Wise Startup Blog

While walking to work today, in the rain, due to Tropical Depression Fay, I had a tiny umbrella to shield me from the horiztonal rain, and needless to say, it wasn’t very effective. This made me think about how owning umbrella works. When you’re lugging around an umbrella, you always wish it was smaller (at least I do), and whenever you’re actually using the umbrella, you wish it was bigger.

This phenomenon applies to a number of things: with life insurance, you hate paying huge premiums until …it pays off. With lawyers, you hate paying ridiculously high rates until the day your legal team either saves your ass or rakes in a ton of cash for you. And let’s not forget startups.

Startups Come in All Sizes

Startups are better than larger firms in that they are more nimble, more adaptable to changing market conditions. For big companies, once they’ve invested $2 billion into a project, it’s got to be a pretty big brick wall infront of you for you not to go through with the investment. For startups, there is no real barrier when it comes to investments. Startups have such a low burn-rate and investment rate compared to large corporations that it’s a no-brainer to adapt to changing times in the market. Change or Die.

There are, however, shades of grey when it comes to startups, and their relative size. If you’re a team of 5 developers, you have a relatively burn rate, can work on a couple of projects at one time, but don’t have the full ability to drop everything and switch to a new focus. If you have a team of 25, you have more ability to work on multiple projects, to adapt to market changes, but you are hampered by an increased burn-rate, and possibility a diffusion of responsibility and a loss of efficiency. Once your startup grows to 600 employees, you can work on a myriad of projects, but suddenly, your burn-rate is so high that your ability to completely drop one project and pick up another carries significantly more risk.

Go Big or Go Home?

Now back to our umbrella analogy… When it comes to how big your startup should be, should be determined by market forces as well. When do you plan to start generating revenue for your startup? Are you going to have to spend 1-2 years developing the technology, and by hiring more people it will only speed up that process? Do you plan to generate revenue on day 1?

Depending on your answers, you’re either going to want to accrue a relatively larger workforce (big umbrella), or a smaller workforce (little umbrella). Based on these decisions, you have to be prepared for the consequences.

The Big Startup Umbrella

If you’re carrying around this big umbrella, and are constantly being told by friends (investors) that your umbrella is cumbersome, annoying, and expensive, you better have an answer. You should be able to confidently tell them, “when I open up this umbrella, and it starts raining, we’re going to invite the whole neighborhood to stand under it.” It’s easy to answer this way, but in reality you may be in one of these circumstances:

• “I have this umbrella because I heard it’s going to rain really bad next year”
• “This umbrella will definitely protect us from the rain, but we may have plenty of room underneath it.”
• “Who cares if it rains? Look how pretty it is, and we installed a GPS to boot!”
• “Rain is so 1.0, this umbrella is for version 3.0″

The Small Startup Umbrella

If you have a smaller umbrella, your expectations should be a lot lower. You have this umbrella, which is convenient, can keep your friends covered from the rain, but it can’t do much for the neighbors. If you hear it’s going to start hailing, your umbrella won’t be able to keep you protected, and the neighbor may be attracting everyone over to his house because his umbrella is so much better (heck, it has GPS).

Either way, whether you have a smaller umbrella or a larger umbrella, you need to set your expectations around these constraints. You can’t save the world with your small umbrella, and you may be making a very costly, ambitious mistake with your big umbrella. At the end of the day, definitely ensure that your investors, employees, and customers are in on this strategic decision, and know what they’re getting into. Is this going to be a small umbrella startup or a big umbrella startup.

If you set the wrong expectations, expect yourself to be in a world of hurt, standing outside, in Hurricane Fay, waiting for the next bus, because you most likely won’t get another chance.

Share your experience with startups you’ve worked with that were either too small, too big, or just right.