What Founders Get Wrong About Scaling – With Carta’s CEO

0:00I remember my first pitch and it was so bad they walked me out the back door by design transparent to a fault so as transparent as I can be until something bad happens. The biggest difference is it's the first time in your career you work for somebody that knows less than you do about what you do. That was Henry Ward, co -founder and CEO of Carter, a company that started reinventing the cap table way back in 2012. Since then the company's grown to about 2 ,000 people and is trusted by over 40 ,000 companies. 13 years in, it's safe to say that Henry has just about seen it all and he is not shy about his learning.

0:39So in today's wide -ranging conversation with ASEXC's C .Games partner, Josh Lue, they discuss went to hire missionaries for mercenaries. When you're hiring early, you tend to want to hire missionaries because they're in love with the problem by definition. They're just like in love with the mission and they'll ride the highs and lows and no problems too low for them Beneath them knowing when you found product market fit I've been trying to buy cap table software from you for like two weeks and nobody will pick up what's going on The problem was selling too quickly The problem is if you start selling Before you forget out product market fit good GTM can actually hide bad product market fit for a while And then what happens is GTM's expensive, fucking expensive.

1:24And the difference between an input versus output -strip and culture. It is very easy for a company to become outputs driven. How much did we book? And I always tell them, revenue is lagging indicator. That's the last thing we should look at. Listen into the end, since this episode includes a lot of candid questions, including how transparent you should be with employees, and even knowing what the right number of employees is. By the way, this podcast was recorded live in San Francisco during our fourth iteration of our A16C Z Games Speedrun program. So if you'd like to learn more about Speedrun, head on over to a16C .com slash games slash speedrun.

2:04All right, let's get started. As a reminder, the content here is for informational purposes only. Should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund. Please note that A16Z and its affiliates may also maintain investments in the company's discussed in this podcast. For more details including a link to our investments, please see A16Z .com slash Disclosures.

2:44How would you describe yourself as a founder? I have this weird theory that as a species, we're imitators. It's the Peter Teele thing. You should watch composition of salusaries where a magnetic call that kind of stuff is. And you see it in management books. Like if you're just like Jack Welch, you'll be successful. If you're just like Elon Musk, you're just like Steve Jobs. And I think what makes founders unique is that they're also different sort of by definition the aberration. And there's archetypes that you can try to group them, but actually what makes founders really special is that they actually don't fit into categories very well.

3:23How do you categorize Steve Jobs? How do you categorize Elon Musk? That's sort of by definition, the founders are finding the cracks in humanity that everybody else overlooked. And so you do have to be an aberration, you do have to be kind of weird. And so I'm definitely weird in my own ways, every founder is weird in a different way. Maybe the thing that I think defines me in a more unique way is the common trope is founders fall in love with a problem, and then entrepreneurship is a vehicle with which to solve that problem. And so you were just obsessed with this problem, whatever is, you know, a game, robotics, whatever it is, you're obsessed with it, and then you build a company to solve this problem, because that's the best way to do it.

4:01And I'm a little bit weird in that I was never obsessed with cat tables. Like that would be really weird. Like I just didn't care. But Carter was my second company. My first company died and failed. And when I came out of the kind of the trough of depression out of that one, I just couldn't imagine doing anything else. And so I had fallen level with entrepreneurship. I just wanted to be a founder no matter what. And I didn't really care what problem I worked on. So to me it was the inverse. I wanted to be a founder and a problem was just the vehicle with which I could be a founder. And that's both good and bad.

4:32The bad part is you might work on problems you don't really care about. Like, you don't like that much. The good part for me and how it kind of translated was because I was agnostic to the problem, I was never married to the problem. Right? Like, if we were going to work on cap tables today because that was the most valuable thing to do, I was happy to work on cap tables. If we were working on work on fund accounting, I was happy to work on fund accounting. No problem was to boring, to low brow, to beneath me. If it helped build the company and move my founder journey forward, I would work on it.

