Later Stage Advice for Startups
By: Sam Altman, President of YCombinator | via TheMacro.com
I want to discuss a few topics that later stage startups face when they’re 12-24 months in and doing well. I’ve adapted a lot of this from the final lecture I gave in How To Start a Startup.
Before product/market fit, your number one job is to build a great product. But as your company grows past ~25 employees, your main job shifts from building a great product to building a great company.
There is very little management in the beginning, and that actually works well. When there are fewer than ~20 employees, most companies have everyone report to the founder. That’s optimal in the early stage.
But what works well at 20 employees can be disastrous at 40. You want to be aware that you will need structure in place before it’s painfully necessary.
You shouldn’t make the structure complicated. To start, all you need is for every employee to know who their manager is and for everyone to have exactly one manager. Every manager should know who their direct reports are, and you should try to cluster people into teams that make sense.
Clarity and simplicity are important–I wouldn’t try to innovate on management structure. Don’t make it complicated or convoluted. It’s also really important to have a clear mission and clear goals– the better job you do with these, the less management will feel overbearing.
Beyond structure, there are a few other management cases where founders often fail:
- Senior People: In the early days, hiring senior people is usually a mistake. As the company starts to scale though, it’s actually valuable to add senior people/executives to the team that have built companies before. Don’t be afraid to do this.
- Not Delegating: As companies start to scale, many founders take on too much personally instead of assigning work to other people. This can work for a while, but as your company keeps growing, you become stretched thin and things get done poorly. It’s really important to delegate work and hire needed people as you approach your breaking points.
- Delegating Poorly: Many founders try to delegate by having employees do all the grunt work, but then still try to make all the decisions. This doesn’t work well–both for scalability, and for making your employees most effective. Instead, empower employees to make their own decisions. Let them know how you think about a problem, but let them own the decision process. You should feel comfortable trusting them if you’ve hired the right people.
If done right, it’s safe to delegate most things; especially delegate the stuff you don’t want to do. Try not to delegate the one thing you really want to remain involved with though–if it’s something you enjoy or think will benefit a lot from having you involved, you’ll be more satisfied.
- Personal Organization: It’s really important to develop a way to keep track of what you need to do and what you need to follow up on with others. It’s not critical to figure this out when you’re just starting out and focusing on product, but it’s crucial as you become a manager.
- Communicating: After a certain point you can’t have one-on-one conversations with everyone. To handle this, learn to communicate in clear, succinct writing, and share it with everyone. It’s one of the highest leverage things you can do, and it scales to thousands of people. ‘All hands’ meetings with all employees at least once a month can be a really effective way to communicate too, and it’s still a really good idea to have one-on-ones with your direct reports.
Most founders ignore HR in the first phase of a startup, but it’s a huge mistake to continue ignoring it as you transition to a later stage. Good HR will help you scale much faster.
Good HR means three things: a clear management structure, a way for people to talk about workplace issues and concerns, and pathways for people to evolve in their careers.
An important component of creating pathways is performance feedback. It can be light, but it should happen frequently. It helps people a lot when people can regularly hear how they are doing–good or bad.
It should also be clear how performance ties to compensation. People talk, and they will eventually find out co-workers’ compensation levels. If it’s all over the place, it can be a complete disaster. Compensation bands let people know how much they should fairly be making–for example, a mid-level engineer will know she falls in a certain range, and a senior engineer in another. They keep things fair and help avoid a lot of crazy negotiation.
Equity is also a very important component of compensation. YC company data suggests that most successful companies give out a lot of equity.
I typically tell founders that they should plan to give away 3-5% of their company each year for the ten years from founding. It’s a lot of stock but you should be doing this to keep your people motivated and aligned.
It’s also a really good idea to do this with refresher grants for existing employees approaching their vesting cliffs, and you should get a plan in place for this early. You never want an employee in a place where they start thinking about leaving because they’ve vested three out of their four years.Always stay in front of people’s’ vesting schedules.
In preparation for the longer term, make sure to monitor your team for burnout. Building a company really is a marathon and you cannot sustain people working 100 hour weeks in perpetuity. You want them to go on vacation, have new challenges, and do new things.
If things are going well, the 12-24 month mark is also a good time to put in place a hiring process. And once you have product/market fit (but not sooner), you should hire a full-time recruiter–getting the best people is arguably the most important thing to do, and you want to be as effective at this as possible.
A couple other HR tips:
- Build a Diverse Team: Even before the 12-24 month mark, it’s worth thinking about how to build a team of diverse perspectives. You want unity of vision, but diversity of backgrounds is good. Myopic culture is typically less effective.
- Announce Offers: Up to a few hundred employees, try announcing every potential job offer on an internal mailing list. If you do it, very often someone in the company will know something good or bad about the prospective employee.
- Structure Onboarding: Have a program in place to ramp up new employees. That way when someone starts, you know what their first week looks like and how they’ll be trained.
- Build Paths for Early Employees: As a company grows, you want to be very proactive in thinking what the path may be for the original 10 to 15 employees. They may not be appropriate for newly needed executive roles, but you want them to be happy–they’re probably loved by their peers, and very productive. So be proactive and talk to them about their path very directly. Sit down with them and ask how they want their careers inside the company to progress.
