The organizational structure (“org structure”) serves to allow a company of any size to allocate resources, communicate and coordinate effectively, and oversee work output toward intended goals and objectives.
The CEO creates the org structure through an organizational chart (“org chart”) which is just a visual, relational depiction of the org structure. The org chart is often viewed as a power structure in that it also informs who makes decisions down the organization.
CENTRALIZED AND FUNCTIONAL
Org structures help employees know who has ownership over what and also lets people internally navigate the company better.
The startup’s org structure should be as basic as possible. There are many different ways a startup CEO can set up her organization. The main choice to make is whether the org structure is centralized or decentralized.
A centralized structure places emphasis on control and operational efficiency. Since people are grouped by functions, it will create and strengthen functional specialization.
The most commonly cited drawback of a centralized, functional org structure is that cooperation - and, hence, communications - between functional teams can be weak. This happens because highly specialized functional teams tend to become territorial over time as the overall company grows in size.
Despite some of these drawbacks, a technology startup should set up the organization in a centralized, functional way. The main reason for this is due a new startup (a) having a clear set of goals which comes with mostly functional objectives, (b) needing to prioritize operational efficiency, and (c) being relatively shielded by communication challenges. In short, all of the drawbacks of a functional structure will not be felt until several years down the line as the startup is too small for the risks to matter.
EXECUTIVE TEAM
The new startup CEO is very different than a CEO of a large company. The large company CEO comes in three flavors: the Great Leader, the Operational Whiz, or the Bean Counter.
When you see a CEO who has a President/COO, you can bet that the CEO is (or trying to be) the Great Leader, a visionary who wants to spend all of her time on products and things such as M&A. Conversely, when you see a CEO who has many senior executives directly reporting into her, it typically indicates an Operational Whiz.
Most large companies have multiple product lines so the CEO will have quite a bit of matrix reporting (e.g., grouping by products and functions) and she will have no choice but to eventually move to a divisional and unit-based structure where P&L is decentralized among executives (ie, Presidents of Divisions, General Managers or GMs of Business Units or Product Groups).
The new startup CEO is unique because she must be all three of those people: the Great Leader, the Operational Whiz, and the Bean Counter.
If we get granular with what those labels mean, we arrive at the following core groupings:
Great Leader - the CEO must be both visionary internally as well as externally; the HR and marketing departments roll up to the CEO for this reason.
Operational Whiz - the CEO must direct the entire organizational toward a common goal (aka, milestone); the sales and engineering departments generate nearly 100 percent of the early- and growth-stage startup milestones.
Bean Counter - the CEO is mainly the co-CFO as the new startup’s finance function is more about fundraising and managing cash burn than it is about anything complex that a seasoned CFO would be needed for; this is why most startups pay for a fractional virtual CFO while using its headcount for a more junior controller and business analysts.
Due to all of the above, the startup CEO will have a large number of top executives reporting into her. It is not a good idea to reduce the number of direct reports.
The org chart will naturally lengthen or deepen as the company keeps growing. You do not want to unintentionally accelerate this deepening hierarchy from the outset.
The CEO needs to prioritize (a) control and (b) operational efficiency above everything else. You cannot afford anything short of tight alignment. And, you will always be understaffed as a startup and cannot afford to be operationally inefficient.
CREATIVITY IS FOR ART SCHOOL
A CEO should not experiment with the org chart. The company org structure is not where a CEO should apply innovation or invention.
The whole purpose of an org structure is to set up the company to operate - that is, to run well. When an org structure is foreign, people will waste time trying to figure why it is set up in a novel way or blame the structure for all kinds of things.
Throughout my three decades in tech I have seen a handful of really weird org structures. They never ever last as the CEO realizes it is causing unintended problems and revert back to a basic structure. Or, the newly invented org structure throws the company into utter chaos and the company spends more time and money trying to clean up after itself than it does on growing revenues.
“My startup is so unique that it needs a tailored org structure.” When you hear this, run for the hills. The CEO is probably some moron who thinks she is an eccentric. As far as org structure, all startups are the same. They are making and selling a single product. And, they are trying to build a company around that product.
The company is just a legal and financial structure through which to make that pursuit possible. The org structure is how that company groups and clusters its people so resources and tasks can be allocated easily. It does not get more unique or complex than that.
HANDLING DIRECT REPORTS
The primary management tradeoff for having many vs. few direct reports is between control vs. operational efficiency.
The greater the number of functional teams that report directly to a CEO, the more control the CEO will have since it will provide a direct line of sight into all areas of the business. The downside is that key decisions may bottleneck too frequently.
