« June 2011 | Main | August 2011 »

2 posts from July 2011

July 28, 2011

The Start-Up Law of Comparative Advantage

I can type faster than my assistant.  If she is reading this blog, she may dispute this (and we may have to have a show down with the help of an online typing test), but I'm a pretty darn fast typer.

But, if my assistant were to sit in on my board meetings for me while I stayed back in the office and typed, I'm not sure my entrepreneurs would be very happy (at least, I hope not!).

Thus, despite the fact that I may be a faster typer than she on an absolute basis, it's way more important for my job as a VC that I maximize my time working with entrepreneurs, something I am comparatively better at than she is.

This simple example is derived from an economic law discovered by David Ricardo that has always fascinated me, called the Law of Comparative Advantage.  This law says that it does not matter  whether a nation is better at producing a particular good on an absolute basis as compared to another nation.  What matters is whether a nation is comparatively better at producing a particular good as compared to other goods it can devote its resources to producing relative to another country.

Unfortunately, I see too many founders ignoring the entrepreneurial corollary to this law, the Start-Up Law of Comparative Advantage.  I'm no David Ricardo, but it seems to me that if entrepreneurs followed this "law", the gains to their start-ups would be akin to the gains attributed to free trade.  Here's why:  founders are typically gifted, multi-talented, versatile professionals.  As such, they get sucked into spending time doing things that they may be better at than the others in their organization on an absolute basis, but that, comparatively speaking, they are worse at in relation to the handful of things that they are uniquely suited for.

I work with one founder/CEO who is so talented, I think he literally could perform the job function of each of his direct reports better than they could.  But if he spent all his time doing operational project management or tactical sales activities, he wouldn't be able to spend time on the things that only he uniquely can do relative to his teammates.  

In a fast-growing start-up, a founder needs to be very protective and strategic with how they spend their time.  Founders are always complaining that they are spread too thin, are overwhelmed with the job at hand, and struggle to figure out how they should be prioritizing their efforts.

I would submit that, above else, there are two areas a founder should not delegate:  product and people.  Product-related activities include developing customer intimacy (studying the "voice of the customer"), designing features, thinking through product strategy and setting priorities.  People-related activities include hiring, setting the culture, coaching and mentoring.

If a founder finds themselves spending the bulk of their time on issues not related to product or people issues, they are violating the Law of Comparative Advantage.  They need to rethink whether they're delegating in the wrong areas, and not being (appropriately) obsessively hands-on in the right areas.

I remember reading once that in the early days at Microsoft, Bill Gates and Steve Ballmer would review each other's calendars on a monthly basis and give feedback to each other on where they should be spending their time.  That concept has always stuck with me, and my partners and I endeavor to do the same periodically. 

Try the following exercise:  at the end of the week, write down the top 6-8 categories of time spent on your start-up (e.g., product, people, project management, operations, marketing, sales, investor relations, miscellaneous).  Just as a lawyer would, track your hours at the end of the week by "billing" each of these buckets.  When you step back and analyze how much time you are actually spending (as opposed to how much time you think you are spending), you may find you can make appropriate adjustments to better deploy your time. 

Adhering to the Start-Up Law of Comparative Advantage may not earn you the Nobel Prize in Economics, but it will help you direct your time more productively when starting your company.

July 13, 2011

Why You Should Eliminate Titles at Start-ups

There has been a recent dialog around a theme I'll call "hacking the corporation" - creating novel approaches to building young companies, particularly when they are in their formative start-up stage and pre-product market fit.  One of them, reinventing board meetings (or, "Why Board Meetings Suck"), has gotten some attention from leading thinkers like Steve Blank and Brad Feld.

I'd like to submit another item to add to the "hacking the corporation" punchlist:  elimnating titles.

At business school, I learned all about titles and hierarchies and the importance of organizational structure.  When I joined my first start-up after graduation, e-commerce leader Open Market, I found the operating philosophy of the founder jarring - he declared no one would have titles in the first few years.  If you needed a title for external reasons, our founder told us, we should feel free to make one up.  But we would avoid using labels internally.  In other words, there would be no "vice president" or "director" or other such hierarchical denominations.

Why?  Because a start-up is so fluid, roles changes, responsibilities evolve, and reporting structures move around fluidly. Titles represent friction, pure and simple, and the one thing you want to reduce in a start-up is friction.  By avoiding titles, you avoid early employees getting fixated on their role, who they report to, and what their scope of responsibility is - all things that rapidly change in a company's first year or two.

For example, one of my first bosses in the company later became a peer, and then later still reported to me.  Our headcount went from 0 to 200 in two years.  Our revenue grew from 0 to $60m in 3 years.  We went public only two years after the company was founded.  We were moving way too fast to get slowed down by titles and rigid hierarchies.  Over the course of my five year tenure, I ran a range of departments - product management, marketing, business development, professional services - all amidst a very fluid environment.  Around the time that we went public, we matured in such a way that we began to settle into a more stable organizational structure and, yes, had formal titles.  But during those formative first few years, avoiding titles provided a more nimble organization.

So when I co-founded Upromise, I instituted a similar policy:  no titles.  We had an open office structure and functional teams, but a fluid organizational environment and rapid growth.  One of our young team members changed jobs four times in her first year.  Only after the first year, as we settled into a more stable organizational structure and I recruited senior executives who were more obviously going to serve as my direct reports on the executive team did I begin to give out titles (CTO, CMO, CFO, etc.).  With the title policy, there was some early tension and discomfort (one young MBA kept referring to himself as a VP externally, although he was clearly playing an individual contributor role and was soon layered).  Often, when you are running your start-up experiments, you are not even sure of the right profile for employees or organization structure for optimal execution.  But you can establish role and process clarity without having to depend on titles.

I haven't been able to institute this systematically in our portfolio, but whenever young start-ups are formed, it's one of the first things I counsel the founder.  Don't let your founding team and early hires get too attached to titles and hieararchy.  In fact, in that formative first year, see if you can avoid them altogether.