
Why successful startups stumble at 40 employees - rmason
https://thinkgrowth.org/why-successful-startups-stumble-at-40-employees-66312ac70fba
======
spyspy
It always astounds me that growing the number of employees is one of the key
metrics of "growth" startups looks for. As if an unprofitable company with 500
employees is somehow more prestigious than a profitable one with 50. Perhaps
it's pressure from VCs to chase market share over profits, founder ego, or
something else entirely, but it's always struck me as a troubling trend in the
startup world. I recall (several years ago) looking up how many employees
worked at Twitter and seeing it was over 900 and thinking, "What in god's name
are those 900 people doing all day?"

~~~
aaron-lebo
It was the same way with Digg. Hundreds of employees to do what exactly? In
hindsight, maybe not shocking it died. Reddit is doing the same, ~300
employees to run something that a team of 30 could (of course, not all are
engineers). It's crazy.

 _Reddit plans to expand to 300 employees by the end of the year from its
current 230. That 's already up from the 140 the company had at the beginning
of 2017.

Huffman declined to share revenue numbers, and the company is not profitable._

[https://www.bizjournals.com/bizwomen/news/latest-
news/2017/0...](https://www.bizjournals.com/bizwomen/news/latest-
news/2017/08/reddit-raises-200m-for-new-1-8b-valuation.html)

Don't know how accurate this is, but Twitter is at 3500 employees now, down
from 3900.

[https://www.statista.com/statistics/272140/employees-of-
twit...](https://www.statista.com/statistics/272140/employees-of-twitter/)

There's something fundamentally wrong with the way the industry builds
products.

~~~
ojbyrne
It's easy to say that from the outside, especially if you cherry pick
unsuccessful companies.

Google has 72k employees, Facebook has 17k. What exactly do _they_ all do?

~~~
mschuster91
> What exactly do _they_ all do?

Google and Facebook both have massive, globally spread datacenters. Staffing
them and ensuring they're built out, maintained and operated alone requires
loads of personnel.

Then you got the massive user count: Facebook with Instagram and Whatsapp has
likely over 2B users, and Google most likely the same order of magnitude.

All these users must be supported - both Google and FB do their best to
provide as low-quality support as they can get along with, but by law they're
bound to quickly react to copyright violation and child porn; in addition
Google has (via Google Apps for Enterprise, GCE, AdSense etc) a number of
projects with companies - and companies who pay your company generally expect
competent support.

Add in all the "low paying" jobs, if they're not already outsourced... like
cantinas, cleaning, facility management - and for FB, Google, Amazon and Apple
at least a strong architecture and legal team.

~~~
ojbyrne
I'm not actually disagreeing with you. My point was those same tasks had/have
to be done at Digg, Reddit, Twitter, etc.

~~~
mschuster91
Digg and Reddit, for starters, don't have hundreds of their own datacenters -
and about one or more orders of magnitude less users than the "giants".
Twitter seems to have operated a mixture of leased and owned DC space
([http://www.datacenterknowledge.com/archives/2011/09/19/twitt...](http://www.datacenterknowledge.com/archives/2011/09/19/twitter-
adding-more-data-center-space-again/)), but far, far less than FB/Google/AWS
do.

Digg and reddit are fairly niche, at least for advertisers - which means these
sites need far less ad salespeople and support staff; reddit also can get by
with having next to zero visible support staff by relying on community
moderators which cost them nothing.

------
depsypher
Can't say I found this article all that enlightening. Having been an employee
at several startups that have transitioned past the 30-40 headcount mark,
there does seem to be a breakdown at that stage. What is the cause, and how do
you deal with it?

This article doesn't really address the causes or offer any true solutions
though. Focus on culture? You need to do that from the start. Get new board
members? So your advice is to get new advisors? Okay, but what steps can you
actually implement to solve the problem?

In my view the real problem is that good management is difficult and not well
understood. Once your company grows to the point where a flat structure starts
to have problems, the usual shift is to a hierarchical structure; not only a
difficult transition, but also ends up trading your old problems for new ones.
I wish the startup world did a better job of tackling these issues.