Folding functional teams into a few number of executives suffers from the opposite problem. The CEO loses some degree of control but gains operational efficiency. In this structure, the CEO will need to spend an enormous amount of time making sure that all of her executives are constantly aligned. After all, the CEO also needs to manage up and report into a Board of Directors (ie, the investors).
Every manager has a maximum limit to how many direct report she can successfully manage. For lower level managers, people management is a full-time job so they can handle a lot more direct reports. As you go up the totem pole, managers need to free up time for strategic matters, deal with broader organizational issues, and address a far larger volume of administrative tasks.
A CEO who had a direct report leadership staff of 8-10 people in their prior VP role will probably find themselves struggling mightily with that many direct reports in the CEO role.
At minimum, the new startup CEO should be prepared to directly lead and manage the following executives and their teams:
Engineering (or Product Development)
Sales and Sales Support
Marketing
Finance
Operations (HR, Legal and IT)
Nearly all other functions can roll up to these five main functional groups. Product management can roll into marketing or engineering. Business analysts can roll into finance or operations. And, so on.
STAGES DICTATE PRIORITIES
Regardless of the org structure, the CEO will spend a majority of her time with 1-2 executives while almost fully delegating the other functions. The CEO should prioritize where she spends time based on stage of startup and mission-critical milestone(s).
The CEO should NOT spend more time with functions they are most knowledgeable about. Nor should the CEO avoid functions they know little about. The CEO job entails setting priorities and driving key results from those priorities. The job is not to act like a specialist. It is a generalist leadership position - the “executive among all executives” is the literal interpretation of “chief executive.”
For example, if a CEO is a former VP of engineering who is most comfortable with product and hates dealing with sales, she will unknowingly spend more time with the product and engineering teams. But, if the startup is operating “on plan” and finds itself several months from needing to raise a new round of growth funding, the CEO would need to spend a great deal of time with sales, marketing, and finance.
Thus, the CEO should base how she allocates her own time based on stage-driven imperatives - not base it on their functional strengths or preferences.
The other pitfall to avoid is to spread time evenly across all direct reports. Many inexperienced CEOs feel obligated to spend a minimum amount of time with every executive. This is foolish. Other CEOs feel the need to micromanage one area while neglecting other areas. This is also foolish.
A startup CEO should only hire highly capable executives who can independently drive results. The moment a CEO feels forced to pay more attention to one area than another it is a sign that the priorities are being rewritten by organizational weaknesses instead of being driven by business priorities and organizational strengths.
The more direct reports a CEO has to handle, the more operationally inefficient she becomes for all of the above reasons, temptations, and natural biases.
An early to mid stage startup is small enough that losing control through a narrower reporting structure is not as big a risk as it first appears. But, for many reasons, first time CEOs wind up with an ever expanding number of direct reports.
Part of it is because the CEO finds that it is easier to recruit seasoned executives when she puts out that “you’ll report directly to me, the founder and CEO” carrot. Part of it is because an inexperienced, first time CEO is insecure and overshoots on the need to be intimately close to every area of the business.
Another part of it is because the CEO overestimates her own abilities (“no one knows the product, the market, and this company better than me since I am the founder - the creator, the soul and heartbeat!”) while underestimating her executives’ capabilities.
If you find yourself feeling this way, quickly stamp out the thoughts and place your attention on your executive hiring practices. You are probably not hiring ultra experienced executives who are better than you in their respective areas of expertise.
CONCLUDING THOUGHTS
To summarize, here are some suggestions for how a new startup CEO should buildout its org structure:
Start with a centralized, functional structure - keep it simple and formal
Keep the Executive Team as small as possible (e.g., 4-6 direct reports)
Allocate CEO time to priority areas based on stage-based milestones
Do not spread peanut butter with regard to your attention or act like a “savior” and jump into every fire drill - your executives are paid to solve daily issues
Hire real executives and let them autonomously operate when executing against the agreed to plan - your job is to direct the execution, not to monitor or manage it - again, that is the job of your more capable executives (let executives execute so you can actually lead the entire company)
Structural breakdowns are caused almost always by people; do not restructure the org before addressing the people problems
An ideal startup org chart is narrow at the very top while as flat (wide) as possible elsewhere
Do not worry about large company issues such as loss of control, misalignment, and communications overhead (startups do not suffer these problems until it grows to 500+ people)
Do worry about small startup issues which do not come from “growing pains” but rather come from a “lack of growth”
All of these org structure matters are important for every aspiring and current executive to understand. To be an effective executive, one must understand how the organization is set up - and why. An org chart is a powerful management tool - not a contact directory or map.