One of the top reasons startups fail? There’s no market need for what they’re building. And unfortunately, many failed companies hire lots of employees before they even realise they’ll never make money.
These companies forget that business is how to get the maximum results with limited resources. It is expensive and foolish to hire a team to test an idea that might always be just that: an idea.
That’s why potential profit — defined as the capacity for a company to make money in the future — should grow faster than the number of employees you are hiring. Always. Every idea should be tested by the existing team and only trigger an increase in headcount if it's successful.
How practically to align profit and hiring
Succeeding as a startup is about scaling rather than growing. Scaling comes in when revenue increases without a substantial increase in resources.
Meanwhile, your potential profit relies on many factors, including costs and risks associated with product production and sales and, of course, a reasonable estimate for demand of that product.
While costs and risks may be calculated more simply, a reasonable estimate of demand can be approached in different ways. Take SaaS as an example; your team can develop a prototype, test it on a small audience, gather direct feedback, see engagement or use other marketing metrics. Sometimes it will be enough to test the key message of the whole idea, using social media to communicate and test it directly with your followers.
Startup founders can be some of the most optimistic people in the world, but it seems to me that they would be better served by being realists
At BetterMe, which is a health and wellness startup focused on health coaching and mental health, the analytics team gather the most data they can — that could include the number of new app downloads per period, the number of people who used a feature, the number of purchases and the number of refund requests. Then together with the core team, we decide on the idea’s future. In most situations, what we should do next is straightforward — scale or stop. Only when we choose to scale do we start hiring.
Protect yourself from the downside
Aligning your profit and hiring will insulate you from the downside when the tough times come.
In 2017, we decided to launch a bunch of new meditations in a VR format. Back then, the technology was at its peak, so I thought this might have drawn more attention to meditations. Together with the core team, we developed a prototype; invested $30K in research, feature development and promotion; prepared meditations; released them in the app, and… nothing happened. Only 0.5% of our users tried the feature. We were disappointed, but we gained an essential experience without needing to lay anyone off. The team still felt motivated, so shortly after, we came up with another brilliant idea that worked.
How (and how not) to run a startup.
Startups often let it go to their head when they see some success. They think it will always be happy days and blue skies. It’s this kind of excessive optimism and the wrong hiring processes — hiring before there’s actually proven demand for a product — that are among the reasons for the massive layoffs we’ve seen over the past year in tech. Understanding this is particularly important heading into 2023, when many younger founders who’ve lived through a 10-year bull market with plenty of VC cash being deployed won’t have experienced the hardship required to survive during tougher economic times.
Aligning your profit and hiring will insulate you from the downside when the tough times come
Layoffs are very damaging to the well-being of the team and it’s not easy to build up morale after you’ve had to let some team members go. My core team has been working with me for five years; they never change, and I develop all new ideas with them. They suggest new products and services, and only once they’ve developed a minimum viable product (MVP) and proven there’s demand do we build the team and scale.
That makes us stronger when there is a market downturn or any other crisis, such as the war in Ukraine, because we are not overstretched — even when it might be tempting to be so.
Startup CEOs must be realists — not optimists
The discipline to keep profit and hiring aligned requires the right attitude from the CEO. Startup founders can be some of the most optimistic people in the world, but it seems to me that they would be better served by being realists.
In that way they can protect their business and their team when the going gets tough, but also build a truly lasting business. As the Ukrainian folk proverb goes: hope for the best, prepare for the worst.