5:03And that's different, right? You have to sort of find what makes you keep taking one step ahead. Yeah. You've talked a lot about managing teams, like sports teams. And so I'm going to beat up this analogy quite a bit here today. So apologies in advance. When you're faced with a problem that maybe you haven't spent your entire life thinking about, like cap tables, how do you make sure you win? Yeah. So it's really interesting in the early days of hiring, which I know all of you are thinking about this a lot. One paradigm to think about hiring is, are you hiring missionaries versus mercenaries? And there's a lot of ways of describing it.

5:39Keith Roboad talks about its bullets versus barrels, but I think the missionary versus mercenary helps a lot in that when you're hiring early, you tend to want to hire missionaries because they're in love with the problem by definition. They're just in love with the mission and they'll ride the highs and lows and no problems too low for them and beneath them. They'll just do whatever it takes and they're, if not incredibly loyal to you, they're at least incredibly loyal to the company that you're trying to build. And so two founders, it's 100 % missionary. There might be 10 people in your 90 % missionary and you've got one person that's there for a paycheck.

6:11And when you're 100 people, it's 70 % missionary. Over time, that ratio changes. And asymptotically, the N plus 1 person you hire is really there for the job. But you still need to keep the missionary culture and they tend to be the people closest to you, right? So, Card is about maybe 2 ,000 people ish now, maybe 10%, 20%, 15 % if I'm lucky, the population's missionaries, but they're probably the closest to me. The problem with missionaries, of course, is they're really a pain to manage, right? Because sometimes you're like, look, can you just do what I told you to do and not give me a lecture on it?

6:45Like I paid you to do the thing. I don't need to like convince you that there's a philosophical purpose for this. And that's why you do need the balance, right, of the missionary versus mercenary. And then I think it's a long, a new way of answering a question around culture is then the culture gets built around the missionaries you decide to hire, and that's the mission culture. Yeah, how do you identify new missionaries? Are you saying that most of the missionaries that the company now have been with you for a long time? Are you creating new missionaries along the way? And how do you, as a CEO, identify that and pull that up into sort of the thing that you're doing?

7:19Yeah, I think it's different for every CEO. For us, so today we pay above market. We just look at our comp, we just sort of pay above market for a variety of reasons. But in the early days, it was a rule you had to take a pay cut to come to Carta. The first 20 people all took pay cuts to come to Carta. And the reason for that was two things. One was to test how bad they wanted to be there, right? If they're mercenary, they'll only come if they get paid more. If they're missionary, they'll come if they get paid less. And then, too, it really forced me to bail not just recruit, but inspire the people to come.

7:55If I'm like, look, you're going to make $20 ,000 less than you're making today to come. Now, the burden of truth is on me to convince them that that's worth doing. And we're an equity company, also. So it's like, hey, I give you equity and you've got to believe in the equity and you've got to believe in the equity story and all that kind of stuff. But it then forced me to elevate my game. Because if I couldn't convince these people to take a pay cut to come to Carta, I wasn't good at what I did. And that was my limit, Miss Sess. I don't know if that still works anymore in a very different world now, but that was what we did.

8:25That was our hack. Cool. We had Mark and Jason come in here a couple of weeks ago and tell us, you know, the founder journey is one of lots of changes. When you have a two -person company and you double it to four people, when you double it to eight people. It's a new company every single time. And as a CEO and founder, you also have to evolve. And so I'm just curious. in what ways have you evolved over time as a founder and in what ways have you stayed the same? Yeah, Mark's so funny. He's on my board in 2019. We did. It was our $1 .7 billion dollar round and Mark let it with a $100 million dollar check and then we filled it up to about 200 -ish.

8:59And he joined the board. I remember my first board meeting after, so he's very interesting in the board meeting. Says nothing. It was quite a little time. And this is pre -COVID when we're in the room together. But he just sit in the back and he just be taking these notes in tiny, tiny font. There's nobody that can read these notes except him. They're so tiny. And he just sit there. And then he doesn't say anything in the board meeting. He just leaves. And then he calls you for breakfast. And he goes, I'll give you feedback privately. So you go meet him for breakfast. He pulled out an napkin at breakfast, and he wrote this line.