~~~
sbierwagen
>Having been an employee at several startups that have transitioned past the
30-40 headcount mark, there does seem to be a breakdown at that stage. What is
the cause, and how do you deal with it?

[https://en.wikipedia.org/wiki/Dunbar%27s_number](https://en.wikipedia.org/wiki/Dunbar%27s_number)

40 is about the point where the CEO can't possibly manage everyone one-on-one,
and has to start delegating real management tasks.

~~~
evincarofautumn
Yup, in my experience, 40–50 is also about when a classroom changes from
“small class” to “lecture hall” or needs a TA, for similar reasons.

Plus the number of edges in a fully connected graph of relationships would
exceed 1000 at this point, so the graph starts to partition itself: employees
stop working directly with most of their colleagues and start dividing into
more isolated “tribes”. And this goes on to affect the structure of their
projects, e.g., software architecture[1].

[1]:
[https://en.wikipedia.org/wiki/Conway%27s_law](https://en.wikipedia.org/wiki/Conway%27s_law)

------
madaxe_again
I disagree with much of this, having taken my own business (ecommerce
platform) through this point and having mentored a few others through it.

Growing a business isn't about distinct phases. It's about a continuous,
iterative programme of holistic improvement, where you are always working _on_
the business, usually while working _in_ the business. For instance, we
followed a leapfrog model whereby we'd prioritise technical uplift (both
product and internal tooling) and then structural uplift (hires, methods,
practices, culture). When we were actively working on one we'd be planning
another - and we worked like this from day zero, when we were just two dudes.

It does differ between businesses and models. In the case of one business I
consulted with, we (me, two founders) put together SOPs, defined the hell out
of everything, hired like crazy (30+ in 3 months), and they got acquired for a
large sum six months on. Muggins got doodley-squat, as until acquisition they
were cash strapped, and afterwards the new owners wound it all up.

What didn't survive the transition in either case was me. I hate working in
process-driven tick-box-now orgs, which is why I started my own business in
the first place, so hit the ejector button on my own org last year - my
discomfort within the beast I grew manifested as a total deterioration of
physical and mental health. Turns out I'm great at building them, which is a
shame.

So. It's easy enough to avoid humps if you're always planning ahead, always
iterating, but the greater barrier is psychological - I guess few are willing
to do the hard things you have to do to keep it on plan - like firing friends,
"intensively monetising" customers, and generally playing a nerve-wracking
seat of your pants game for years on end - because the cost is ultimately
steep. Self hatred is like acid, and I honestly think most orgs fail because
founders find it hard to completely compromise their values for the good of
their business and employees.

~~~
ChuckMcM
Then you're takeaway should be that if you wrote a book about your experience
it would have solid sales :-).

I think you were fortunate to have this sort of mindset from the beginning and
I can tell you that it is not common. One of the 7 habits is to work on things
that are important but not urgent. This is what you do when you're working on
the next phase while executing on the current phase. I tell people it is like
watching yourself drive.

If you have the experience of teaching your kids to drive you might notice
that they are much more likely to hit things when they are looking where they
are driving, than they are when they are looking where they need to be.
Another example I've heard is sailors walking with a cup off coffee on a ship
that is moving with the waves. If the sailor watches the coffee to keep it
from spilling, the coffee goes out of control and spills, but if the sailor
looks to where they are going, the hand doesn't let the coffee spill.

The same is true in business where if you focus so hard on how you are solving
the current problem the next one hits you before you are ready for it. Whereas
if you're thinking about the next problem while executing against the current
one, then when the next one arrives you are already starting to execute
against it.

I'm serious about the book too. Its a very useful way of approaching running a
business and many others would benefit from your experience if you could put
it into book form.

