Stake Ventures

The Bureaucracy

Obviously a strong fearless leader has a strong hierarchy of civil servants to make sure his vision and wise thoughts are carried out. In a dictatorship this is the bureaucracy. In a large company these are the layers of middle management and non core infrastructure such as HR, accounting, fancy staff restaurants and security.

Any good dictator has a strong defence. Traditionally companies have handled defence through corporate counsel and security staff.

Nowadays IT is an important part of this. Ensuring that outsiders can’t breach the electronic borders known as the firewall.

Unfortunately it is also very common that these same staff are spending lots of resource making sure people inside the firewall aren’t accessing things out side the network that don’t follow the vision of the visionary leader. After all he does know best and doesn’t want you to harm yourself by that dangerous foreign land called facebook.

North Korea has very strict limits on the amount of visitors (and what kind of visitors can enter the country). God help the poor soul who actually might want to move there. Visionary leaders normally have parts of their bureaucracy known as Department of Immigration/Homeland Security/Control of Foreigners enforce strict limits on this.

The visionary leaders in large companies normally have similar departments although they are known as Human Resources. These often have strict application procedures and the power to deport citizen’s who erroneously aren’t following the vision of the leader.

Planned economies don’t scale

I’m sure we can find and laugh at many such similarities. However where the real and worst similarity is is the fact that no planned economy has ever worked outside of various small communities with a limited scope.

Tribal societies can work quite well with a chief. Most tribal societies are pretty small and everyone know each other, you aren’t going to fuck over the other people in the village as you’ve known them all your life.

Furthermore there tend to be very little diversity of activities within the community. As a leader you can probably grasp when it’s time to plant the rice or go hunting. No need to understand thousands of different separate industries and activities.

When you start introducing more than a small group of economic activities it is pretty much impossible for a leader or even a council such as a Polit Bureau or a Board of Directors to have sufficient insight and wide enough vision to manage it successfully.

The solution utilized by Kim Jong Il and most large corporations it to delegate the planning through the hierarchy. The only problem here is that the business model of people within the bureaucracy is never what ever the business model of the country/company is. Rather it is to move up the hierarchy. It should be noted that I define the bureaucracy as the layers between the visionary leader and the productive citizens/employees.

As a rule of thumb you could say that if there is corporate politics in your country/company you are screwed. Politics happen when unproductive layers (battling middle managers) or slices of the company (like IT, HR, Legal) need to prove their worth and protect their job.

Hack’s for scaling without Kim Jong-Il

For a company to be able to smart and agile you need to have it small enough that either the visionary leader quite literally can keep track of and understand all issues (such as which javascript library to use or pros/cons between say Engineyard and Amazon EC2) or have direct constant access to and respect for those who do.

Now you may be under pressure to grow from investors, this is fine and to be understood. Growth is great and should definitely be encouraged, however growth should be managed and controlled. This is the real job of the visionary leader. For example I can’t stress enough how important it is to keep focus on your business and not spreading into unrelated areas. Can you say Yahoo?

Other important thing for managing growth. Outsource every god damn thing that isn’t directly focused on your core business. Even if it is cheaper to have your inhouse HR, CFO, IT department and wacky staff restaurant outsource it.

Having these non productive departments lead to politics. It is difficult to avoid though as these become team members. While it may be fun being visionary about the wonders of token ring network layouts and the productivity enhancing features of tapas day, the vision should be on the business and the productive team members.

So wait a minute, how do you explain China/Google?

While both are definitely large plan economies they have been successful at creating a creative free enterprise culture within. China by copying Hong Kong into a growing number of enterprise zones, Google by using 20% time.

I think 20% time is probably by far the most important innovation keeping Google afloat with new product development. It’s kind of like telling all your employees that for one day a week they are their own visionary leader.

This way Google have avoided the trap of most large plan economies. “We need to be in the portal/mail/social networking/video space” or Mao’s catastrophic Great leap forward.

Of course Google still has to centrally plan which of the maybe 100 internal social network projects they want to push, but they are able pick one that is already under development and under the leadership of a visionary guy/gal. But picking a well designed visionary project is a lot less risky than designing one by central committee.

