“For every thousand hacking at the leaves of evil, there is one striking at the root.” —Thoreau

Highlights

  • Tech startups are on pace to hire 322,000 people this year

    • This rampant hiring is derived from ~4.4 millions job postings in 2021

  • Meanwhile, companies have purchased $396B in software in 2021

    • 37% of software goes unused, sometimes referred to as “shelfware”

  • These massive investments in people and software are often the right solution for the wrong problem

The #1 tech startup mistake

I’ve worked at 5 startups and have seen meteoric growth from $1m to $100m to $250m ARR more than once. Having worked in the tech/software industry for 10+ years, I’ve also been fortunate to cultivate a network of software leaders, many of whom I call for advice and have learned a great deal from.

The #1 mistake I’ve seen startups make: they try to solve software problems with people, and people problems with software.

Let’s start with the software piece

The current era of Product-Led Growth has been the tip-of-the-spear for massive software expenditure. According to Gartner, companies will shell out $482 billion on software in 2022 (and $396 billion in 2021).

Source: Gartner 2021

That’s not inherently a bad thing—quite the contrary. Technology can unlock massive efficiency gains and tangible ROI for business when harnessed software effectively.

But alas, 37% of software goes unused, costing companies tens of billions each year. This “shelf ware” would be more conspicuous if tech startups valued profitability—but this is seldom the case. Would you scrutinize your costs when you have 80-85% gross margin and venture capitalists have given out $454 billion so far this year?

Hire, hire, hire

The default playbook for an over-capitalized startup is rampant hiring. Each hire increases the startup’s burn rate by ~$15k/month. I’ve seen burn rates go from $500k/yr to $2m/yr in 7 months.

Like a locomotive gaining momentum, the hiring train gains energy. It is very hard to slow this train down. Hiring will usually persist unhindered until an external force shocks the system: VC funding dries up, stock market correction, COVID/budget cuts., etc.

The right solution for the wrong problem

A lot of the hiring, especially in Go-To-Market functions, is aimed to sell & support a nascent product. The software solutions offered by Seed, A/B-round companies are far from finished, so customers need a lot of massaging to make it work. This is where startups try to solve a software problem with people. The result: bloated COGS/Cost-to-Serve, and 3-year breakeven points.

In a similar vein, most rapidly-growing startups are sheer chaos so its incredibly hard to get alignment and process across the team. The solution? Software. Many a manager and leader has reached for the tool, when what was needed was decisive command. This is where startups try to solve people problems with software. The result: hundreds of tools, questionable adoption, lack of process.