------
godzillabrennus
As someone who has been through this. The 40-50 employee threshold for a
business requires competent people appointed to the management of departments.

There are people who start companies and either fund raise or drive revenue to
the point that they have the ability to hire that many people.

Unfortunately, when they don't have the skills to hire the right people then
the business tends to implode.

~~~
snarf21
I think that is the difference. Under 50, you are hiring people to execute and
the leader can still control everything. Above that you must hire managers to
control pieces of what you used to control. You must trust them to do the
right thing for the company. Most people who are successful at the 0-50 can't
let go of that control.

------
emagdnim2100
The Marine Corps teaches the "rule of three:" each leader should have at most
three direct reports.[0] In practice, leaders at the platoon level or higher
(~40 people total on the infantry side) also get a senior enlisted advisor who
serves as a trusted second-in-command but who isn't a direct report in the
same way as your subordinate unit leaders. Additional folks beyond those three
should report to one of the boss's subordinate leaders, not to the boss. The
structure repeats up and down the line, sometimes with small tweaks: three
rifle platoons to a company, three squads to a platoon, three fire teams to a
squad.

I always found this approach to be tremendously effective. If decentralized
command were applied diligently from a company's earliest days, I believe it
would sole a lot of the scaling issues organizations face. But it's difficult
for most startup founders to give up control.

[0] See, e.g.,
[https://www.inc.com/magazine/19980401/906.html](https://www.inc.com/magazine/19980401/906.html)

~~~
BatFastard
Makes for a very deep hierarchy. I personally prefer flatter companies.

~~~
JamesSwift
It doesn't create a deep hierarchy really, and scales well due to it being a
Log3 of the total employees.

Seems very reasonable to me.

------
nathan_f77
Fun fact: The author of this article (Steve Blank) founded Rocket Science
Games, where Elon Musk worked as an intern.

~~~
ggambetta
Plot twist: "Patrick the student" is actually Elon Musk.

------
timdellinger
I agree that there's a missing playbook for that phase of companies... it
would be great to see some collected wisdom on "these are the ways that
companies run into problems in this phase" and "this is how to prevent / deal
with those issues".

Startups often have a fun "screw the corporate rules, we're doing it our way!"
mentality that's perfect for the Search phase described by Steve Blank here.

During my time in a Fortune 500 company, I came to see the reasons for some of
the corporate rules and corporate culture... I saw the problems and potential
problems that the rules and processes are in place to deal with.

If you've never been in a large organization, it's a very different beast than
a small one... I imagine that it's tough psychologically to institute rules
and processes that you rebelled against in an earlier stage.

~~~
JBlue42
Excellent point. The company I worked (not a startup) had existed below 30
people for most of its multi-decade history. They started expanding rapidly
the past few years and I came onboard when they were at 60 people. That double
in the two years I was there. The higher-ups, who had started and run the
company for decades, were strictly against not wanting to "seem corporate" or
have too much organization / structure because it was "corporate". Yet, they
kept running into ways that the structure would self-organize or that things
would stagnant because they weren't being responsive to the large amount of
employees below them. They wanted everyone to participate in a vision but the
vision was basically "get bigger and don't be corporate" and rather muddied.
Everyone I spoke with that had been there more than 5+ years, and that would
be honest, had said the major changes in the company 'felt' like they came at
50 people, 70-80 people, and definitely after 100.

It was interesting for a while but a bit of a shitshow. All the leadership
felt they could run things they same way they always had instead of adjusting
to the new paradigm - which is rather 'corporate' in my book.