Building a company that is able to innovate repeatedly is the hardest thing in business. Most companies do one great thing then stop innovating. Great founders work very hard to overcome this.
Alignment is key–companies become unproductive because people are either not on the same page, or they don’t understand the priorities. If you can keep the entire team aligned in the same direction, you have won over half the battle.
Start getting there with a very clear mission, roadmap, and goals. Everyone in the company should know what the roadmap is for the next 3-6 months or even a year.
There’s a classic test I love to give companies struggling with scaling– I’ll ask the founders a simple question: “If I asked 10 employees what the top three goals are for the company, would they say the same thing?” 100 percent of the time the founders say yes. I’ll then go and do it, and 100 percent of the time no two employees say the same thing.
Founders are always surprised by this because they think they communicate their ideas effectively. In reality, they’re not communicating their ideas as clearly or as frequently as they should. It’s critical to make a habit of reiterating your roadmap and goals so people can understand and internalize them.
Similarly, transparent communication is really important. It’s critical for founders to have a management meeting with direct reports every week. it’s a good idea to have all hands meetings with the entire company at least once a month. Use these to go through the roadmap of the entire company, the immediate three month trajectory, and how the immediate trajectory plays into the longer term goals.
Other longer term productivity tips
- Do Offsites: Take your best people outside the normal workspace for a weekend where everyone has time to just talk and think through the bigger picture. People have interesting ideas when they’re out of the day-to-day.
- Get Legal Docs in Order: If you assign someone to go through and collect every agreement that the company has ever signed, you will save a lot of future headaches.
- Start Doing Financial Planning and Analysis (FP&A): If you have someone build a really great model of the business, you can optimize and understand how things are working at a level that most people totally miss. Most people don’t hire someone to work on this until they have a few hundred employees, but it’s worth doing sooner.
- Hire a Fundraiser: A full-time fundraiser is another role I think is worth hiring much earlier than most recommend. If you hire someone really great after your B round and their full-time job is to prepare for the C round, you’ll almost certainly get better results than if you hire an investment banker later on. You’ll also end up paying way less money and take a much smaller dilution.
- Pay Attention to Unit Economics: Sooner rather than later, you need to figure out how to make more money from each user than you spend. Most great companies historically have had good unit economics soon after they began monetizing, even if the company as a whole lost money for a long period of time. It can be tempting to paper over a problem with the business by spending more money instead of fixing the product or service, but this is a major trap.
- Watch Your Runway: Even if unit economics look great, you’ve got to make sure there’s money in the bank. Don’t ever get down to just a couple months of cash in the bank.
As you keep working on your company, it will almost certainly get harder. The highs are higher but the lows keep getting lower.
As you become more successful, people start rooting against you. Journalists and people on the internet will find ways to pick apart what you’re doing, and it sucks to read. Early on, you’ve got to figure out how to ignore the haters.
Also early on, it’s good to start thinking about how long a journey your startup will be. Very few founders make an actual long term commitment to what they’re building, and the ones that do have a huge advantage. Have a strategy that assumes you will work on your company for the next 10 years–it can be an extreme advantage that few founders leverage.
And remember to take vacation yourself. We often see founders that go three or four years without ever taking a real vacation. That may work for a year or two, but you will burn out.
Finally, don’t lose focus. Focus is what made you successful in the first place. There are a lot of reasons people lose focus–burnout is certainly one, and talking to potential acquirers is another very dangerous one. Don’t become distracted.
Marketing & PR
We tell companies to ignore marketing and PR for a long time. Press will not make your startup.
But, as you start to be successful, it becomes something that founders need to spend time on. Once your product is working, switch from not caring about it to caring about it a little bit.
Never outsource the key messaging of the company to a PR firm or your head of marketing. You should figure out what the message of the company is going to be yourself.
I’d also recommend getting to know key journalists. No journalist wants to talk to a PR firm; they’re much happier to hear from the founder. Pick three or four journalists that you develop really close relationships with that like and understand you, then contact them yourself; they’ll actually pay attention and care about the company.
12-24 months in is also when business development can start to matter. This certainly assumes though that you’ve already built a great product.
If you’re getting into business development deals, make sure to develop personal connections with whomever you’re trying to do big deals with. No one wants to feel like they’re being used transactionally, so make sure to show you actually care about the person you’re dealing with.
That said, make sure you set up competitive situations. This is a basic principle of negotiation, and most founders learn this from fundraising. You get good terms and deals done when you have a competitive situation and you stay persistent.
The final point I’ll make is that you have to ask for what you want. If you want something in a deal, don’t be afraid to say so. Most of the time you won’t get laughed out of the room, and you might actually get it.
It’s worth saying again–the later-stage is a different beast than when you first start your company, and you need to be aware of that. Pay close attention to when you cross that point, and put things in place accordingly.
In a nutshell, have clear, simply-structured management that people understand. Set up ways for people to advance their careers and be rewarded. Make sure to focus on what most needs your attention, and get good at delegating what doesn’t. Communicate clearly within the company, and set a roadmap so people know where to point their efforts.
There’s obviously a lot to it, but keeping these in-mind can help a lot. And again, don’t worry about these things when you’re starting out–stay focused on making a great product.
To read the full article: click here: http://www.themacro.com/articles/2016/07/later-stage-advice-for-startups/