Five Years Too Late

January 30, 2009

Smaller is Better

Filed under: Startups — Tags: , , , , , — fiveyearstoolate @ 2:43 pm

Today we’re happy to have a guest post from our partner Will Porteous on the benefits of small, entrepreneurial teams. – EDW

will

Will D. Porteous

Over the years we’ve come to believe that small teams can be stunningly effective at the early stages of a company, often much more effective than larger teams. We have also found that, when they are good, such teams typically only need a modest amount of capital. This may sound overly simplistic. After all, some endeavors are just more complex and require a wider array of skills. But in our experience good entrepreneurs understand that resource constraints can make it easier to focus on what’s really important in a new company. What follows are some observations on this idea:

Product development is a fundamentally creative endeavor that requires incredibly tight coordination among the participants. Three great developers are usually better than thirty average developers, particularly if they have worked together before and if there are one or two strong leaders among them. Over and over we see core innovations that become great products coming from small teams (often just three to five people). In our current portfolio this has been particularly true at companies like Drop.io, Payfone, and Kashless. And this phenomenon isn’t just limited to software companies. At hardware companies like Data Robotics and Peek (both current RRE portfolio companies) we’ve seen the innovations of two or three founders get to market as products with fewer than fifteen people in either company. This is not to say that there aren’t some tasks that large teams, or even large communities do well (e.g. look at the strength of many open source products that were refined by hundreds of thousands of person hours from their communities). But in pursuing a new opportunity, at the early stages smaller highly focused teams tend to do better.

And it’s not just creating great products that small teams do well. Small founding teams should also be able to prove real customer demand. Good founders tend to know the problem they are solving intimately well. And they tend to know more than a few prospective customers. If they don’t, they know how to reach them without the formality and expense of a big marketing effort.

When I first joined the venture business in 2000, at the start of the last downturn (was there an upturn in between?), we were receiving a lot of inquiries from systems companies making gear for the telecom equipment market. Their target customers were both the established carriers and the emerging CLECs (Competitive Local Exchange Carriers). Most of these new systems companies had already raised heaps of money. There was a lot of capital available for these new equipment companies after the multi-billion dollar exits of companies like Chromatis and Cerent. It was as if the race was on to build the next “God Box” and get bought for a ten figure number. I remember walking into one such systems company that had raised a lot of money. They were raising a Series D. There were thirty hardware engineers, thirty software engineers, ten people in QA and documentation, ten in marketing, plus a whole complement of senior management including VPs for every area. And they were all good people working very hard. And they had never shipped a product.

Not only had this company never shipped a product or booked a dollar of revenue, it couldn’t definitively tell you when it would. The glut of resources early in the company’s life had contributed to an undisciplined culture. Product plans were not clear and too many people had their “hands in the code.”

What was worse, the established carriers weren’t buying and the CLECs were going out of business. The management team had never anticipated that there might not be demand for their products and they couldn’t conceive of a way to build the company that didn’t entail burning $2.5 Million per month. While they were growing the organization they had lost sight of what was changing in the markets they hoped to serve. They had raised too much money and made too many promises to their existing investors to stand up and say “this isn’t working; we need to make something else that somebody actually wants to buy.” Instead, they kept running the company like nothing had changed hoping to persuade a new group of investors to underwrite their outdated view of the world. You can imagine what ultimately happened.

Companies that have raised too much money in pursuit of the wrong idea are scary places. They are like a parallel universe where everything appears normal, but it really isn’t (movie buffs, think of “The Truman Show” or “Stepford Wives“). Getting back to reality is always painful and usually includes a major reorganization and often a recapitalization. The motivational challenges that come with downsizing or restarting on a new idea with a smaller team can be withering. And the odds of long term success in a restart are never as good as in a new company. More on that another time.

The point of this story is that it is better to stay small and wait until you know you’ve got something great before you raise a lot of money. Good entrepreneurial teams can achieve a remarkable amount on just a few million dollars. They can usually build at least a Beta version of their product. They can put that product in front of some potential customers and learn a LOT. They can iterate until they have something that prospective customers REALLY like. Along the way, they can learn a lot about how to sell the product and what customers are willing to pay. And, by keeping their team small and their burn rate low, they can preserve their option to change direction if they need to.

So, why is it that small teams are often so effective? There must be many reasons for this. Certainly, good entrepreneurs tend to hire strong and surround themselves with broad gauged, talented people who can lead, manage, and also be major individual contributors. Such agile teams know how to both live in the details of making the product and to focus on the larger questions of building a business. They bring together many different skill sets in a small number of people. There’s often a high degree of trust in such teams, especially if team members have worked together before. In addition, the sense of having been chosen to be a part of something new and special is often very inspiring and motivating. The work at the early stages of a company is massive in its apparent importance – and there is a lot of both work and responsibility to go around. Good teams must have a tremendous work ethic and reject any team member who doesn’t measure up. And perhaps most simply, communication is easier in a small team with a shared sense of mission.

