Former Yelp COO explains how to survive ‘the valley of death’ at a startup
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I recently spoke with a group of CEOs whose companies had grown past 50 employees, but hadn’t yet grown to 100.
This growth phase is tricky — a company becomes too big to behave like a start-up where everyone wears 10 hats and reports to the CEO — but can’t yet afford the kinds of specialization and systems that come with a team of 100+.
This phase is sometimes referred to as “the valley of death,” as many companies either stall or sell the business before growing past the other side.
While every journey is different, there are some common pitfalls. For those leaders who aspire to build a well-functioning team for the long term, here are four rules of thumb that might save you time and heartache:
1. Invest in full-time managers, each with at least six direct reports.
The natural tendency at this stage is to promote strong individual contributors to “player/coach” roles, meaning they do their day job while also managing teammates. This saves money in the short term and provides an easy reward for strong players. The problem is that these semi-managers don’t get enough at-bats to get good at anything (e.g., hiring one person per year). This also leads to “I formations” on your org chart, where each manager has only one or two direct reports. This results in a lousy working experience for your typical employee — she relies on an inexperienced semi-manager for support, and has few or no peers.
The solution is to bite the bullet — promote or hire promising leaders into real manager roles with 6-12 direct reports each — then support them in becoming great at it. This can feel expensive and risky in the moment, but it means your typical employee will be more productive and stay with you longer.
2. Accept that 1/3 of senior hires won’t take; be prepared to hire and fire quickly.
A company’s first few outside executives are critical, so we tend to take months and dozens of interviews to make each offer. Nonetheless, we’re often surprised (for good and bad) after the new hire comes aboard.
Nobody bats 1.000 with executive hiring. Some new execs work out better than their references and resume let on; others will have perfect pedigrees and just don’t thrive in your company. Personally, I’ve found that about 2/3 of my exec hires go as hoped. I’ve heard other company numbers as low as 55% and as high as 80%.
If you accept that hiring execs is a stats game like anything else, you’ll make those hiring decisions more quickly (though certainly don’t be cavalier) — and be ready to switch gears after a couple months if the new hire isn’t taking off as hoped. This is in everyone’s interest, and it’s much more practical than planning for perfection.
3. Forget the bonus program; keep compensation plans simple.
Conventional wisdom holds that we should “pay for performance,” so many companies introduce an individual bonus program around this stage. One common version grades each employee on quarterly goals and then pays a bonus on say 20% of compensation. We did this at Yelp too. A year later we concluded that the program was a bust. Negotiating the grades took tons of time. Employees were demotivated by any grade less than 100%. And we were only marginally “paying for performance,” as the difference between excellence and mediocrity was only 2-3% of comp.
So we cut the program and raised salaries to include the bonus pool… and we didn’t lose anything besides the headaches. I’ve since seen several other companies ditch their bonus programs with similar results.
Two caveats: First, this does not mean ignoring performance management; you still need to set goals and hold people accountable; second, commission for salespeople is different and almost always important. Don’t cut that.
4. Only 50% of staff will hear what you say; over-invest in internal communication.
With a team of 10 or 20, everyone sits within earshot of the CEO, so they usually know everything that happens. As companies approach the 50-person threshold, it’s common to start hearing complaints from employees who feel out of the loop.
If you haven’t already invested in proactive communication, now’s the time to start. Host a weekly all-hands meeting, establish new hire training, answer anonymous Q&A, and send regular written or video updates. Also accept the need to repeat yourself: Beyond this size, only about 50% of people digest any particular message… so if something is important, share it a few different ways to ensure it gets through.
Any company crossing the 50-employee mark has done something right… you’ve built a business that requires a sizeable staff. Congratulations. Now the next part of the fun begins.
Geoff Donaker manages Burst Capital, through which he invests in and advises tech start-ups. He is also a board member and former COO of Yelp.
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