Saturday, November 17, 2012

Dunbar's Number and Startup Adolescence

Dunbar's Number Part 2 can be found here.

Kevin Simler has written about a connection that I've also noticed, that between Dunbar's Number of 150 and startup organizations. He goes further and analyzes startups in terms of anthropology, which is excellent. Looking at it one way, all business analysis really is just a branch of anthropology that uses a scoring system, because the larger civilization these mini-tribes exist in have an agreement about the scores the mini-tribes have to achieve to continue getting the chief's approval to exist as such. (This is called accounting.)

I was often brought into biotech companies when they had stalled out at this number because of external constraints (failure of product in clinical trials) to try to accelerate the process or jump the track to a new indication for the drug. There are growing pains at and beyond this number that often significantly damage the company's prospects in its transition to being a larger organization.  What I noticed is that by the Dunbar Point:

1) Corporate culture, for better or worse, is set in stone. I suspect this actually occurs much earlier in growth than Dunbar's Number, resulting from the personalities of remaining founders and challenges the company encountered - likely in that order.

2) This seems to be an inflection point at which the free rider problem becomes much worse; non-productive people who want a stable income are hired, and, recognizing rationally that at this size firm or larger their own performance won't impact the future prospects of the institution, they often don't work too hard. They also recognize that in the presence of remaining founders, they're not going to climb the ladder far anyway. And finally, karma is no longer real at this stage. There are too many people for us each to keep score on the rest of the people in the organization. Bad deeds go unpunished and good deeds go down a black hole. Karma is only real when there are people who can remember the deeds that you're in frequent contact with and who will and act on them in the future.

3) Possibly because of #2 above, rules that don't make sense or don't seem to connect to the organization's purpose and means of self-perpetuation multiply and become entrenched. This occurs because the people enforcing them now justify their existence in the organization, and because as an organization grows there are more people between any individual and the customer and investors, i.e. the entities in the outside world that the organization needs to perpetuate itself. Consequently it's more important for an individual concerned about their future prospects to please other people inside the organization, regardless of how irrational the rules are with respect to the future prospects of the organization. You're more likely to be fired (and lose money) if you defy a rule to do what you think is best for the company but it makes your boss look bad, than you are likely to lose your job due to downsizing or company bankruptcy if you follow the irrational rule, thus harming the company over the long-term. In the abstract, what is rational in the near-term for an individual departs from what is good for the company. This also seems to hit an inflection point at about 150. There's a great Dilbert (which of course I couldn't find) where Dilbert asks the boss, who's obsessed with screwing over another department as well as the customer, when they're going to think about beating the competition.

It seems to many observers that something happens as previously successful start-ups grow to make them go off the rails, largely because of internal cultural changes that cause them to self-sabotage. My observations of what happens during the startup transition contains that implicit assumption, although we have to admit it might be false: it might just be that we're seeing statistics, and regression to the mean implies that you should expect to see a bunch of companies doing well for a few years (during which time they will grow) and then their luck runs out. But the following suggestions assume that there really is a true negative effect on corporate culture and success in future profits of growth beyond Dunbar's Number.

To #1 and 3 above: these are intractable and I can offer no remedies. Removing founders often doesn't work; and status is important to humans. See this primate behavior experiment to understand why.

To #2: - Set performance metrics and relate them simply, visually, and frequently to the performance of the organization as a whole and against anonymized members of their teams. Automate it to the extent possible, so they can get frequent feedback (not just once a year or quarter) without consuming too much time generating the report. Make it clear that these are the same metrics their bosses are using. Suddenly you see that fake sick day you took, and how it affected a deadline that cut into profits (or some other metric elsewhere in the organization.) Of course, sometimes, the reality is that people's jobs really won't have a huge impact on the company's fortunes. But if you can't think at all of how to measure someone's performance and connect it to how the company is doing, then you either need to think harder, or get rid of the position. And if you're not willing to think of eliminating the position because Suzy in marketing is a nice lady and she knows Jim the Senior Director of XYZ, then you're already way beyond the startup transition.

- Focus on loyalty to small teams of up to 10-12 people. This is the military's strategy of enforcing emotional loyalty within a unit; it's not possible to be emotionally loyal to a large abstract organization unless you were raised in it as a child (like a state or religion.) Not only will this create more feedback for people - easier to to feel rewarded for doing something for a co-worker you respect than the organization, and know there will be real karma as a result (and these bonds of respect are created by the company). This also helps break down other kinds of alliances that form within the company (but not in the company's interests).

- When the founders aren't going anywhere, the new blood you get knows it's not going to the top any time soon, and you can't groom everyone to replace them. That's okay, as long as you're networked with the rest of your industry/space, and the hard work and reputation that they build while they're with you will count elsewhere in the network. Companies that don't expect young blood to leave are stupid, and some have actual functions in HR to address this. People in high-turnover, high-human-capital industries are saying "duh" to this one, but this should be something that's addressed explicitly right from the beginning of their association with the company.

Dunbar's Number Part 2 can be found here.

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