In my last post, I discussed some of the impacts on the decisions around “how much” and “how soon” in terms of spending resources.
The punchline? Startups that invest too much, too soon run a great risk to run out of money. Alternatively, companies that spend too little, too late often fail for a different set of reasons – an immature feature-set that does not achieve product-market fit or cannot scale adequately, competitive marketplace issues, or employee burnout.
Decision Making Under Uncertainty
In our third year of operation, spending decisions remain front-and-center.
As a business-to-business SaaS company, we are exceptionally fortunate that marketing and non-HR sales expenses are not significant. The vast majority of our expenses are directly related to salaries and benefits.
So, our “how much” and “how soon” investment decisions revolve around hiring in three areas:
- Engineering: If we invest in additional programmers, we can get to market faster with new and valuable products.
- Sales: if we hire expand the sales team, we can grow revenue faster.
- Customer support: additional help in this area allows us to bring on new customers faster.
In reality, a hiring decision in each area is intractably related to the others. The financial resources are obviously shared, so filling a position in one area comes at the expense of staffing in the others. And, getting maximum value out of one team is dependent on how well the other two teams are operating.
Compounding the challenges is a time lag: the process to recruit, hire, and train is anything but immediate. Often, it can take six months (or more) from the decision to hire to having an employee who is contributing fully.
The Venture Capital Approach…
In the world of “Planning for Success,” the two-part answer is simple:
- Raise a bunch of money.
- Scale up all three teams immediately, with the expectation that new products will be available, the sales team will succeed in finding customers, and support will be necessary to onboard and assist new users.
With the risks inherent in both startups and software development, it’s pretty easy to imagine how hiring in any of the three areas can get out of sync and can create inefficiency and operational challenges.
Take the “how much” and “how soon” decisions around whether to hire a software engineer:
With uncertainty around the precise time and personnel resources needed to roll out a new product, under-allocation of resources to engineering means that the company burns through money as under-utilized sales and support personnel sit idle. Alternatively, over-allocation to engineering (without the requisite sales and support team) delays growth and potentially compromises a competitive advantage.
At Gain, we’ve always skewed towards the conservative approach. Most certainly, we have not embraced the “Planning for Success” mindset. For us, this means raising modest funding and focusing on product development.
We staffed and ran a full-functioning engineering team for over a year and half before hiring our first non-engineer. And we’ve continued to invest disproportionately in product development relative to how other entrepreneurs who are more growth-focused likely would have.
The reason for this is not that we’re satisfied with a modest early-growth trajectory. Rather, it’s a combined focus on controlling the risks inherent in creating a high burn rate as well as a desire to put the pieces in place for growth after initial traction.
And (as is articulated here), it’s much better to focus on the period of growth after initial traction, than it is to exploit near-term sales opportunities.