David Sacks joined Zenefits this week as COO, which is a huge win for the company. David could have done anything he wanted from starting his own company, joining as CEO, becoming a VC,etc. With the announcement, it made me realize that there’s an increasing importance of having a COO at an early stage startup. Some of the time, the title will be “President”, but COO is usually the right term. Here’s why I think it’s becoming more important and how founders should look at it.
What should a COO do at a startup?
This is a question a lot of people ask and there has been a lot of discussion from smart people like Bijan at Spark and Mark Suster at Upfront . In my mind a COO runs the part of the organization that scales primarily via people and processes as opposed to the part of the organization that scales via software. Finance, HR, Sales, Support, *Specific Vertical Operations* (more on this later), etc. are all functions that can only scale their value to the organization by adding more people. Software like Zenefits or Quickbooks can certainly help people in these functions, but the only real way to grow HR or Finance at a startup is by hiring more people. The COO makes sure these functions run on time. The technology and product organizations will certainly need to add more people over time, but their value can easily scale without adding more people. The same team of five engineers and one PM that created a feature to add value to 1 million users can likely create a feature that will let them scale to 1 million users. Product and technology should ultimately fall under the jurisdiction of the CEO.
Domain Expertise – Why a COO is different at every company
Finance, HR, and support are general COO skills. Every company has them and I find them to be table stakes for COOs at any startup. In the past, most COOs hired someone to only take on these duties. Though important, I agree with Mark Suster, that these roles by themselves do not warrant a COO for a startup. The key differentiating factor between a COO at a traditional company and a COO at a startup is vertical domain expertise. Many successful companies are attacking very specific verticals with very specific processes and operations. They’re nuanced and the key to success. In the ad-tech industry, ad operations, publisher operations, and client management are very nuanced processes that only someone with previous experience can make run like a well oiled machine. A COO at a startup should be the one that manages the teams who look after domain and vertical expertise that is specific to that startup’s market. Hiring a COO also makes sure you do not overlook mistakes that you don’t even know you’d make by bringing on someone with operational domain expertise in the field.
At Onswipe, we brought on Rich as our COO about a year and a half into the company as we began to scale up. Aside from having a great sense of humor, Rich had a good decade of domain expertise in digital media and publisher services. As a founding CEO, I knew what a CPM was and that’s about it. Rich ran the publisher operations and support teams as COO, allowing us to scale up fast. He had the deep domain expertise needed for publisher operations. Without Rich, it would have been hard for us to scale the business as we didn’t have the industry know-how and operational knowledge to continue moving at a fast pace.
The movement of atoms over the movement of bits
Many startups such as Instacart, Uber, AirBnB, and many more are working on the movement of physical items (atoms) as opposed to just digital ones (bits). This requires the massive coordination of thousands to millions of individuals that are either full time workers or part time workers. We haven’t seen technology startups scale in this manner before: going after vertical industries while applying software in conjunction with large pools of labor. The margins are thin and the margin for error is even smaller. A COO at companies focused on moving atoms and managing large pools of independent labor is critical as founding CEOs likely won’t have the bandwidth or know how to manage this. As we start to see more and more companies focus on existing industries, moving atoms, and large labor pools, the COO role is going to become increasingly important.
When is the right time to bring in a COO?
I think it’s something a company does after an A round or a growth round. A company should do it after an A round if they’re preparing to really scale product market fit as you want the kinks out by then. B Round investors are going to focus on numbers way more than the A round and want some operational efficiency. Another option is to bring in a COO after a large growth round to scale the company from good revenue to incredible revenue. An example of this is what Zenefits just did with David Sacks. I do think it’s a mistake to hire a COO too early. They won’t have as much to do and there won’t be a foundation for them to mold yet. This is the easiest way to have an executive leave fast.
Don’t get lazy as CEO with Finance or HR
My last piece of advice is for the CEO to not get lazy with finance or HR. When bringing in a COO, it’s easy to think it’s all off your plate and you should just forget about it. As founders, we’d rather focus on product than finance or HR. Every founder should let their COO do their thing, but still focus in heavily on the cash operations of the business.