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Anand Lunia

22 Feb '17
Revenue per employee and metrics that matter in the long run
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Recently I trolled Shailendra Singh of Sequoia when he tweeted ‘Indian startups need to deliver so much more value per $ of rev than elsewhere, it’s why they can win abroad. big challenge & opportunity’
I said ‘but they are the least efficient in $ capital per $ of rev, and also in productivity, as in $ rev per employee’. He shared details of how they are helping their portfolio cos establish some benchmarks.

Interestingly, Revenue per employee and capital efficiency have been identified by practically everyone as a big systemic problem in India. Bundle this with the fact that Indian consumers demand a very high value per $ of revenue, and you have an almost no-win situation. Of course, all three parameters are linked. High number of employees is a result of bloated call centers serving consumers who just won’t find the right buttons on the app, and high burn on employees in turn causes low capital efficiency in terms of $ revenue per $ capital invested.

Google, FB etc. have a revenue of more than $1M per employee. When you speak to entrepreneurs in India, their goals are equally high, though some pragmatically reduce it by a factor of 4 to account for purchasing power parity. So lets say $250K per employee per year. Funnily though, they also defend their current team size of 50–100 right after Series A, at almost zero revenue, by saying that they are ready for growth without adding any employees over the next 3 years; Almost speculating that they will grow from zero revenue to $25M without any new employees.

Let me give an anecdotal, old example here, and founders can do their own math. Inkfruit, one of the earliest ecommerce cos in the country, founded in 2007, had a revenue of $250K per month after they raised a Series A in 2010. Now, a garments showroom in Karolbagh, a thriving shopping street in Delhi, does that much revenue with about 10 employees, all low end. Inkfruit had 100 employees. Assuming efficiency at least as high as the non-tech retailer, Inkfruit was ready for 10X growth to $2.5M monthly revenue with their 100 employees. Did it happen? Alas, Inkfruit was merged with another co, and we will never know. The merged entity however is nowhere near that kind of revenue.

These are fictitious numbers, and dated. What’s more important is that there is no online brand in India that has crossed that kind of revenue despite having 5–10X more employees than they ought to have.

I spoke to Kashyap, Inkfruit CEO, and this is what he had to say “When I look back and think about what we would have done differently, most of my thoughts are around significantly different bet on marketing spend. But not so much about the team size itself. Having seen a lot of other businesses closely since Inkfruit days, I feel team was one place where we were fairly efficient. Bulk of the team was very junior on delivery side and most of the other teams were lean.” Compared with salaries today, 2010 salary bills were not as high. But this is not just about burn on salaries.

How did we reach here?

Let us not even discuss causes like frivolity or extravagance. Entrepreneurs who take pride in posting pictures on FB captioned “Look Ma, I lead a 100 people company” were probably the ones who were funded erroneously in the first place are not the subjects in consideration here. What concerns us is that very well meaning founders also end up committing some blunders.

Pressures, demanding consumers: Hiring some 20–30K monthly manpower is the easiest, quickest and for many the most pragmatic solution for meeting short term goals. We at IQ too have ended up giving this advice. It is natural for the entrepreneur to focus on validating the market, getting high consumer service ratings and short circuiting long marketing cycles. But these short-term hacks never get eliminated in the long term. As the company grows, these become accepted more as best practices. With extremely demanding consumers who are used to a certain level of human service, it’s very difficult to get rid of these short term hacks. Uber did not offer a call center in India. Ola did, and consumers continue to call the helpdesk for every 30 seconds delay in their pick up.

Hiring ahead of time: Founders hire as per projections. For the first two board meetings, investors also focus on ‘team building’. Unable to meet the stretched targets presented to the board while raising money, the founder tries to compensate by meeting all hiring targets and sometimes even exceeding them, all in good faith.

Frugality for name sake: A lot of founders take low salaries themselves, and manage to hire some initial employees at below market salaries. This gives them and their board a sense of accomplishment and feeling of well being. And steadily, the number of employees creeps up because, ‘hey we have employee costs under control’.

Deceptively low cost of employees: Nobody noticed when the income of blue collared workers in cities crept above that of entry level IT professionals. Somehow in the minds of Indians, hiring more manpower for cheap cannot destroy value in any way. Some founders even take pride in being able to attract talent at lower than market costs.

What is the real problem?

If you have capital, it should be ok to hack short term growth, isn’t it?

But here is the catch, not only do high employee costs make the business unprofitable, but they also drag down the growth rate. One big reason most companies struggle to scale faster than 2–4X every year in India inspite of massive funding is dependency on manpower to scale. It takes time to hire, train and deploy people. This expense in terms of time also has diseconomies of scale. Don’t blame the market size for slow growth. A large army of foot soldiers also becomes self serving. You bloat, hire HR managers, spend time on getting ‘culture’ in place and conduct town hall meetings to discuss your $1M annualized revenue target and look no different than the incumbents you aim to disrupt.

Need to ‘design’ processes and org structure:
Pushed by the board, young founders have only one goal in mind- hack your way into the next round of growth. So unlike traditional companies where focus is on efficiency and long term profits, founders don’t get a chance to think of processes and organization design for the next 3/5 years.

Outside help, benchmarking and best practices from multiple industries can help
In a classic case of echo-chamber benchmarking, the salaries and numbers are benchmarked only to other startups, and not even to incumbents. I haven’t seen any food tech startup that has an org structure delivering more $ per manager or $ per employee than that of Dominos.

Seek long term advice:
 It’s disheartening to see how little outside help is sought for efficiency. Most advice startups want is on growth hacking or optimizing marketing costs. They feel that the only metrics that matter are metrics that get them funded. It’s akin to treating your own company like a cancer patient with a limited life, who can only be treated with a few booster doses of Chemo.

Get started:
A fintech co that does far less revenue per employee than regular banks do is not really disrupting anything. And the excuse of being a non-revenue social startup is lame. Enough benchmarks are available in this space, for e.g. numbers for employees per million users. As a first step, founders should set a 2-year goal, and then monitor the metrics every quarter. What gets measured gets improved, as they say.

There is a churn in VCs and new blood is joining. The focus has been only on growth metrics so far and proving the market has been a priority. It will be good to see some new, more comprehensive ways of analyzing and managing companies. Founders need to think long term, beyond the metrics that get measured for funding.

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