16 ms·

Shouldn't the calculation of the 'value' of the average employee be the annual profit divided by the number of employees, not revenue?

• nbstme 5y ago
  Yes, it's another interesting metric. Although ideally, a fast-growing focuses on cash flows and reinvest all the cash so that there are no profits at the end of the year.
• seibelj 5y ago
  Also good to see if revenue can increase while adding few or no employees. Then the potential for flywheel is there, vs. an agency that scales costs linearly with revenue.
  • nbstme 5y ago
    True! Some startups, unfortunately, have a scalability problem and need to scale headcount to increase the revenue proportionally.
• pjc50 5y ago
  "average revenue per employee" is a fairly widely used metric even in non-startup companies. "Profit", GAAP or non-GAAP, is these days kind of a virtual number; Amazon have been hugely successful despite not "making a profit" in the traditional accounting sense. However the article hints at what's really going on: in many startups the objective is to cash out before the question of profit has to be addressed. Many of these buyouts are "acquishutdowns" - the product has zero value and is shut down after a short transition, while the customers and staff are really what's being bought. In this sense the startup functions like an expensive recruitment agency or an inefficient version of the footballer transfer scheme. In those cases it's advantageous to hire even if there is nothing profitable for the employees to do - because it increases the buyout value.
  • nbstme 5y ago
    You're right; all these metrics can be easily manipulated, whereas revenue is more reliable. I guess you're talking about "acqui-hire," meaning the acquisition of teams of 10-40 people for ~$25m. My broader point is that many startups scale to hundreds of employees, buying growth, but remain poor businesses. Headcount is a vanity metric similar to likes on social media or fundraising.
    • m_ke 5y ago
      Growing a sales and marketing team can translate to a lot of revenue growth.
      • nbstme 5y ago
        Yes, and as long that the revenue growth is higher than the cost, most startups should do it!
• andruby 5y ago
  When looking at revenue / employee, in businesses where wages are the biggest cost (eg: software), that ratio also gives you a upper bound to how much you can pay employees and still be profitable. In my book, revenue / employee is much more meaningful than profit / employee, because profit is arbitrary to a large extent.
  • nbstme 5y ago
    +1 and I should have mentioned that there are significant disparities, say per country, of how much an employee costs.