I just read this post about how the startup Level Up has raised $41MM but may now be running out of cash, and according to the article is down to half its previous employee count. It got me thinking about a big mistake I see startups make, which is over-extending before finding true product/market fit.
I was well aware of this danger at Socialize, and we still made that mistake. At one point in early 2012, we were up to 16 employees. When we sold to ShareThis, we were down to six. It's not that six employees was too few -- it was exactly the right number and type of employees for the stage of our company -- it's that sixteen was way too many. We didn't absolutely need that many people to build and sell our product, even though we felt at the time that we did. The six employees that ended up forming the core of our company in the year before we sold it were all very key employees and are incredibly productive, and that's what we needed to find product/market fit.
So if a CEO is acutely aware of the issue and still falls into the trap, I can't imagine what the siren call of rapid expansion does to CEOs who aren't watching out for it. But it is possible to get around it: On the opposite side of the spectrum you see companies like instagram that sold for $1 billion with just a dozen employees.
So I've come up with a mental framework to optimize the outcome of a new startup dealing with this issue.
Daniel's Framework For Optimizing Product/Market Fit:
First, be proactive: This part is easy for hardcore entrepreneurs. When you're just starting a business, being proactive is how you create the first version of your product, bring on the first investors, and hire the first key employees. Being proactive means things like:
Keep being proactive until you hit on the right opportunity for the startup. Be ruthless & relentless about moving on to try something else if what you originally thought would work, doesn't. Oftentimes this process can take a startup 12 to 24 months. Ideally within the first 24 months you'll have found something that has good indications of a strong product/market fit. How do you know? You'll know when it happens, just like Justice Potter Stewart defined pornography this way:
"I know it when I see it."
Things will suddenly get easier. You'll have users coming to you, instead of you trying to convince users to try your product. You'll have people suddenly wanting to work at your startup. You'll have people wanting to invest in your startup.
The key in this first stage, before you find the product/market fit, is to take enough angel money to find this "thing" you're looking for while keeping the team lean and small. Hire no more than half a dozen employees. Ideally only four to five. All technical. One with a world-class design eye, and maybe one "business person," so long as s/he is also technical. The rest should be top-notch developers that love shipping code (and quickly).
Then, be reactive: Here's the tricky part. This is the switch in attitude I'm convinced most entrepreneurs miss because they're initially in this "proactive" mode. Once they achieve just a little bit of product/market fit, that proactivity becomes a cancer. Hiring spirals out of control. Suddenly angels or VCs want to throw money at you because you've got some traction. It's easy to take their money, which then puts pressure on you to hire more and move faster.
Once the product & company starts getting some traction, I'm convinced that it's important to take a reactive stance on everything but that one thing that's providing the traction. This means things like:
All the pressure in the world will be on the CEO to keep hiring, keep spending and keep expanding -- especially from investors and the board. But it's important to move into a strong reactive posture with an insane focus on making 'what's working best' even better while slowing down on everything else.
I'm sure some people will disagree with me. I'd love to continue the conversation in the comments.
My focus on getting to product/market fit was originally inspired by a 2009 blog post by Marc Andreessen on the topic (which might be going away soon, as Posterous is shutting down on Aprilt 30th. So go read it while you can!).
This article is 110% on point. However, I would make a much stronger statement and say If you are an early stage (1 to 2 years old) start-up with more than 5 employees, then most likely you have too many employees.
Finding Product Market fit is a must. But you must also be realistic in understanding what resources you need to accomplish the fit. I worked for a start-up prior to Socialize that essentially failed because it burned through money in a non-productive way. It believe that the implementation of its product was more involved or difficult than it actually was, hence the company hired 7 software engineers, when 4 would have been more than enough.
This happened for two reasons. First, we did not focus our efforts on building a small core set of features, which led to building too man features too soon. Several of the product's features were very difficult for our customers to use; we should have focused on making core features simpler and better instead building more features in the product. This led to the slow adoption (thus slow sales) of our product in addition to major cash burn-through because of rapid development of a broad set of unnecessary features.
Second, the product development process was much easier to implement than the founder had perceived. Instead of paying 7 engineers, the company should have had only 4 engineers (Yes, even if this meant I wouldn't have had a job). Additionally, our salaries (the software engineering salaries) were much too high in my opinion; but, on the other hand, the high compensation may have been necessary to hire top talent in the D.C. area, which is dominated by high paying defense industry jobs. However, this start-up was not part of the defense Industry, which was why it was appealing to me. Culturally, the company was a bonafide start-up company, and it was building an interesting and technically complex product. These facts alone made money a secondary issue for me, which is why I would have accepted less to work for the company than it had offered.