Another important thing is openness. China was one of the most closed societies in the world and in some areas they still are. However China learnt that to utilize their number one resource (their vast population) they needed to focus on the globalizing world. As the world globalizes and the world wide economies grow China is their to sell them clothes, shoes and computers.

China’s manufacturing infrastructure has become the base for the unprecedented global economic growth in the past 20 years and the foundation for startups in just about every country in the world (except maybe North Korea).

Google have followed essentially the same approach as China. They realized that their strength was in their vast server capacity they developed for their core search business. It is therefore in Google’s best interest to push the open web and create infrastructure that others can build on. AdSense, OpenSocial and AppEngine are all examples of this.

Of course some countries/companies set up Economic Free Zones in an attempt to copy the more successful countries/companies. An example was Digital’s AltaVista division (where I used to work) and Yahoo’s Brickhouse. However if they aren’t respected by the mother ship and corporate politics cause them to be ignored, they can’t work in the long run.

I should also say that rumors are from googlers that Google may be heading down the path of Yahoo into corporate political hell. It definitely would take a mighty visionary leader to avoid this happening in such a large company, thankfully they have 2. But then so did Yahoo.

Don’t get pushed down the slippery slope

As a startup today you are hopefully on top of your innovative product/service. If you don’t run a tight whip with regards to this focus it is very easy fall into the traps that will send you straight to North Korea.

Many entrepreneurs for example are very young and have no experience in the day to day running of businesses. They therefore often take advise from people older than themselves. You probably wouldn’t take programming advise from a Cobol programmer in building your hot Rails app, but people follow dated advise from the 60s about their business.

The slippery slope goes something like:

1. Get an office
2. Buy and configure your own servers
3. Hire an office manager
4. Hire an HR person
5. Hire a finance person
6. Hire an IT person as the HR and finance person can’t install Office and the programmers are too busy

By now whether you believe me or not have 5 different fiefdoms to require vision and resources. As the company grows these fiefdoms become empires to be protected at all cost.

The server guy has all the reasons in the world why you can’t move to EC2 or AppEngine. So you won’t get that flexibility. The developer’s can’t pick a new language or database as these don’t follow our standards.

The HR department starts implementing policies that she brought with her from her old job.

In general once you have these fiefdoms installed it is very hard for an inexperienced visionary leader to control and manage them.

The fact is that most startups go through this process, because that’s what all the other startups do, without really questioning the need for it.

All of the above points can and should be outsourced relatively cheaply. Let the HR people innovate and be visionary themselves in their own HR startup (the movie industry uses these almost exclusively eg IndiePayroll ).

EngineYard or Amazon provide very good and very different outsourced hosting.

While you can outsource IT. I think that everyone who works in a tech startup should be able to manage their own computer (or at least a MacBook).

I know people have strong opinions about offices. However there are other options besides the obvious such as working out of the visionary leaders SOMA loft or everyone working from home. Most cities now have great CoWorking spaces, coffee shops and even Regus is a good yet expensive alternative.

VC’s and other Grown ups

VC’s and other advisors (such as Mom and Dad) can also be particularly bad at pushing you down the way it’s always been done. They will often push you down the above steps, because thats what you need to scale. Sometimes they will be very insistent on this and you won’t really have a choice. You might end up thinking, they know better than me or this isn’t a battle I’m willing to fight.

There are many risks involved in taking funding, but one of the worst is loosing control. Most people imagine this loss of control as being booted from the CEO spot, but you are way more likely to loose control to a VC financed bureaucracy.

It is important if you have a philosophy on this that you make sure the VC’s understand that being lean and agile is an important part of your strategy and that this isn’t negotiable.

Finding the right size

Popular perception holds that companies must always be growing or they’re dying. There’s either up or down, win or lose, success or failure. I think that’s a harmful dichotomy that leads to the death of perfectly viable companies in their quest for constant growth. DHH

Startups are all about growth. However there may come a time, when you are so successful at what you do that the only way to grow is sideways into other areas. No matter how tempting this is and how good it appears that Google are at it, I think it is a mistake.

