The start-up law of comparative advantage

August 1, 2011, 3:11 PM UTC

Applying macro economic theory to the start-up environment.

I think I can type faster than my assistant (although she might object, and challenge me to a type-off). But, if my assistant were to sit in on my board meetings while I stayed back in the office and typed, I’m not sure my entrepreneurs would be too happy.

Thus, despite the fact that I may be a faster typer than her on an absolute basis, it’s way more important for my job as a VC that I maximize my time working with entrepreneurs, something I am comparatively better at than she is.

This simple example is derived from an economic law discovered by David Ricardo that has always fascinated me, called the Law of Comparative Advantage. It says that it does not matter whether a nation is better at producing a particular good on an absolute basis as compared to another nation. What matters is whether a nation is comparatively better at producing a particular good as compared to other goods it can devote its resources to producing relative to another country.

Unfortunately, I see too many founders ignoring the entrepreneurial corollary to this law, the Start-Up Law of Comparative Advantage. I’m no David Ricardo, but it seems to me that if entrepreneurs followed this “la””, the gains to their start-ups would be akin to the gains attributed to free trade.

Founders are typically gifted, multi-talented, versatile professionals. As such, they get sucked into spending time doing things that they may be better at than the others in their organization on an absolute basis, but that, comparatively speaking, they are worse at in relation to the handful of things that they are uniquely suited for.

I work with one founder/CEO who is so talented, I think he literally could perform the job function of each of his direct reports better than they could. But if he spent all his time doing operational project management or tactical sales activities, he wouldn’t be able to spend time on the things that only he uniquely can do relative to his teammates.

In a fast-growing start-up, a founder needs to be very protective and strategic with how they spend their time. Founders are always complaining that they are spread too thin, are overwhelmed with the job at hand, and struggle to figure out how they should be prioritizing their efforts.

I would submit that, above else, there are two areas a founder should not delegate: Product and people. Product-related activities include developing customer intimacy (studying the “voice of the customer”), designing features, thinking through product strategy and setting priorities. People-related activities include hiring, setting the culture, coaching and mentoring.

If founders finds themselves spending the bulk of their time on issues not related to product or people issues, they are violating the Law of Comparative Advantage. They need to rethink whether they’re delegating in the wrong areas, and not being (appropriately) obsessively hands-on in the right areas.

I remember reading once that in Microsoft’s early days, Bill Gates and Steve Ballmer would review each other’s calendars on a monthly basis and give feedback to each other on where they should be spending their time. That concept has always stuck with me, and my partners and I endeavor to do the same periodically.

Try the following exercise: At the end of the week, write down the top 6-8 categories of time spent on your start-up (e.g., product, people, project management, operations, marketing, sales, investor relations, miscellaneous). Like a lawyer, track your hours at the end of the week by “billing” each of these buckets. When you step back and analyze how much time you are actually spending (as opposed to how much time you think you are spending), you may find you can make appropriate adjustments to better deploy your time.

Adhering to the Start-Up Law of Comparative Advantage may not earn you the Nobel Prize in Economics, but it will help you direct your time more productively when starting your company.

Jeffrey Bussgang is general partner at venture capital firm Flybridge Capital Partners. You can follow him on Twitter @bussgang

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