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Two Thought Experiments for Startups

May 13th, 2010 | business, design, economics

I’ve been meditating on these two ideas, and they resonate for me. See what you think of them.

The Building

Imagine taking the roof off of your building and shaking out all of the people inside.

Now, rearrange the people into an optimal value-producing configuration.

I would bet that you could find a handful of combinations that unlock $1 billion in value; I’d bet you could find a few that unlock $10+ million in value; and I’d bet that 50% of the available combinations would unlock more value than the existing configuration.

What are the barriers that keep us from unlocking maximum value in our workforce? Walls, lack of connections, non-optimal application of resources, and addiction to personal cash-flow spring to mind.

Why do we perpetuate these non-optimal configurations of resources? What are you doing to unlock the potential in your building and in your broader community?

Keep the Same Team?

The more exposure I have to the world of startup investing (and to startups themselves) the more convinced I am that team is everything. At first I was more apt to evaluate a startup by its idea and its market metrics. But I’ve come to believe that all bets are bets on people.

In support of this strategy, I’ve started to look for heuristics that indicate that a particular team is worth betting on. And one question I am asking founders is this: If you do secure funding, would you keep the same people or would you hire new team members?

The answer can be revealing. If they indicate that they will keep the same team members, it’s worth asking why. And understanding the why behind the why. If there are good reasons why the team is well-cast, then this is likely a bankable team. Good reasons include expertise and real dedication. Bad reasons may include “knew them at my last job,” “he built it under contract,” or “found him at a meetup.”

There’s no hard and fast rule here, but the key thing to remember is that money changes everything. But if it changes too much of your team make-up, it’s probably not a bankable configuration to begin with.

How are you rearranging the world around you to produce optimal, bankable teams? To me, this is the essence of entrepreneurship. What do you think?

  • http://twitter.com/buddybeers Buddy Beers

    Good stuff dave!

  • jcutonilli

    The essence of entrepreneurship is learning. It is not about people , its about how quickly a company can figure out what they need to do and how to go about doing it in a way that can be sold in the marketplace. Eric Ries and his lean startup methodology expound on this idea.

    Compare the failure rates between VC backed companies, small business, and incubated companies. VC backed companies have failure rates in the 80-90% range, typical small business has failure rates in the 50% range, while incubated companies have failure rates in the 20% range. I would guess that the VC backed companies will most likely be backed by the best teams, yet they have the highest failure rates.

    I believe the failure rates can be best explained by the amount of learning that occurs. The VC backed companies get a lot of money but very little time to learn due to the insistence on fast growth. Incubated companies get coaching, which allows them to learn. Small business doesn't get the coaching, but has more time to learn.

    I have no doubt that the best teams minimize the amount of learning that is needed and that the better the team the faster the learning takes place. However, all companies need to learn certain things no matter how good the team is and if they are unwilling/unable to learn, that team/company will fail no matter how good the team.

    John

  • K in DC

    Part of your post reminds me of a book called The Origin of Wealth by Eric Beinhocker.

    The second part of the book proposes that there is a vast design space for all possible businesses, and that “business plans” are like the genetic code for a business. Some businesses will thrive and grow, others will fail and die.

    The value of a formal business plan is much debated, but Beinhocker's proposal could still be interesting to look at.

    I am not all the way through the book but thought I would mention the parallel.
    http://www.amazon.com/Origin-Wealth-Evolution-C…

  • gregrittler

    Dave,

    Spot on as usual. I've been a part of a number of startups as an owner/coach or as a player and the team is the key fundamental. Not that all the players that take it through startup are best for it once it is stabilized, oftentimes the startup players are better going to a new venture and turning the startup over to others that can take it further. But the chemistry, competence, and character of the participants starting the business are key. For me second to that is a clear path (even if it is a flexible path) to getting the business cash positive.

    I LOVE the shake up the building example. My first CFO was a guy named Bob Lambrix from fortune 100 Baxter Healthcare. He always said “no one wakes up and wants to come to work to cause problems, everyone wants to succeed and contribute, but there are a lot of obstacles to that”. I think if we could stop putting people into boxes we would unleash more of our creative potential that will move all of us more toward success.

    Thanks for the always generous thoughts.

    Greg

  • http://twitter.com/davetroy Dave Troy

    I think we're actually saying the same thing here, John.

    A good team learns, and learns fast. A bad team can't learn.

    Some people are capable of that kind of quick learning, which takes sharp people and observation skills, and strong drive. A team of those kinds of people are what I'd consider to be a “good team.”

    Similarly, people who learn slowly and don't pay attention to the world around them are a nightmare in an entrepreneurial context.

    So when I say “good team” it's not about paper qualifications. It's about whether they have that ability to learn quickly; one way to know whether they possess that skill is to look at their record of past achievement.

    If they have “done it before,” it makes it more likely that they can “do it again,” but only if that prior experience was truly based on fast, iterative learning and repeated leverage of assets and situation. If it was just a lucky break the first time around, that tells you very little.