In summary, optimizing Product/Market fit is essential not only because of top-line revenue, but because of costs as well. Additionally, you must be realistic in the estimates of technical complexity of the optimal product so that you don't over (or under) hire.
William, in my blog about the acquisition, I talk about the dangers of hiring too quickly. I agree that it's a huge danger. But I wouldn't put defined metrics around # of employees to time. For example, Instagram had something like 12 employees when it was bought by Facebook for $1 billion, just 18 months after it started. That may be an outlier example but there are plenty of others that prove the point.
Putting metrics around not over hiring before having product/market fit, however, makes a lot of sense, like you also say.
I agree about not putting defined metics around # of employees to time. Also, I think that most of the time any "generalization" should be thrown out of the window for technology start-up ventures. However, above I said "most likely," meaning that if you have more than 5 employees as an early stage start-up, then the company should consistently ask a serious question as to whether it is operating as lean as it can while remaining sufficiently productive. Though, it could very well be the case that a 1 to 2 year-old start-up needs 15 employees to perform optimally.
To your point about Instagram having something like 12 employees just after 18 months after it started, this assumes that the Instagram was correct in its assessment that it needed 12 employees to accomplish what it accomplished. Perhaps, it could have done the same with less than 12 employees. As outsiders, and no formal research, we don't have enough information to determine this . But if we automatically assume that every company that has a successful IPO or acquisition was hiring optimally, then discussion of "hiring too quickly" is a futile task at best.
In order to make myself more clear about what I wrote above, let's revisit your quote in your article: "Hire super slowly, and fire quickly. Don't bring a new person on until the pain of not having that employee is unbearable." Considering this, my point was about being realistic about what you believe is "unbearable." The founder of the start-up that I mentioned previously, thought that less than 7 software engineers was "unbearable." From my prospective as one of the engineers, I think he was clouded by lack of understanding of product/market fit and technology complexity.
Unless we find empirical evidence, this discussion is primarily anecdotal anyhow. But In many entrepreneurial business case I've read, it seemed as if one of the most common mistakes was growing and hiring too quickly.
Thanks for a different perspective, I think this truly works for a CEO who is looking at long term business sustainability. Very soon I'm ought to get into the process, will keep this in my Journal.
Great post Daniel! I agree with most things in the post with this exception:
"Oftentimes this process can take a startup 12 to 24 months." - I think thats waaaaay too long. I feel like we were lucky in this regard because you did such a great job fundraising =)
Other startsup aren't so lucky.
But as long we're critiquing ourselves, one thing we did well was to set goals. One thing we did bad was disregard those goals as we missed our targets. We assumed this could be fixed with more employees and more features instead of looking at the core product. Once we figured that out we moved back down to 6 people and produced more VALUE (not just code) than we did with 15 people.
I think it's important for any entrepreneur ( or executive at any company ) to set concrete goals for products and not be afraid to cut or dramatically change that product. This doesn't mean you have to change your high-level goal but more so the strategy to achieving that high-level goal.
As humans, we're inherently attached to anything we create which makes cutting/changing the core product harder to do.
I was recently approached by a friend in the venture capital industry who asked me to write about my experience as an entrepreneur and transplant to Silicon Valley. Here's the resulting transcript of our discussion. I'm publishing it in the hopes that it helps other entrepreneurs, as well as those who haven't yet taken the leap but want to.
Can you tell me about the fundraising cycles your company has gone through?
We began in Washington D.C. in 2008 in a townhouse on Capitol Hill. It was a terrible time to fundraise due to the financial crisis, so we self-funded a mobile consulting firm called PointAbout which built mobile apps for large brands, including Disney, The Washington Post, The Huffington Post, Newsweek, Cars.com and many others. That firm quickly grew to over 30 employees (and a much nicer space in DC -- although still a townhouse!)
The first few weeks of any startup are tentative at best, and any sane founder will wonder more than a few times what the heck they were thinking to quit their job. During those first formative weeks, tasks and priorities are set, working habits are established, and a certain amount of structure forms around the nascent product and team. These are heady and dangerous times. There are no customers, employees, funders, or advisors to steer the ship, correct course, or check the founder’s assumptions. Everything happens quickly, and experienced founders realize that missteps during this period are the most costly. The critical all-consuming goal is to get something out into the world as quickly as possible while still respecting user expectations.
One thing we learned from our first startup: before there is a beta product, a startup needs a blog like a fish needs a bicycle. So don’t expect many updates until we actually have people start using Code Combat.