Flatter, deeper, faster, stronger
Last week, we looked at the 180 startups I met in the first half of 2024 to see whether it helps or hurts your growth to hire a VP of Sales and a VP of People by the time you have $1M in annual revenue. This week, we're going to look at the same companies to figure out how many managers a startup needs if it wants to grow.
- How big should teams be?
- Do flatter structures perform better?
- When should you hire an outside COO?
This is Part 2 in a 4-part series. You can sign up to get each weekly installment if you're not already subscribed to nerd processor. Here we go!
Reminder: Positive and negative growth signals
6 or 12 months later, I don't know for sure how every single company I met in the first half of 2024 is finishing the year in terms of revenue. However, there are some events that are reasonable proxies for a company's positive or negative growth, and I used these events to model outcomes for these companies. You can see all the signals I counted as positive or negative in last week's series kickoff.
If you do one thing right, make it team size
For each of the companies in my data set, I looked at how many people had manager roles compared to the company's total headcount. I included exec roles, line manager roles, and everything in between. I snapped the team data when I first met the founders, and then I looked at the company's growth signals 6-12 months later. In particular, I wanted to see whether teams that are dense with managers perform better or worse.
Data note: I discarded manager titles that are typically not people managers, like Marketing Manager and Account Manager. This is an imperfect proxy, of course, since startup titles are not totally consistent. But having hand-checked in detail for dozens of companies, I'm confident the data is directionally correct. I also focused this analysis on teams that had at least 10 people when we first met.
The findings are striking. The data reveals a clear sweet spot: The companies with the most positive growth signals have about 5 employees per manager.
71% of the companies with team sizes ranging from 4-6 people showed positive growth signals, compared with 43% of companies with team sizes of 9+ and just 29% of companies with team sizes of 1-2.
The distribution looks like a lopsided bell curve. Too few managers, and you don't perform well. But having too many managers is even worse. If you've ever looked at an org structure where it's the norm for leaders to manage just 1-2 people and thought, "This can't be the best way to operate," you're absolutely right.
Last week, we saw that companies that hire a VP of People by the time they have $1M in annual revenue show more positive growth signals 6-12 months later. This data may begin to suggest why: companies with strong People leadership are more likely to have principles about management competency and team size.
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COOs: Not too early, but not too late either
Many early-stage COOs are founders. However, I was interested in the cases where a company chooses to hire an early COO from outside the founding team. Not every CEO does this; I never did! But sometimes founders that are less operationally minded will make this choice.
Since the decision to hire an outside COO is polarizing, I wanted to see whether companies that did so had more positive growth signals 6-12 months later than those that did not. I found two interesting insights.
First, if the company is really early-stage, hiring an outside COO is a strong predictor of negative growth signals. More than half the early-stage companies (less than $1M in annual revenue) with an outside COO showed negative growth signals.
Last week, we saw that hiring a VP of Sales too soon predicts negative growth signals. This insight is similar. Trying to scale operations before you've locked in to product-market fit is a recipe for failure.
On the other hand, when companies have passed $5M in annual revenue, hiring an outside COO predicts positive growth signals. And the higher the annual revenue, the stronger the positive growth signal.
For companies between $1M and $5M in revenue, there's no clear insight in this data. This suggests that, in general, a true transition point happens in between these revenue stages.
Next up: Do more diverse founding teams perform better?
I also took a look at founder demographics to figure out whether there was any relationship between demographic and early startup growth signals. We're going to dive into that next week.
Thanks for reading! If you like this kind of insight, check out the founder coaching and advisory services I offer. (And if you want proven activities that build high-performing teams regardless of company stage, here are three of my favorites.)
Kieran
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