9:32And he said, this is the founder spectrum. And he goes, on one end, I'm going to put down maniac. And then the other end, I'm going to put down rigid. And then he put like one in for maniac and it was like impulsive or something like that. I'm not sure. And he put one in from something slightly less than rigid, you know, like rules -based. And then he goes in the middle. He goes, you don't know what to call this, this middle thing. And he goes, you're on this maniac side. He goes, when you're at early stage, that's fine. And you should be a maniac. But you now have $200 million in the bank account.

10:03You've got 700 employees, whatever it was. because we need to get you over to the middle. We don't want you to be rigid, but we need to get you in the systems thinker. It probably took me a year to understand what that meant. Now I totally get it. When you're at the early stage, you're just building a thing. You're building a product, you're building a team. When you get to a certain level of scale, you're not building a thing. you're building a system that builds a thing. And so you start thinking about like, well, how do I build an HR department? Like, how do I build a sales organization? How do I build not a product?

10:43But how do I build an R &D organization that can then go build products? That's the thing. And it took me a year before I really conceptualized it in the way that I can know if I'm doing a good job or if I'm working, is if I'm actually building systems versus building things, is if the team comes to me and they don't know how to make a decision, right? They're like, hey, should we do Henry? Should we do A or B? And what that says to me is I didn't give them a system's framework for how to make that decision because my job shouldn't in general, not 100%, like there's some things only to see you can decide, but generally when they come to you and A and B, what they're really saying is you didn't give us a framework with which we could make a decision on our own A or B.

11:26And so then I spend all my time going, well why didn't I give them a framework? right? And what is the framework? And then I teach them the framework so that they can figure out how to do A and B. And I think that skill I still am learning and practicing every day. Awesome. So all these founders are early stage. They're all racing towards product market fit. You had one company that didn't quite make it one company that has clearly achieved product market fit. What does product market fit mean to you? And what advice would you give to founders that are sort of in this stage right now? We haven't quite gotten it yet, they're racing towards it.

11:57Mark describes it in his writings. It's like product marketing for fitness when you can fill the market, pull the product out of you. And I remember that moment in, I think it was August of 2014. We were selling cap tables. Back then, people would actually call in to buy a cap table software. And as we changed our phone system, it was like ring central to dial pad or whatever. And it was like, you know how you press one to talk to sales, to a studio to talk to support, whatever. Somehow we messed it up. So when you hit one to talk to sales, it just hung up. We didn't know for like three weeks.

12:30And the only way we found out is we were just still like selling so many cap tables. And the only way we found out is somebody somehow got their way through our support channel. And it was like, I've been trying to buy cap table software from you for like two weeks and nobody will pick up what's going on. And that's the only way we figured out. And then we're like, wow, we might have product market fit. No matter how bad we are at selling this stuff, people are finding a way to buy it in spite of us. That's a really good sign. I think that the problem or the challenge, or maybe the mistake that founders often run into, is it's sort of like the George Washington thing, like don't fire until you see the whites of their eyes.

13:07Founders start spending a lot of money on sales quickly. They're like, oh, I got the product. Now it's a sales problem. And the problem is if you start selling before you forget out product market fit, it, good GTM can actually hide bad product market fit for a while. And then what happens is GTM's expensive, fucking expensive, it's incredibly expensive. It's actually far more expensive than R &D. And 10 years ago, right, everybody was using open source software, AWS. We are dramatically lowering the cost of creating a startup, starting a company. And we think we helped with that. Part of this mission was to create more entrepreneurs, create more founders by reducing the cost of starting a company and our thing was not compute or software ours was legal fees.

13:50It's reduced legal fees so more founders could start companies. So we dramatically, between 2010 and 2015, dramatically, the world dramatically reduced the cost of starting a company. But the rounds kept getting bigger. Why? It doesn't make sense. Why does it cost more money? And it's that economic theory of the more abundant something becomes, right? The more demand gets created. They got cheaper and easier to make startups, so then to actually be a successful startup required way more cost to break out. And that's where all the money goes, is in sales and marketing. So anyway, the mistake that a lot of founders make is they don't wait till they see the whites of their eyes before they fire and they start selling and investing in sales too soon, which hides the product market fit.

