Why in-sourcing operations is foolish for startups

Written by Adam Spector, CEO & Chief Plumber @ levy

I’ve founded four startups and invested in 150. About 10% of them have gone on to become unicorns (even in today’s environment!).

A lot of people ask me what differentiates the best from the worst. The simple answer is: focus.
The companies that try to do too much inevitably fail.

This rule applies to your core product but also to everything surrounding that product. This is why I become ANGRY when a founder tells me they want to bring operations in-house. This is one of the more STUPID decisions a founder can make.

Some basic math: 

• Founder’s time is worth at least $1k/hr
            - Note that Naval says it should be $2k or more
• Founders spend 10-20 hours a week on back-office work (seriously)
            - Ex: onboarding a new teammate or offboarding a bad one
• Internal hires = $150k (base, benefits, equity)
• Founders will spend dozens of hours recruiting, hiring, and training a person for a role the founder themselves don’t know how to do? How is that a good use of time? Non-experts make a lot of errors that need to be fixed at some point (usually by expensive lawyers)

Do a bit of multiplication and we're talking about $300-500K in costs per year. That is insane!

So why do founders still in-source?

• They understand doing this work themselves is a terrible use of their time
• They don’t know any other options exist
• This is what their peers are doing so like a good lemming, they follow the pack over the cliff
• They believe their growth requires an internal operations hire
• They believe hiring for a role they don’t understand is the path to success

They are utterly wrong on every point except one: there does come a point, usually around 50 FTEs, where you should hire an internal HR person. When you hit 100 people, you may want a startup CFO. These senior hires should be doing specialized strategic work, not dealing with the underlying operational plumbing. In fact, many of the best senior hires for these roles will tell you it’s been years since they were working inside of an HRIS. Instead, they were focused on building out recruiting, training, performance management, etc.

Founders are good at ignoring what they don’t want to see (hey, look at me, I’m focused 😂..JK). What they don’t see is that every hire you make slows you down just a bit. This is another person to recruit, train, and manage.

This rule of thumb is that founders should outsource everything except their core product and sales. No investor invests because the founder says, “I’m so great at operations” (unless they are an operations startup!). VCs invest because the founder is world-class at one thing. The more they can focus on their superpower, the greater their chance at success. This rule applies to every business in the world. Imagine the world’s best chef. They are a kitchen rockstar and now you tell them that they need to spend 10-20% of their time figuring out HR, finance, compliance and more? Sounds like their chance at failure just increased by 10-20% (and in fact, that number is true - most startups and SMBs fail).

Dear founders: take it from me, outsource as much as possible but especially back-office operations. It’s not your core skill set. Focus wins. Distraction is a slow death (even if you feel busy…busy with mundane tasks). Imagine 500 extra hours in a year to build. Imagine saving $150k or more in a hire who is unlikely to last.

If you want to save 500+ hours a year, reduce your back-office worries by 90%, and simply be the CEO your investors hoped you’d be, get started with levy
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