Headcount is the enemy

In one of the Apple histories, Tim Cook is quoted as saying, “Inventory is fundamentally evil.” Inventory is cost. It will eventually have to be written down (i.e. thrown away) when it stops selling and you move onto new SKUs. Reducing inventory also has the benefit of improving your agility: If you can operate with only a couple days of inventory in the warehouse, that means you are able to source, build and sell new product quickly. Which means you’re innovating and responding to market conditions rapidly. 

SaaS companies should be thinking about headcount the same way. 80% gross margins and auto-recurring revenue gives SaaS founders an awful lot of breathing room to operate. What do SaaS founders do with this breathing room? Pretty much all of them add headcount. It’s an easy mistake, but it’s also a big mistake. Just like inventory, headcount simultaneously adds cost and reduces your agility. Headcount is the enemy.

Headcount is cost. Cost is risk and cost is dilution. It’s the risk that one missed annual plan will wipe you out because you have to pay for all these people. It’s the necessity to raise money every year or two, even when you’ve had a mediocre year, even when the macro sucks. You don’t have the option of deciding not to raise next year because this year was just okay, or walking away from a process when the term sheets aren’t great. You’re locked into giving up at least 20% every other year. More in bad years. Automatically owning less of your company over time becomes an unavoidable truth, not a choice you make.

Headcount is a business that’s not agile. If you’ve hired half a dozen employees in sales ops and marketing ops and finance, then a pricing change is weeks of them all meeting with each other in various configurations. If you automated your Salesforce and NetSuite as necessary and held the line on backoffice headcount, then a pricing change is an afternoon. Around 100 employees, the communication about a change starts to take way more time than the change itself. This has a chilling effect on how many changes you make every week, month and year. It makes you vulnerable to leaner, meaner competitors. Take pride in an efficient, automated backoffice that doesn’t require an army of ops teams.

Founders add headcount because headcount feels like growth. Yes, there’s always another job to be done, and the stated reason for adding headcount is to do these jobs. I call bullshit. The real reason founders add headcount is the feeling of headcount growth is addictive. Watching the dingy little operation explode into multiple floors of downtown office space filled with eager young engineers makes you feel like you’re finally winning. It makes the team feel like they chose the right startup. It’s the one thing you can show mom to make her understand that you’ve built something real. Chasing this feeling leads to a dangerous spiral.

Managers add headcount because it’s how they measure their status. In some ways this is understandable. They are building a career that will include more companies than just yours, and the easiest way to communicate how senior they are is how many people they manage. Your attitude towards this just needs to be, “that’s tough.” Perhaps coupled with, “we’re all going to make a lot more money if we don’t spend it all on chiefs of staff and ops teams.” This will be a constant battle, but some of your leaders will get it and appreciate it – as long as you hold the line with the others. A corollary is that you need to avoid hiring leaders who don’t remember how to do any of the work themselves.

Reducing headcount is very hard. If you fail to hold the line on hiring, eventually a bump in the road and a missed annual target becomes life-threatening for the company. To save the ship, you’ll have to reduce a lot of headcount quickly. Looking a large fraction of your team in the eye and telling them that they don’t know where their next paychecks are coming from, that it’s time to pack their things, that their visa statuses are now in doubt – it’s awful. Planning and executing such a move will consume many weeks during which you can’t bring yourself to think about anything else. Far better to just not get into this situation. A small team is resilient to shocks. Tell your team early and often – and especially right after fundraises – that headcount is the enemy. Some companies are huge and bloated. Some are lean and mean. Be the second kind.