Two great articles that show that smaller can be better than bigger
I’ve been thinking a lot about the economy (who isn’t?), company size, and efficient ways of doing things lately, and the following two pieces are great at blowing up conventional wisdom about those topics. In essence, what they’re getting at is that smaller can be more efficient, faster, better, and more profitable than bigger!
Assumption #1: The more money a company brings in, the better it’s doing
The reality is not necessarily. This Fred Wilson piece called When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs nails down something that I’ve been thinking for a while: bigger isn’t always better. In fact, smaller and efficient can mean bigger profits, as counter-intuitive as that sounds. I love this bit about Craigslist, for instance:
Let’s look at Craiglist. I’ve heard people estimate that they are doing close to $100mm in annual revenues at this point. Many say, “they could be doing so much more”. But the Craigslist profit equation is interesting. They apparently have less than 30 employees. That’s about $4mm/year in employee costs. Let’s assume that they spend another $6mm per year on hosting and bandwidth costs and other costs. So it’s very possible that Craigslist’s annual costs are around $10mm/year. Their value equation then is 10 x (100-10) = $900mm. That’s almost a billion dollars in value for a company with only 30 employees.
Assumption #2: The larger the company, the more/faster/better work gets done
Anyone who works in software development or with developers knows that this is very far from true, but it’s fun to see it articulated as well as this aptly titled piece called Smaller Is Better, on the Five Years Too Late blog.
Product development is a fundamentally creative endeavor that requires incredibly tight coordination among the participants. Three great developers are usually better than thirty average developers, particularly if they have worked together before and if there are one or two strong leaders among them. Over and over we see core innovations that become great products coming from small teams (often just three to five people). In our current portfolio this has been particularly true at companies like Drop.io, Payfone, and Kashless. And this phenomenon isn’t just limited to software companies. At hardware companies like Data Robotics and Peek (both current RRE portfolio companies) we’ve seen the innovations of two or three founders get to market as products with fewer than fifteen people in either company. This is not to say that there aren’t some tasks that large teams, or even large communities do well (e.g. look at the strength of many open source products that were refined by hundreds of thousands of person hours from their communities). But in pursuing a new opportunity, at the early stages smaller highly focused teams tend to do better.
