Comparative Advantage: Where Genius Founders Miss the Mark

In the fast-paced world of start-ups, we often romanticise the idea of a genius founder, a one-person powerhouse who can juggle every aspect of a business. But is being a Jack-of-all-trades always an asset, especially as a company scales??

In this story, we'll journey through the tale of Alex, a prodigious Silicon Valley entrepreneur, and unearth a pivotal business principle that every founder must grapple with: the art of delegation and the power of comparative advantage.?

By the end of this story, you'll discover the delicate balance between individual brilliance and collective efficiency, and why trusting your team might just be the secret to scalable success.

Turning a Blind Eye to Comparative Advantage

Once upon a time, in the heart of Silicon Valley, there was an entrepreneur named Alex. Alex was a prodigy, a polymath, a veritable Da Vinci of the digital age.?

He could code better than his developers, sell better than his sales team, and write more persuasive emails than his marketing department. His brilliance was undeniable, and his start-up, a revolutionary AI platform, was his magnum opus.

In the early days, Alex's extraordinary abilities were a blessing. He was the driving force behind every aspect of the business, from product development to customer acquisition. His employees admired him, his investors were impressed, and his competitors were wary. The start-up was thriving, and it seemed like nothing could stop it.

But as the business grew, cracks began to appear. Alex's perfectionism, once an asset, became a liability.?

He found it hard to delegate tasks, as he believed he could do everything better. He would spend hours rewriting emails, refactoring code, and revising sales pitches, much to the frustration of his team. His employees felt micromanaged and demotivated, and the company's culture began to suffer.

The situation worsened when the company expanded from a team of 20 to a team of 100. Alex was stretched thin, trying to oversee every aspect of the business.?

His health deteriorated, his relationships suffered, and his once vibrant start-up began to stagnate. Despite his best efforts, the company's growth slowed, and eventually, it filed for bankruptcy.

This is a classic example of the dilemma that Ben Horowitz, a renowned venture capitalist, has often spoken about. He argues that the skills and mindset that help a founder grow a business from 0 to 20 employees (the 0-1 phase) are not necessarily the same as those needed to scale a business from 20 to 100 employees (the 1-n phase).?

The former requires a hands-on approach, while the latter requires delegation and trust in the team.

How Does Comparative Advantage Help?

This is where the concept of comparative advantage comes in. First introduced by economist David Ricardo in the early 19th century, comparative advantage is the idea that even if one person or country is more efficient at producing all goods, they can still benefit from trade by specialising in what they do best relative to others.

Let's explain this with a scenario where Alex, the boss, and his three employees - Bob, Carol, and Dave - are working on two tasks: coding and sales.?

To quantify value generated while doing a task, let me refer to productivity as a “value points per hour” (vph).?

Alex is a prodigy, so he can generate 100 vph when coding and 120 vph when doing sales. Bob, Carol, and Dave, on the other hand, are less efficient.?

Bob generates 60 vph when coding and 50 vph when doing sales. Carol generates 40 vph when coding and 70 vph when doing sales. Dave generates 50 vph when coding and 60 vph when doing sales.

Now, let's say that Alex has 10 hours per day to work, while Bob, Carol, and Dave each have 8 hours. The total amount of work that needs to be done each day is 16 hours of coding and 16 hours of sales.

At first glance, it might seem like Alex should do all the tasks himself, since he's more efficient at both. But remember, Alex only has 10 hours per day. If he spends all his time coding, he can generate 1000 value points (10 hours 100 vph), but no sales work will be done. If he spends all his time doing sales, he can generate 1200 value points (10 hours 120 vph), but no coding will be done.

What's the Optimal Allocation of Tasks?

Let's start by assigning Alex to the task where he has the highest comparative advantage, which is sales. He can spend all his 10 hours on sales, generating 1200 value points.

Now, we have 6 hours of sales and 16 hours of coding left. Bob, Carol, and Dave each have 8 hours. We should assign each of them to the task where they have the highest comparative advantage.

Bob generates more value points when coding (60 vph) than doing sales (50 vph), so we assign him to coding. He spends all his 8 hours on coding, generating 480 value points.

Carol generates more value points when doing sales (70 vph) than coding (40 vph), so we assign her to sales. She spends all her 6 hours on sales, generating 420 value points, and the remaining 2 hours on coding, generating 80 value points.

Dave generates more value points when doing sales (60 vph) than coding (50 vph), but since all sales hours are already covered, we assign him to coding. He spends all his 8 hours on coding, generating 400 value points.

In total, the team generates 2580 value points per day (1200 from Alex, 480 from Bob, 500 from Carol, and 400 from Dave), with all tasks covered. If Alex tried to do everything himself, he would only generate 1200 value points, and many tasks would be left undone.

Here’s the punchline: Even though Alex is more efficient at both tasks, the team can achieve more collectively by specialising in what they do best relative to others. In the context of a start-up, this means that even if a founder like Alex is better at literally everything that needs doing than their employees, they should still delegate tasks to them. Why? Because their time and energy are limited resources. By focusing on what they do best and delegating the rest, they can achieve more than if they tried to do everything themselves.

For example, even if Alex is a better coder than his developers, his time might be better spent on strategic decision-making, fundraising, or building relationships with key partners. These are tasks that only he, as the founder, can do. Meanwhile, his developers can handle the coding, even if they are less efficient than Alex. This way, the team can achieve more collectively than Alex could achieve on his own. And I hope my calculations earlier made this abundantly clear.

Had Alex understood and embraced the concept of comparative advantage, he might have been able to turn his business around. He could have focused on his unique strengths as a founder, empowered his team to contribute in their own ways, and built a sustainable business that could scale beyond the 0-1 phase.

That’s a Wrap

The story of Alex is not just my imagination, it’s a metaphor for many start-ups that don’t make it past seed stage. I’ve personally already experienced a handful of real world manifestations of it.?

No matter how talented or intelligent you are, you cannot do everything yourself. I recommend you embrace the power of comparative advantage and trust your team. Often, it’s that simple realisation itself that allows prodigies to become better delegators. If this applies to you: You’re welcome.?

And a final tip: the easiest way to avoid the daily handling of the unintuitive logic of comparative advantages is to hire a team that is better than you.