long weekend every now and then to go for a long ride.
You admit to yourself in quiet moments that your specialist employees are much more competent than you were, back when you were doing their job. Some of your old ideas were pretty dumb, in fact, and their new ones are pretty good. You’ve managed to keep the enthusiasm alive all these years, and you’re quick to grab new ideas and run with them. Better yet, you’ve got an organisation behind you to handle all of the details of execution.
Five years and five hundred employees later, you finally go public. Now instead of 30 investors, you’ve got thirty thousand. Reporting and compliance obligations go through the roof. You actually have to answer to independent directors on the Board, and one of their chief objectives is to make sure you don’t squander too much money and you’re remunerated appropriately. It’s not that your independence has been compromised in any way – people have voted with their feet to (wholeheartedly) back the maverick CEO leading this wonderful new company. But the additional work is substantial and you feel like something has been lost in the transition to public ownership and the entrance to public life.
There’s a second half to this story…but it’s a tale for some time in the future. Give it a few more years.
I have no investment in any company mentioned in this post. The examples of situations in this post are a product of the author’s imagination and not intended to reflect any real-life individual or company.