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Startup Math: 1 + 1 = 1/2

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Editor’s Note: We’ve been introduced to a great new founder’s blog, and we’re delighted Chris Lyman has agreed to share it with us. A 3-time entrepreneur, Chris is currently CEO of Fonality, a Los Angeles-based VoIP provider he founded in 2003 — and where Chris prefers to be called ‘Janitor’, which tells you a lot about him. Chris has written about many useful things lately, including why CC’ing colleagues on email should be banned from the manual of best business practices. The first post we share in full is about the law of diminishing returns at young companies — and how more resources can actually mean less for your startup.

I have noticed some funny math in my startups over the years.

This funny math doesn’t start until after VC funding — so to better explain it, I must first rewind the clock to our pre-institutional investor stage.

See, I do funding a bit different than other entrepreneurs. I launch the company myself. I form (some of) the team. We build the product. We get to revenues … and we even go profitable. In short: we get our ship lean, mean, and pumping efficacy from every valve.

Then we go get VC funding (less dilution, more control, etc.)

It’s so predictable what happens next. Ya gotz some green in the bank and a newly formed HR department, replete with a salivating recruiter, brimming with job reqs to be filled. Go! Go Go!

Staffing at warp speed always scares the crap out of me.

I approve each new req. — queasy — because this new person will now solely be focused on what *used* to be 1/20th of my job. As I sign the req, I hope they will be better at “it” than me, care more about “it”, and get more of “it” done.

But, in my heart, I feel the funny math coming on.

Each new person that gets added to a startup, instead of adding an integer worth of value actually temporarily subtracts value. The old person, instead of doing their old job, is now training the new person. Add a body and get less for your pleasure. 1+1= ½

Eventually you end up having more new people than you do old – I call this being “upside down”. That is when the ownership problem starts to compound. Nobody has really been here long enough to know, or care, and once the “new job excitement” has worn off, accountability starts to dwindle. In my old company, this problem was pervasive. The more people we had, the longer it took for anyone to pick up the phone when it rang.

It won’t always be this way. If you survive your terrible twos, you will eventually get more efficient with each new body. Slowly 1 + 1 = 1.25, then 1.50 and it probably never gets much higher than 1.75. With the exception of specialized industries like wholesale and investment banking, the most efficient companies in the world can achieve $1M of revenue, per employee, per year. Google is $1M, Dell is at $900K, Cisco $570K. The average of non-financial Fortune 500 is about $290K.

In my current company, I made a firm decision to combat the chaos of these mathematics from the outset – wielding the best weapon I have in business: honesty. I started warning people about it from day one. During “all-hands” company meetings, whilst folks munch pizza and hear about our financial numbers, I remind them “1+1= ½“. When I see five people in a meeting that only requires two, “1+1= ½” is all I have to say.

I don’t even have to say it anymore. It has become a saying.

And, I think it has helped.

Prior to founding Fonality, Chris Lyman founded Virtualis, a web hosting company sold in 2000. Chris also founded a media-focused systems integration firm in Los Angeles. He is a licensed SCCA-Pro driver and owns a motor sports racing team. You can read more from Chris on his CEO blog at trixbox. (Trixbox is the brand name for Fonality’s Asterisk-based IP-PBX units.)

11 Responses to “Startup Math: 1 + 1 = 1/2”

  1. This maps to my experience. Back in the dot-com days we raised a modest series A and went from 5 to 25 employees in 3 months. Trying to keep accountability and productivity high was a real challenge. This time round I’m just focusing on self funding and automating as many business processes as possible, but realistically the best that will create is a decent lifestyle small business (which isn’t a horrible thing to have!).

    I’d like to know if in addition to just bringing the problem to light if there are any hints and tips for handling the crazy period? The best answer I came up with was to prioritize ruthlessly on the basis that if you could grow X (where X is the currently limiting constraint – often sales), you’d stay in business long enough to fix the other stuff!

  2. Great job on outlining how you go about developing a start-up. It’s and interesting approach…wish it worked for what I have been working on. I’ll check back to see what else you come up with that might help with start-ups who need funding.

  3. anonymous

    I struggle with this problem, but come at it from both ends of the spectrum. (Founder, and employee)

    With my founder hat on, of course I have the exact same perspective and sentiments as you echoed above.

    As an employee (as recently as a month ago), of course I have a completely different perspective. Perhaps its just I’ve never had the privilege to work at a company where I could honestly believe they’d be the next Microsoft, Google, or Facebook.

    That my .01% would actually be worth something. Then there’s having bosses & PMs and various people who annoy you that Founders don’t have to answer to (until they take on VC).

  4. This brings to mind C. Northkote Parkinson’s essays “Parkinson’s Law”, “Directors and Councils”, etc. Those are real eye-openers, especially the part about how subordinates and layers of management so easily multiply to form an entrenched bureaucracy.