Better yet would be to grow by investing in other startups or even encouraging your best employees to go on “80% time” in return for a 20% stake of his dream. This would let you essentially scale into new areas without removing the focus from your business.

Find out more

37Signals seems to follow this philosophy. David gave a talk at Startup Camp where he talked about several strategies that they have taken in not becoming North Korea.

A great slightly academic discussion about the problems with central planning within companies can be found at the EconTalk Podcast: Munger on the Nature of the Firm

So why do people use checks?

• Is there any other way to pay?
• Habit
• Intentional delays – Hopefully by the time he receives the check, the check I just received will have cleared.
• Float – earn interest on the money until the victim/supplier is able to clear it.
• My accountant told me to do so
• There is not an easy way to send payments electronically in the US
• It is the cheapest option

Alternatives?

PayPal and ACH transfers are the best alternative for US businesses. For international transactions PayPal is good if it’s available in the recipients country, otherwise SWIFT transfers are available all over the world. If you are worried about cost, ask the payee if he’d be willing to go 50/50.

ACH is only good within the US but is a fairly cheap option. ACH is the network that is normally used for payroll, but it is actually also the backend network used for clearing of checks, so it really is very economical. The downside is that there may be a day or two’s clearing of funds. Ask your bank how to do it. I believe most banks should be able to offer it. My bank Wells Fargo sent me a RSA Secure ID to be able to do ACH payment, which they call DirectPay. To send someone money this way all you need is the name, ABA number and account number of the recipients bank account.

PayPal has been around now for nearly 10 years and is a great option. It’s easy, it’s quick, it’s safe, it’s the Web 2.0 of money. Use it. The downside that the recipient may have to pay up to 2.9% transaction cost. I know personally I’ll happily absorb that cost for the convenience of not having to waste an hour going to the bank. A non obvious benefit with PayPal is that if you can use your credit card and receive air miles, that potentially could add up.

Habit

Not an excuse, get over it.

Intentional delays

First of all the intentional delays might be fine for the struggling cash strapped startup juggling large faceless suppliers such as the phone company etc. However as a startup your core suppliers are likely to be various kinds of human resources such as programmers and designers who you work closely with. I think this is highly disrespectful. Freelancers are just as likely to be cash strapped as you are. The way to deal with this is to be honest with your suppliers.

While we all would like to be paid on time, we all live and understand the realities of being a startup. Give us a heads up with an estimated time of payment and we are probably happier than hearing the “check is in the mail” defense for the 10th time.

Float

This is also an intentional delay and a really stupid one for most startups. Unless you are operating at the scale of a business like PayPal, the few dollars you make in extra interest is really not worth pissing off your suppliers.

My account told me to write checks

I’ve heard this over the years. Checks makes the accountants life easier. Seriously. That is just a load of cr*p. You already handle book keeping and receipts for all sorts of electronic transfers. Besides providing email receipts, PayPal and Banks have this innovative feature called a statement. It has all the information you or your account needs to match transactions with invoices.

As small businesses we often take everything our accountants and lawyers say as gospel, remember they are people just like us. They are however way more traditional thinking and less likely to question status quo, than your average founder of a revolutionary social web 2.0 startup. Question the advise they give you.

There is not an easy way to send payments electronically in the US

See the section on alternatives. There are 2 very good options that you probably already use for other things.

But checks are cheap

Firstly ACH payments are pretty cheap. I already mentioned that many suppliers are happy to absorb the extra transaction cost of paypal.

However checks are not cheap. Ok it might take you a few minutes to write one out and put it in an envelope. However think about the recipient. It costs me about an hours worth of lost earnings to go to my bank and deposit a check. That is a pretty heavy transaction cost for me.

Burn your check book!!

Just say no to the check option. There really is no excuse for you to pay people (yes suppliers are people too) by check. If you have been annoyed at some point having to go deposit a check, stop the cycle and don’t do it for your own suppliers. Almost every other aspect of our life is handled electronically and you as a visionary entrepreneur should know better.