Thoughts on Software

Minimum Stakeholder Businesses

Businesses have stakeholders. People often think about these stakeholders in broad groups such as employees, customers and investors, but there is actually a lot of diversity within each of these. For example, employees perform vastly different functions. They can be organized into different teams and departments with distinct objectives. Their levels of experience can change their behaviour and their life circumstances can greatly vary their incentives.

Similarly, customers come in many shapes and sizes: from ordinary people to small businesses to multinational organizations. If your customer is a business, you may interact with many different individuals, each of whom is also a stakeholder. When you bring on a large customer, you can end up adding dozens of stakeholders, each with drastically different relationships to your product.

As a business's stakeholder count grows, its complexity grows as well. A business with one employee requires a less complex HR function than a business with 100 employees; serving one customer requires less complex operations than serving 100 customers. Adding a brand new category of stakeholder can have an extreme impact on a business's complexity. For instance, when a business adds its first employee, there are a large number of basic HR systems that need to be put in place. However, once these systems are set up, adding the next four employees may be fairly straightforward.

In the world of SaaS startups, the conventional measure of success is revenue. As startups mature, they are increasingly stack ranked by their ARR and ARR growth rate. With this intense focus on revenue growth, businesses must add new customers at all costs. When new types of buyers emerge, this is celebrated. Rarely is caution taken to consider the complexities that these new stakeholder types will add to the business. Only later do employees notice that the business is increasingly torn between competing, sometimes irreconcilable priorities.

This can lead to bad outcomes for once successful startups. The product's initial users can experience a stagnant product as development cycles are devoted to satisfying the basic requirements of newer stakeholder types. In the worst case, the startup fails to meet the needs of its new customers and simultaneously loses the love of the customers that carried it to initial success. When the startup successfully bridges the gap, it is often thanks to founders and employees making immense personal sacrifices to brute force the operation of an overly complex business.

So what if we were to retire revenue growth as the unimpeachable northstar for a startup? If we aren't building a startup with a purely financial mindset, could we build a business that is sustainable to operate indefinitely, pleasant for employees to work at, financially rewarding and ambitious in scope? If it can be done, I believe one key is keeping the stakeholder count to the absolute minimum.

Of course the theoretical minimum stakeholder count is one: a founder, with no employees and no customers. This business is unlikely to accomplish much and extremely unlikely to be financially rewarding. So we need to draw a line somewhere between zero stakeholders and every conceivable stakeholder. We need to determine which stakeholders are absolutely essential to our startup's success.

Whether explicit or not, ambitious startups are built around a mission. There are certain stakeholders who are essential to accomplishing this mission. Who will this mission impact? We might be quick to think about who our customers will be, but we want to get more specific. Which specific individuals at our customers do we want to make an impact on? How can we structure our business to accept these individuals as stakeholders and avoid all the other potential stakeholders at the customer? Can we avoid IT, compliance, procureument, and legal? Maybe it requires a lower price point. Maybe we need to avoid storing data remotely. Maybe it's not entirely possible. But how close can we get?

Who do we need to accomplish this mission? What is the absolute minimum number of employees and how can they spend the highest percentage of their day furthering the mission? We are building a business we actually enjoy working at and running so maybe we can be more liberal with our timeline. Maybe we will leave huge amounts of revenue on the table if we don't have a marketing team or sales force - but that's okay, we aren't building a unicorn!

How much money do we need to set the business on a path to success? Success is not a unicorn hypergrowth startup. Success is a sustainable business that is making a meaningful impact in the world. We aren't blitz scaling this thing, so maybe we can get to break even early on and then run without any additional investment. Maybe we will be crushed by a heavily funded competitor - so let's find the niche where the 'growth at all-costs' VC funding model isn't viable. If we do need financing, can we raise it all from a single investor? Can we raise it from an investor that will add less complexity than another one might?

In any of these analyses, we may ultimately conclude that the mission is not compatible with a minimum stakeholder model. In fact, that may be the most common outcome. If you are going to sell cloud software to banks, you are going to have an absolute ton of stakeholders and that's unavoidable. A minimum stakeholder business is not going to be viable. So pick your mission carefully! And most importantly, avoid making your business more complex than it has to be. Rightly or wrongly, I believe there are many missions out there that a small focused group of talented individuals can accomplish if they structure their business to minimise their stakeholders.

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