Small teams are also hard emotionally. They often feel very anonymous to people coming from large, well known organizations. They demand tremendous amounts of vision and faith. They tend to be fairly democratic, which can be good in the early days, but doesn’t work for too long. They are stark, demanding environments. They can also be a lot of fun. They are the true crucible of company formation and long term value creation. So, if you want to get big for the right reasons, it helps to start small.

8 Comments »

  1. I think teams get over-sized when management doesn’t chase down the root causes to problems. They see a problem and throw a body at it. It indicates a lack of thoughfulness on the part of management.

    I’m not sure that small effective teams are any more “thoughtful” though. They just happen to find themselves in a situation where they are naturally effective because they are working with the right teammates, in the right market, with the right product, etc.

    Comment by Nivi — January 30, 2009 @ 7:05 pm

  2. I forgot to mention that Eric Ries has a wonderful post on how to hire to keep teams small: http://startuplessonslearned.blogspot.com/2009/01/lean-hiring-tips.html.

    Comment by Nivi — January 30, 2009 @ 7:09 pm

  3. Mr. Porteous,

    While small teams can get a product to market quickly and effectively, at times this is done at the expense of the overall customer experience. Perhaps this is from being unable to see the big picture and instead being completely driven by pushing out new products.

    I’ll explain this through my recent experience with one of your portfolio companies, Data Robotics. The Drobo is a classic case of a product being pushed out to the market before it had matured properly and gone through an acceptable level of QA. You can visit any website where the Drobo or DroboShare is reviewed, Amazon and NewEgg for instance, and read about all the horror stories of people losing data from these devices. I myself have been unable to access my data for the past 16 days, and Data Robotics seems ill equipped to help me. For instance, they apparently don’t have the foresight (as a larger, more thoughtful company would have) to have spent a day developing an application that could give a user access to their data in case the Drobo fails in some way or erroneously marks a drive as bad.

    On top of (and partly due to) the design and manufacturing problems of the Drobo is a problem with support, which is also being widely talked about. Customers wait on hold for over an hour just to talk to Tier 1 support, who are generally unhelpful. Even Tier 3 support doesn’t have the resources they need to fix any unusual problem. They need access to the developers to fix real problems, but the developers are so busy trying to push out a new product, they can’t spend five minutes talking to a customer with a support request escalated to the highest level.

    Data Robotics tries to limit the visibility of these problems by providing official forums but making them only accessible (even for reading) by customers with Drobo serial numbers. But this can only hold back so much of the real experiences of Drobo users: it spills into other forums and other websites accessed by hundreds of thousands of people, like my own.

    When a product is marketed in part on its ability to protect a users’ data, public perception becomes a big part of its future success. If the device is viewed as unreliable and dangerous, it won’t matter what new products the company brings to the market or how fast they’re able to do so. First impressions matter; consumer confidence isn’t something that can be regained easily.

    While small companies are good at focusing on one particular thing, at least in the example I have given of one of your portfolio companies, they are ill equipped at dealing with all the other aspects of running a successful, respected business.

    Comment by Bradley Spengler — January 30, 2009 @ 7:34 pm

  4. Good small teams “know the problem they are solving intimately well” and also know that they can’t solve all of problems when they grow. But if they can keep that sense of urgency and intimacy, they’ll probably be less apt to forget how to be nimble and resourceful.

    On the point of overized management – I’d also add that well funded companies attract well paid executives who will look to meet their own needs first over the company’s.

    Comment by Ravi Sohal — January 31, 2009 @ 8:59 am

  5. […] far from true, but it’s fun to see it articulated as well as this aptly titled piece called Smaller Is Better, on the Five Years Too Late blog. Product development is a fundamentally creative endeavor that […]

    Pingback by Two great articles that show that smaller can be better than bigger ¦ Online Media Cultist — February 1, 2009 @ 3:10 am

  6. Will,

    Enjoyed reading the blog, good insights! Fully agree that especially in the early stages of the company a small team is the way to go – this was your counsel to us also. We’re experiencing this in our company everyday… with just the two founders we are able to do a lot of innovation, can dare to really push the envelope, validate with the customers/analysts and perform any realignment very rapidly – something that would be much harder in a bigger setup. However, a small downside is that a lot of the grunt work that is essential for building a complete product also falls on the core team. As we are planning our first team expansion we’re planning to augment the team along two dimensions: a small, core group focused on continuing innovation complemented with an offshore team that can perform some of the “commodity”, but really important items.

    Puneesh

    Comment by Puneesh Chaudhry — February 1, 2009 @ 11:17 pm

  7. I did not read this blog entry, but feel like replying anyways.

    Comment by George Glass — February 3, 2009 @ 9:20 pm

  8. Will,
    Base on your thought and current market condition, does it make more sense that RRE changes its strategy to become a micro-cap venture fund, meaning investing $500K sized amounts at the earliest stage?

    Comment by DingDang — February 27, 2009 @ 3:22 pm


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