14:35And the kind of the thesis I always give is for founders, the first thing any founder wants to do after they build the product is higher VPS sales because they hate selling because most founders today are product founders. So they hate selling because it's selling sucks. And so like, I'll just hire VPS sales. Problem solved. You know, my angel investments what I say is like, hey, wait as long as you can before you hire VPS sales and do all the sales yourself because you're the only one that will feel the market pull. Wait as long as you can before you're a VPS sales and there's wait a little bit longer.

15:07Wait until you see the whites of their eyes before you do it. Because what I see all the series A companies that don't make it is they raise $10 million, $20 million, they hire a bunch of salespeople, they burn through it and they didn't have product market fit. Super helpful. You talked a little bit about company culture and maybe just to come back to this for a little bit. As a founder CEO, at some point you go from making all the decisions to creating systems and still making a couple of the decisions. And as you've all, you also have to sort of train yourself. So if being a founder is like an athlete, what is part of your training regiment?

15:38Yeah, so I spend most of my days doing scale problems, not early stage problems. So apologies if I'm not being as relevant, but I'll give you a scale problem that I think maybe translates to the early stage. So I do this thing with executives whether I'm promoting executive or hiring executive. Imagine it's a CFO. Hey, what's the difference between working for a CEO, working for me versus every other boss you've ever had in your career? And most of them will give business school answers. Well, you have to be cross -functional, and you've got to be strategic and whatever. And I say, you know, all that's probably true, but the biggest difference is, it's the first time in your career you work for somebody that knows less than you do, about what you do.

16:18Right? Like, you're a CFO. You spent the last 20 years. You were a analyst, and then became a director of finance, and a VP of finance, and every stage of the way you worked for somebody that used to do your job. And they did it really well, otherwise they wouldn't have got promoted. And then now you work for me and I've never done finance. I've never been a CEO. And I'm very sympathetic. I'm compassionate. I always say like, it must be so disappointing. You spend like 25 of your career grinding it out, climbing up this ladder to one day be a CFO and work for the CEO and you realize he's an idiot.

16:50Like, you know, there's nothing about what you do. So my interview question is always, well, so how do you deal with that? If that's the difference, how do you work differently? And then you go into a conversation about like, am I hiring you to tell you what to do versus I'm hiring you to tell me what to do? I always does another framework to think about hiring. The reason I say that is then that the flip side, the founder of the CEO is, okay, well, if everybody in your exact team, the eight exacts you've got, all know their jobs better than you do, what do you do? Like, where is your value? in this, like how do you be the CEO that the CFO who knows way more than you do about CFOing?

17:33How do you have a 30 -minute meeting with them and they walk away going, that was really helpful. Like, Henry, I'm really glad I met with him. And that's the challenge of being a scale CEO. And the reason I tell that story is I think that's the challenge of being early stage, right? is there's some things you'll be an expert in. There's others you won't, but how do you be relevant to everybody that you have to engage with? Whether it's your new header product or your new engineering lead or the support person on the team that's doing customer calls, you know, an investor. How do you be relevant to all these constituents that by definition no more than you do about their narrow slice?

18:12And I think that's the challenge of being a founder over time. Maybe just take that one step further. At some point, the company gets big enough or broad enough where you can't know all the things. How much do you as a founder of Focus on Inputs versus Outputs as a shortcut to this exact thing? Yeah, it's such a great question. We're literally talking about this last week in our exact meeting about inputs. It's very easy for a company to become outputs driven. How much did we book? How much do we revenue? And partly why that's true is because that's kind of how we're wired and we want to win that's the scoreboard and all that kind of human psychology.

18:49The other part is this organizational, right? Like, your team's gonna come to you and they're gonna be like, crushed it, let me show you how I crushed it. And we're an inputs company and I have to keep reminding my exact team because they always want to talk about revenue. We are quarterly revenue numbers and I always tell them revenue is lagging indicator. That's the last thing we should look at. It's totally lagging. We should look at everything else other than revenue that drives the revenue and focus inputs. But that's not what people will bring to you. And the story or analogy I use is Dremont Green, Warriors Player, not the best shooter.

