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Tech Industry

The end of the bloated start-up

Venture capitalist Robert von Goeben tracks the rise and fall of a new type of corporate pork. The upshot: a return to smaller staffs, leaner operations, higher quality people, and more productivity.

When you think of a bloated bureaucracy, what do you think of? The large corporate behemoth? The "everyone gets an assistant" entertainment company? The Brazil-style governmental agency?

While the idea of corporate heft has always been attributed to old-style organizations, the last few years have seen the emergence of a new type of corporate pork: the bloated start-up. But like a lot of other things from the late '90s, the over-staffed technology start-up has gone the way of Kozmo.com, and nascent technology companies are--once again--having to do more with less bodies.

In only a year, the technology labor market has gone from famine to feast. It used to be that technology companies were starved for good talent, but now it's the bodies doing the hunting. It's hard to miss the harsh spotlight put on the massive layoffs at companies like Cisco Systems, Lucent Technologies and Compaq Computer, among others. But what's happening at the start-up level where companies, by the very nature of their youth, were supposed to be running lean? What can we learn about labor trends from the current hiring practices of raw start-ups?

At a start-up company board meeting, there is always the point where the projector lights up the conference room with the obligatory organizational chart. We've all seen these a million times, the ubiquitous set of blocks and lines that lays out a company's body count. This part of the board meeting used to be a time sink. Because the labor market was tight, Internet-economy companies would turn on the recruiting spigot full blast, even from Day One.

A few, less well-managed companies, would manage this labor shortage by stockpiling bodies with a cavalier "we'll figure out where to put them when they're hired" attitude. A prevailing dot-com joke at the time was the "mirror nose" recruitment technique, which said that if a candidate could fog a mirror placed under their nose, they were hired. Hence, the bloated Internet start-up.

Reading off a new script
But at a recent board meeting for one of my post-millennium seed-funded companies, I was struck by how quickly we breezed though the organizational chart. The script went something like this:

CEO: And here's the org chart, not much has changed since last month.
VC: How is that new QA manager working out?
CEO: He seems OK, but it if doesn't pan out we have a bunch of backup candidates.
VC: How about the open sales and marketing positions?
CEO: We've got five interviews this week for the sales position, and I'd like to talk about holding off on the marketing slot for a couple of months.
VC: Fine, let's move on to fund raising...

Down here in the trenches, it's amazing how fast hiring is moving down the corporate list of imperatives; only office space is getting a shorter shrift. Of course, no one is suggesting that building a great team isn't important. But how many people does it really take to run an early stage company?

The answer: less than everyone thought it did. I think back to the pre-crash days, and many start-up org charts looked something like this:

CEO
CFO/controller
CTO/Founder/Product Visionary
VP Products, plus 2-3 product managers
VP Sales, plus 2-3 salespeople
VP Business Development, plus 2-3 BizDev directors
VP Marketing, plus 1-2 marketing directors
VP Engineering, plus 10-15 engineers (many of which were consultants or open positions)
Network Operations/IT (2-3 people)
QA: 3-4 people
Office manager and various admins (1-2 people)

Of course, these charts vary considerably depending on the type of company. But look closely at these numbers and you see how companies easily grew to 30 to 40 people, before they even had product or revenue. Marketing? Bloat. An IT staff? Bloat. Admins? Super-bloat!

Three factors are dramatically changing the dynamics of staffing in early stage tech companies. One is pretty obvious, but two are more subtle.

More bodies, less spending.
As everyone knows, the massive layoffs and closures in the tech sector have dumped a lot of bodies onto the street. The ones that didn't cash out on the Internet boom (read: most of them) are out looking for jobs. Along with this glut of candidates, most start-up companies are not spending like there's no tomorrow--because there is a tomorrow, and it will most likely be spent begging for money from VCs, who are looking to fund leaner operations.

More labor availability means higher caliber employees and more productivity.
Think about engineers and salespeople. In the dot-com era, top-notch help was hard to get, so the people you did hire weren't always top performers. Hence more turnover and a larger staff. Today, I see my companies getting a long way with just a few crack programmers, or just one killer salesperson.

It just doesn't take that many people to operate an early stage company.
The dirty secret of early stage technology companies is that they are well suited to running on a skeleton crew. Software companies can be especially lean because their main product is intellectual property. But even hardware or device companies are benefiting from outsource suppliers to thin their ranks.

Here's what a typical start-up organizational chart is looking like today:

CEO
VP or Director of Products
VP Sales, plus 1-3 salespeople
VP Engineering, plus 5 engineers
QA: 1-2 people
Office manager

Your mileage may vary depending on the company, but the trend is clear: Start-up bloat is out. The industry is back to smaller staffs, leaner operations, higher quality people, and more productivity. Let's thank the overzealous CEOs (and VCs) of the dot-com era for pushing the hiring pendulum so far that we've now forced back to sanity.