~~~
thwarted
_It was interesting for a while but a bit of a shitshow. All the leadership
felt they could run things they same way they always had instead of adjusting
to the new paradigm - which is rather 'corporate' in my book._

This is a great observation, and one that is frequently overlooked or
downplayed, that the true definition of "corporate" is not the existence of
process or procedure or anything specific, it is being static and not
adjusting to change. Thinking "we don't want rules and process because we want
to remain flexible" results in the shitshow, but it's those very processes
that enable predictablity in the operation of the organization which leads,
paradoxically to some, to freedom. The kind of freedom you really want is
freedom from having to think about and frequently deal with all the ("little")
things. To wit, if your plan is to hire 30 people for a new department, you
want solid HR, finance, and IT onboarding processes so you're not dealing with
those things in a bespoke way for each hire, so you can continue to work on
hiring the next person. If you don't have good customer service and post-sales
support in place, you're going to be constantly fielding issues from current
customers when all you want is the freedom to work on getting new customers.

~~~
JBlue42
Well said.

I always thought of it as giving a platform or framework so, as you said,
people didn't have to think about it. It's ready to go when a project is about
to launch, etc. I also wholeheartedly agree about that w/ the more human
processes (HR, onboarding, etc).

It was an interesting experience to learn from though my pushes for change and
resulting frustrations are probably what ultimately lead to being laid off.

------
fsloth
One way is to look at the organization as a random graph. Relations between
people - edges - describe business dependencies. If the growth has been
completely organic to that point, there are chunks of undocumented and
unnoticed connections. Unnoticed, until they break, I presume. The complexity
grows as a square of the number of people. With 40 people there are 40 x 39
random edges (1560). With 20 (20×19) the number is 380. With 10 (10 x 9) 90.
So, as back of the envelope estimate a company with 40 people is 17 times more
complex than a company with 10.

I'm just blowing hot air, but it seems to me people - engineers especially -
are not discussing dependency graphs in relation to this problem as much as
they could.

Also, root cause analysis suddenly looks like a much more powerfull tool to
discover the connections in the graph ( _if_ those hidden dependencies cause
major pathologies).

~~~
strictnein
This is actually what I thought the article was going to be about.

------
ZenoArrow
I'd suggest it has something to do with coordination.

When you have a small team, you can more easily arrange for that team to all
pull in the same direction. When you pass a certain threshold of employees
(I'm not going to suggest 40, the number is clearly going to vary in the real
world) a lot more effort is required to coordinate the work of employees. This
means more middle managers, more meetings, more email traffic, more office
politics as teams start to fragment, etc... All of these things can hamper
productivity if not handled correctly.

------
aristotle2
I've actually had to write an ebook (for content marketing purposes) on
growing a company and going from 3 to 9 to 30, and so on. The most interesting
thing is the Greiner's Growth Curve as well as Adizes Corporate Lifecycle.

I'll leave the direct link to the pdf here even though it's gated content, so
pls downvote.

[https://activecollab.com/downloads/GROWTH.pdf](https://activecollab.com/downloads/GROWTH.pdf)

------
wolco
It's different for each company. One founder told me that he couldn't manage
more than 7 or 8. At that point you can't be involved in every decision.

~~~
frandroid
Most managers can'd manage much more than 10 people, then you have to delegate
to other managers...

~~~
milesvp
This was definitely the wisdom I've heard historically. I suspect the number
may be slightly higher than it was 40 years ago due to digital communication,
but a lot of what I hear is that it's just really hard to deal with all the
personal, and interpersonal problems that crop up.

This also makes me think if you're lucky and have a low drama team, you can do
more than 10, but at the end of the day you're going to get a superlinear
increase in interpersonal drama the more people you manage so this number is
likely to remain small.

------
mbesto
50, 100, 150, 500 employees - are, in my experience, the breaking points for
many businesses. After 500, inertia generally takes over.

~~~
frandroid
I understand 100 is double 50, and where you go from "a few teams" to
"departments", but what's so different between 100 and 150?

~~~
jaggederest
Here's my rough understanding, from experience anyway:

50 is the level at which systems and processes start to become critical - you
can't just succeed accidentally through heroism, you have to deliberately set
out to learn from and solve problems or you're sunk.