19:23Anyway, the game was on the line, and the ball was of course supposed to go to Curry, didn't happen, it went to Dremont, and he shoots a three, he never gets the reason. But he got it in this time, and it was the buzzer -beater won the game. And the commentator was like, what a brilliant move, I know, by Steve Kerr, to give it to Dremont, right? And the coach analyst that was there was like, no, no, no, no. That's an output -driven model. It was actually a terrible move. They got lucky, but in no world was that the right play. And in fact, it wasn't. They tried to get the curry, and Dremont just made a decision, and it worked out.

20:00But that's so there was an output. There was an input. So the outputs go, next time we'll do Dremont again. But that's the wrong answer. The answer is always inputs. You go to curry. But it's really hard. You have to keep reminding teams to do that because they will naturally always want to go to outputs because that's how we're trained. That's how their careers are built. That's how they look good in front of you, all of those things. Yeah, and so maybe you take this full circle back to the company culture. What have you built inside of Cardiff to make sure that the team stays, can put focused?

20:29So I don't do as much as I should and would like to, but writing is an incredibly powerful tool. If you're a good writer, but being a good writer, it's like being a good coder or a bad coder. Like, it makes a big difference. If you're the programmer of a company, you're coding languages, any language you're using, but that's how you program the system. And the writing is incredibly powerful because when it like codifies everything, but it becomes a reference Bible that when teams are getting together and arguing about stuff, it's the checksum on the manager, right? Somebody on the thing goes, well Henry wrote that and we should be doing that.

21:05And so writing's incredibly powerful. I have a Slack channel called Henry. And it's just my channel. I'm the only one that's allowed to post. So it's a read -only channel. Like it's just, it's basically my kind of internal newsletter. People can post on the replies, but they can't do the main messaging. And it's been there since 2014. Like any employee can come and see everything I've written. And it's things from each year's 101 and our culture to our strategy to, here's a trip from Rio, you know, our office there. and here's what I'm thinking. So like, I do a lot of shout outs. Customer email me, they love their team, or support person.

21:42Here's a screenshot of that email. And that's my way to codify the culture. And then the reinforcement comes from hiring. I love that idea. Because one of the things that happens in big companies, as you might know, is whatever you've written in the past becomes weaponized at the ground level, somebody says, oh, Henry wrote this thing before. And so, therefore, we must do things this way. But by being in front of people, all of the time, having this written thing that people can look at that's updated is really, really helpful. It prevents some of the bad big company things that can happen. Totally.

22:11The Henry said problem is a huge one. Whatever you're saying, Bob Amy said, you'll get it if you're not already. I actually don't know quite how to solve this. I'm curious if anybody has, because it gets weaponized all the time. They're like, well, Henry said this. Henry said that. And people always come to me, they're like, they actually wanted to ban the phrase Henry said. You just couldn't say that at Karta. They came to me, the exact team, right? like, can we get your support to ban the phrase Henry said? And I said, well, I'm all supporting it if they're wrong, but if they're right, like they should say Henry said that.

22:39Like, it's correct. I don't know why I want to ban that one. And so that's one of the biggest bureaucratic problems of a company, yeah. All right, all these founders are busy building. They're going to be raising their next round here in just a couple of months, few short weeks, few short months. Maybe talk a little bit about any advice you would have for them. You talked a lot about your early investors and how important they were to you. and so yeah, I would love to hear any of your advice for early stage investing from the founder side. So the thing I learned in the early stages, I don't know if this is still true, but I remember my first pitch and it was so bad, they walked me out the back door.

23:14Like I couldn't even leave in the front. They're just like, here's the exits to the stairway and it's just the fucking worst. You could only go up from there. And this is also before they treated entrepreneurs more respectfully before, and Dresden was like, don't be late for an entrepreneur. I mean, this is where they kept you waiting. You think I'm joking? I'm not. I would go to pitches in the evening to pitch to angel investors because they'd have all these angel networks. And it was basically like, I don't know, it's like a drunk sporting thing that you went to. Like you go up, they'd be drinking beer and heckle you while you're pitching.