Leonardo's way • The seven signs of startup dysfunction

I was reminded by Andy Rachleff’s post of the perspective I’ve gained both from experiencing both successful execution as well as making mistakes. 

Experiencing success and failure while remaining cognizant of cause and effect is an exercise in being aware.  Perspective cannot be gained without exploration. Imagine painting or designing in the dark. Without looking, or even looking both left and right, up and down you cannot size up what you are about to make or transfer what you know to another work of Art.  Experiencing failure alone creates risk aversion, and suggests the absence of learning. Experiencing success alone, generates blindness about how you got there. Therefore a blended experience coupled with awareness is critical. 

A successful startup is an optimization exercise. Value is a function of market size, momentum and having the right team to capitalize on the market opportunity. Optimization of startup function is stage dependent. At the early stage the risk is not falling apart. Once initial momentum has been generated it is important to catch flight. Once a company is growing fast and has some success, long term value is created by continuing to build new products, without succumbing to the internal stagnation that can happen at scale. 

This essay explores dysfunction at the early (0-10 employees) and mid stages (10-100 employees) of a company. Arguably these are the most critical stages to traverse, and also I haven’t experienced the late stage yet with Quid so my experience at this stage is only conjecture. 

Early Dysfunction

The early stage is about not falling apart and catching wind of a market. So what are the main sources of dysfunction?

• Founders are misaligned on ambition, reactions and intentions. Founder misalignment happens on how decisions are made, because founders are disagreeing on something inherent in their personalities. A long term focused founder can be misaligned with someone who thinks too small. How founders react under pressure can also create misalignment, so when the going gets tough founders may react differently, one giving up while the other wants to persevere. Founder misalignments exist on levels of ambition, reactions to pressure and intentions (short or long term perspective). If you react the same way on all these fronts then you are aligned. If you have significant differences you aren’t. No two people are identical, but at least you can align philosophically. Founder misalignment can make it such that under signs of stress, the founders would rather not work with each other. If that is is the case, you can split a team even before you get going.
• Team has no momentum. In the early stage, you have to make momentum from a standing start. A team that doesn’t do that will not succeed. Momentum comes from having external deadlines, shipping and getting feedback, having focused releases, getting money or new users. Momentum comes from interacting with the outside world. The faster a team can be motivated by external forces and getting to a pattern of behavior of reacting and improving from the outside world. This means selling before you have a product. Or building a product and showing it off to users. Or setting a very public milestone like a press launch with a hard deadline to create pressure can be useful. My Y Combinator experience taught me how great a forcing function having tight deadlines can be. Creating a rhythm of reacting to cycles of momentum can help create a healthy habit. But generating momentum from a standing start is the responsibility of the leadership. Successful founding teams are like tornados of momentum - convincing external stakeholders to participate in shaping a vision into reality.
• Team is working on the wrong thing. This is the easiest to change if you can generate momentum from scratch and will work with each other through thick and thin. A market is a proxy for the number of customers, and the money in aggregate they are willing to give you. Starting with the wrong initial Market Size can limit your potential. It takes the same effort to work on very small idea than a big one. Depending on the ambition alignment of the initial team, as long as you start in a broad enough market initially, you can make your idea bigger. Starting in a small market can stunt your potential. There are hundreds of entrepreneurs who will not succeed because they are aiming for the wrong thing. Valuable ideas have proxies. E-commerce when it started had the proxy of physical retail. Sharing idle bedrooms had the proxy of vacation rentals and travel. Its easy to validate that something is valuable if it has an old world proxy. Being able to listen or proactively ask customers if this is valuable is a forcing function. Often this is tied to asking for money from customers.
• Team is undercapitalized: Runway allows for experiments. Runway, also gives you some buffer to add resources once things work. The more runway you have the more you can experiment. Having more money can also make you lazy, as you know you can run as many experiments as you want. Also more money can bring too much investment oversight. So the amount of money a company has at the early stage allows for the right incentives to be created. A team with less money is definitely motivated to either make money or in danger of not having enough to prove to raise more money. The right amount allows for experiments and resources to find a source of momentum in the business, and grow into it. Too little money increases the probability of failure, or can create incredible survivalist incentives. My Y Combinator experience with Snaptalent showed that we could build a functional product, and get to customers on less than $50k of funding.

Mid Stage

Assuming you have managed to avoid implosion during the early stage, you now have some revenue, or momentum, and a focused team that has overcome the initial uncertainty. The mid stage is about co-ordinating resources, and scaling human interactions to manage conflict, as well as doing more of the thing that worked by setting processes. The key to growing mid stage startups are in building a machine for generating revenue, building a team and a rhythm for momentum. If the number of potential units of dysfunctional behavior from one person is n, adding more people requires vigilance of n times n. 

• Team cannot manage and co-ordinate projects: Any company’s output can be broken down into distinct projects. Organizing projects, setting deadlines and standards, and co-ordinating output to completion is a skill that few people explicitly focus on. Companies like Asana and the use of individual productivity techniques like the Getting Things Done (system) help institutionalize execution. Even worse is a functional organisation that is simply working on too many projects. Cutting projects and evaluating effort spent are important aspects of management. Feature creep is common in product development, well on an organizational front the same phenomenon is known as project creep. Focusing output on the core value that the company is driving through effective communication of priorities as well as education throughout the organization is also a core skill. Defining the focus of the company and saying no, requires discipline and deliberate design. Hiring in project managers, operating leaders who can say no, or changing the culture through education of existing individuals. 
• Team forms political silos: A self correcting team is a functional one. A team that has information silos of negativity, or politics like cancer start to invade the organization and slow it down. Having clear information flow and trust up and down, which leads to corrective action is a must for a functional organization. Political or negative individuals with high influence must be fired or shown a path to transition.
• Team is not reshaped to suit direction: Over the journey of a company there is course correction that comes as a result of learning what is valuable to the market and what isn’t. Good companies are servants to their customers and love doing so. As a result, some parts of the organization aren’t necessary any more. Either those team members change roles and adapt, or have to be let go. For example shifting your focus from web to mobile means adapting to market conditions. If you have a team that was focused on the  web, and you cut the web product entirely you may not need all those engineers. You have to have them adapt or let them go. Similarly, in identifying problem individuals you have to offer them a way out or fire them. The team is an evolutionary thing with selection pressure being what drives value for the business. It isn’t uncommon to reshape the team a few times, or have attrition through forced or organic circumstances.

The principles of momentum, capital and market also apply in the mid stage as processes are built and revenue is created. 

The late stage
If you have got this far, the late stage is about capitalizing on your foundation. Enjoying the critical mass of people you have and continually improving. With continued effort hopefully one day you will be rewarded with a financial event worth telling your family about and looking back fondly at your hard work. 

This is the fun stage. This is where we are with Quid. 

Please comment if you think i’ve missed any big sources of dysfunction.