What I Learned About Running a Startup From Econ 101 Student entrepreneur Joseph Draschil on the theory of comparative advantage and how your startup would do well to learn about it.
I certainly wasn't expecting to find the answer to one of my earliest startup challenges in a macroeconomics class. But that's exactly what happened when my professor introduced the class to strategic-trade policy.
My partner at the time, another first-year MBA student, had been working with me on a business concept for the previous seven months. Up to that point, we had both been juggling the various tasks with no clear definition of roles. Our summer break was coming up and we were getting ready to ramp up our business. It was time to divide and conquer.
Unfortunately, when it came to dividing up the roles, I was having a hard time letting anything go. In my mind, I was better at just about everything, including pitching, sales, business development, marketing, project management, product development and design. If I am better than my co-founder or even employees at all of these things, I should do them all, right? Put the best player on the court, right?
David Ricardo, the economist who codified the theory of "comparative advantage" in his On the Principles of Political Economy and Taxation, wouldn't agree. Instead, he would say that even if a founder has an absolute advantage at two jobs -- for instance, he is better than anyone else in the company at coding and at selling -- there will always be someone with a comparative advantage over one of them.
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Without getting too deep into the math of this concept, comparative advantage says that it doesn't matter if Michael Jordan is better at every position than any other players on his team (a.k.a., absolute advantage). He is still better off focusing on playing at his very best position (a.k.a., his comparative advantage) and letting four other guys get on the court with him. Sure, Michael Jordan could theoretically play all positions better than anyone else, but he can't play them all better at the same exact time.
So what does this mean for entrepreneurs?
In the real world, resources are always constrained. And if there is any resource entrepreneurs never seem to have a surplus on, it's time. If the founder spends an hour coding, that's an hour he can't spend on sales. If he spends an hour on making sales calls, he can't spend that hour coding.
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For this reason, my co-founder and I split up our duties. Even though I thought I had an absolute advantage at both building the product and demand for the product through sales and marketing, it would be much more efficient for me to not try to do it alone. He would focus on sales and business development, where he had a comparative advantage. And I would focus on building the product, where I had a comparative advantage.
So, the next time you are breaking down roles among your founding team and you feel like you need to be doing all of the jobs, remember this: First off, stop kidding yourself. You're not better at everything (and neither was I). And second, even if you are better at everything, you don't have the time to do it all yourself. So, choose what you're best at and let others step in where they have abilities.
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How did you learn this lesson at your startup? Let us know if an economics course inspired you too in the comments section below.
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