100 is the level at which people can no longer self-organize and need explicit
constructs to manage organization. I.e. not just 'a pool of engineers who work
on the product', but a X team and a Y team and a Z team.

150 is the level at which every person can no longer know everyone on a
personal level at the company. You'll need some way to handle cooperation and
communication that's not "Talk to Bob", and all hands meetings can only happen
at best yearly.

500+ is the point at which things will generally become stabilized / ossified
enough that the ongoing structure of the company either works or it doesn't
and the difficulty of changing those things becomes exponentially higher.
Reorganization is a significant misnomer.

~~~
mbesto
Basically this.

------
wannabag
I like the high level CEO view of this problem since it's a good reminder that
the overall phase needs re-think. That said, what this article hints to in the
title and misses is that there are inherent problems for startups that are in
fact related to the number of employees.

Some commentators touched this subject as well and rightly so, when you reach
around 20-40 employees you start having problems that are organizational. If
not addressed properly these will cripple growing startups and in some cases
even prevent them from reaching the next stage.

I went through a couple of these failures myself and I can't stress it enough
when discussing problems related to growth; there is a point when you can no
longer communicate or work in the same way and you can't expect things to self
organize. It takes quite some reorg including some hard decisions to get to a
stable stage or in the best of case, transit smoothly but that takes someone
very well aware of all the pitfalls.

------
throwawayaway0
I was an early hire at a data protection startup which inexplicably began
behaving like a much larger and profitable company when product was still very
flawed and barely usable. ~$100M of funding and many years later, that company
has yet to become profitable and rather than shudder the doors, merged with a
competitor. All common stock rendered completely worthless in the process, not
that there was any hope left after all the dilution anyways.

What I saw was a whole lot of empire building. Things seem to snowball very
quickly once managers start getting hired and they're all aspiring for greater
head count.

------
s73ver_
I imagine it's because, at that point, you're running a real company, with
needs for marketing, sales, health insurance, company policies regarding leave
and all the other adult stuff that most people expect at a real company these
days. And generally, the person who started the company doesn't have the
skills/knowhow to handle all that (many were just line engineers or what have
you the year or two before). These things can obviously be learned and dealt
with, as evidenced by the fact that there are companies that continue after
the stumble.

~~~
convolvatron
also consider that while there is funding, everything is great by definition.
at least two places I worked at had to start showing results around then...it
wasn't anything about scaling, they just didn't have anything to show

------
kevinojt
As the VP engineering of a company in the Build process our CEO do most sales
thing and won’t hire capable people and fire incapable people. What should I
do?

------
pythonhulk
This article is a decent attempt at explaining this phenomenon. Most early
stage startups are co-founded by highly driven people, who work well even with
the absence of processes and structure. This ethic will never translate to all
your employees after a certain point. This is where process and structure come
in and often, it is too late before it can be successfully implemented.

------
erikb
I can accept that there are different levels of growth and at each of them
there can be trouble. But it's not just one level. You can just as well
stumble at 5 employees (I experienced that), at 17 employees (experienced
that) or at 80000 employees (experienced that; admittedly not a startup
though).

------
awjr
I think below 40, employees have multiple roles where you are expected to
think on your feet. It attracts a certain type of person. Above 40, you are a
cog in the machine. You really need to keep to your role and the company
succeeds because of the role you do.

------
stcredzero
How long does it take for the typical company to go from 20 to 40 employees?

------
Walkman
Because they are not successful? :D They keep being small for a reason.

------
posterboy
embedded questions in a headline should get the same sentencing as those
ending in a question mark. It is not hard to point out the answer in the
title. I won't try at it, thohgh, since I won't read the article (either way
or because of) Betteridge's law of headlines.

~~~
thwarted
"Why successful startups stumble at 40 employees" is a statement and an
answer, not a question. If it was a question, it would be "Why do successful
startups stumble at 40 employees?"

~~~
posterboy
Same difference.

