Later Stage Advice with Sam Altman (How to Start a Startup 2014: Lecture 20)

All right, uh good afternoon and welcome to the last class of how to start a startup. So, this is a little bit different than every other class. Every other class has been things that you should be thinking about in general at the beginning of a startup.

Um, and today we're going to talk about things that you don't have to think about for a while; in fact, you shouldn't. But since I'm not going to get to talk to most of you, uh, again before you get to sort of post product-market fit stage, I wanted to just give you the list of things that you need to think about as you're scaling and the list of the things that usually, uh, founders fail to make the transition on.

So, these are the topics we're going to talk about, but again, um, all of these things are things that are not writing code or talking to users, which means with a few exceptions that I'll try to note, you can ignore them until after you have product-market fit. Most of these things for most companies become important between months 12 and 24, but it's really more about stage than anything else.

These are things that usually hit around 25 people, uh, and definitely post product-market fit, so just write these down somewhere and look back at them when you get there.

So, the first area we're going to talk about, uh, is management. At the beginning of a company, um, there is no management, and this actually works really well before 20 or 25 employees. Most companies are structured with everyone reporting to the founder. It's totally flat, and that's really good; and that's what you want.

Um, and at that stage that is the optimal way, um, for product—that's the optimal structure for productivity. But the thing that tricks people is that when lack of structure fails, it fails all at once. And so what works totally fine at 20 employees is—from 0 to 20 employees—is disastrous at 30.

And so you want to be aware that this transition will happen, and you don't actually need to make the structure complicated; in fact, you shouldn't. Um, all you need is for every employee to know who their manager is, and there should be exactly one. And every manager should know who their direct reports are.

You want to ideally cluster people in teams that make sense, of course, but the most important thing is that there's just a clear reporting structure, uh, and that everyone knows what it is. And if you want to make changes to it, uh, people understand how to make changes or to hire someone.

Clarity and simplicity are the most important things here. Um, but failing to do it is really bad. So, because it works in the early days to have no structure at all and because it sort of feels cool to have no structure, many companies are like, “We're going to try this crazy new management theory and have no structure.”

Um, what you want to do is innovate on your product and your business model. Um, management structure is not where I would recommend trying to innovate. So, uh, don't make the mistake of having nothing, but don't make the other mistake of having something super complicated.

A lot of people fall into this trap where they think it's like, you know, people feel cool if they're someone's manager, and if they're just an employee, they don't feel cool. So, people come up with these convoluted circular matrices management structures where you report to this person for this thing and this person for that thing and this person for that thing, but, you know, actually, this person reports to you for this thing. Um, that's a mistake too.

So don't—don't try to innovate here. This is the first instance of an important shift, uh, in companies or in the founders' job. Before product-market fit, your only job that matters is to build a great product, or your number one job is to build a great product.

Um, as the company grows, and at about this, you know, 25 or so employee size, um, your main job shifts from building a great product to building a great company, and it stays there for the rest of your time. And this is probably the biggest shift in being a founder that ever happens.

There are four failure cases we see all the time as founders become managers, um, so I want to talk about...