Headcount is Destiny

The best startup CEOs are master storytellers, weaving a vision of the future so compelling that investors and prospective employees fight for a seat on the rocketship.

As a startup investor or student of business organizations, it’s helpful to develop some simple heuristics that can help you get beyond the bullshit to see what’s really going on. One of my favorites is a quick comparative analysis of the org chart, cap table and hiring plan.

To use the simplest example, a “software company” without at least one technical co-founder isn’t a software company, it’s a storytelling exercise. It might turn into one in time – by adding real leadership fluent in the relevant domains – but pretending otherwise reflects either dishonesty or a fundamental lack of respect for the craft of building and shipping product. (And no, the offshore team you found on Upwork and have “an incredible working relationship with” doesn’t count).

But what about a team that has some full-time engineering capacity on the org chart? That’s when the cap table comes in handy: if the business leader owns 99% and the technology leader 1%, you basically have the same situation as above, even if the raise deck looks different. The same goes for other key functions: the relative weight of co-founders + leaders on the cap table is usually a reliable barometer for the dominant founder’s priorities and values; I’ve often seen three-person “co-founding” teams with two business guys holding >90% and the technical “co-founder” in single digits – not a good sign.

Let’s say the founding team is actually well-balanced in skills, leadership ability and relative ownership. How do you handicap their ability to scale over time? And where are their blind spots as leaders? This is where the hiring plan comes into play. A simple 12- or 18-month hiring plan should show which roles will be filled, in what sequence, and with what comp expectations. If every head in the plan is in engineering with no sales or marketing hires, the team probably has a big blind spot around go-to-market. If the plan shows a big bulge of hiring in the first month or two after the planned raise, they probably have no idea how hard it is to recruit great people or build around key hires. And if a seed-stage plan includes full-time heads in finance, legal and admin support, the founders are probably big company alums who are used to being supported (and will likely blow through their raise without hitting their product or sales milestones)

What about in bigger orgs that have already scaled a few key functions and are shipping and selling at some reasonable cadence? This is where the relative weight of headcount across the org, key reporting relationships and leadership “holes” tell the story.

My favorite example is the services company that’s pretending to be a product company. I have yet to encounter a software services firm that doesn’t secretly believe it’s a brilliant product company that’s “just doing some consulting to pay the bills” while they work on their masterpiece behind the scenes. If most of the headcount – and several of the most important leadership roles – are in sales and “account management” or “delivery”, you already have your answer no matter what the CEO says. (Revenue mix tells the same story – if services are >50% of the total, and are episodic / non-recurring, you’re not a product company). Extra credit if the leaders cite as inspiration one of the tiny handful of exceptions (37signals is the most common) that prove this rule.

Even without a full org chart, just scanning the leadership team can give you a quick read on the organization’s priorities – and the CEO’s limitations. Worst of all is the “team” that actually has no leaders apart from the CEO. If every key function is staffed by relatively junior individual contributors and they all report directly to the CEO, you’re probably dealing with an insecure leader who can’t / won’t share authority with high-performing functional specialists. At the other extreme, co-founders who can’t answer the question of who’s CEO – or who insist on sharing that title – probably have blind spots about the importance of individual accountability, clear lines of control and the power of hard conversations.

Different leaders can have different opinions about which functions are important enough to require “executive” leadership, and who reports to whom often depends on differences in leadership capacity and maturity across the senior team at any given time. But listen carefully and probe on the gaps between how the CEO describes their priorities and how they embody them in their direct reports – headcount is destiny, functional excellence comes from great functional leadership, and organizational excellence is rooted in the relationships and behavioral dynamics among the CEO and their leadership team.

Are there exceptions to each of these examples? Of course there are – which is what makes the work of choosing founding teams to work with so endlessly fascinating. But knowing what questions to ask is the first step in teasing apart fact from fiction, and picking the right teams to spend the next decade of your life with.