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Hey guys, this week we’re back again with a controversial take from one of the leading InsurTech founders in the world, Stan Smith of Gradient AI, who last raised a $56m Series C a few years ago. 

In the venture capital world, there's a prevailing orthodoxy that has taken hold like gospel: middle management is a startup killer. 

Flat hierarchies are celebrated, layers of management are seen as bureaucratic bloat, and the phrase "too many managers" has become shorthand for a company losing its scrappy edge. But what if this conventional wisdom is wrong?

Stan Smith, CEO of Gradient AI, challenges the venture ecosystem's obsession with flat organizational structures and reveals why middle management might actually be the secret weapon for scaling startups.

Setting the scene 

Gradient AI operates in the massive insurance market, using artificial intelligence to help carriers identify high-risk claims before human adjusters can spot them. The company started as an internal business unit at actuarial consulting firm Milliman before spinning out as an independent company. Today, it serves both property & casualty and health insurance markets, with health now representing over half the business.

But Smith's path to embracing middle management wasn't immediate. Like many founders, he initially fell into the trap of trying to do everything himself; at one point managing an unwieldy 30 to 40 direct reports. 

“Flat is right”... VC hypocrisy? 

The venture capital industry has long championed flat organizational structures, particularly during the early and growth stages. Investors are now demanding sound unit economics and a clear path to profitability. Startups that can demonstrate strong fundamentals and a focus on sustainable growth will be better positioned to secure funding.

This focus on efficiency has reinforced the belief that management layers are inherently wasteful. The thinking goes: why hire managers when you could hire doers? Why create bureaucracy when you could maintain agility?

Series B is when culture can either start breaking or solidifying. With more people on board, more layers of management, and faster hiring, it's easy to lose the magic that made your startup work in the first place. This perspective, while common, treats management layers as a necessary evil rather than a competitive advantage.

Even the structure of venture capital firms themselves reflects hierarchical thinking, with positions like Associates, Principals, and Partners forming clear chains of command. Yet many VCs continue to push their portfolio companies toward flatter structures.

How did they get here

During Gradient AI's bootstrap period inside Milliman, Smith made trade-offs that seemed logical at the time but created problems later. 

This approach worked in the short term. The company was generating revenue, satisfying customers, and growing. But as Smith reflects, "I think we made a lot of trade-offs to put more capacity for getting products out the door than building a better execution machine."

The hidden costs only became apparent later: inconsistent processes, uneven career development, and Smith himself becoming a bottleneck for critical decisions.

Their relentless focus on product had led to a bigger problem: operational inefficiency. The people were all there, just not in the right order. 

Maybe it’s insurance specific? 

The insurance industry presents unique challenges that make flat hierarchies particularly problematic. Unlike consumer tech startups that can "move fast and break things," insurance operates in a heavily regulated environment where mistakes have serious consequences.

The regulatory landscape adds another layer. Insurance companies must comply with state-by-state regulations, maintain strict documentation, and undergo regular audits. This isn't an environment where processes can remain informal as you scale.

Moreover, Gradient AI's customers are themselves highly structured organizations with formal decision-making processes. Selling to insurance carriers requires relationship management and compliance expertise. A flat startup often struggles with the accountability and clear communication lines these clients expect.

The awakening

Smith's perspective shifted as Gradient AI transitioned from getting products built to scaling systematically. "I think we're transitioning from 'get the product built, get the product out there, drive revenue' to 'how do you make sure this scales from where we are into 3, 4, 5x to the future.'"

The realization was that management is about enabling others to do their best work. Stan believes that good managers don't just supervise; they coach, develop talent, remove obstacles, and create the conditions for teams to excel.

True cost of under management 

When Smith looks back, he's clear about what he would do differently: "If I could make one change, I would have been in a position to raise capital sooner so I could have built up more capabilities sooner. Not a lot of money—but I think more money sooner, we would scale faster."

The capabilities he's referring to aren't just technical or product capabilities, they’re management and operational capabilities. 

The key insight from Gradient AI's experience is that there's a sweet spot for middle management. It's not about creating bureaucracy for its own sake, but about creating the right organizational infrastructure at the right time.

Smith's advice to other founders reflects this nuanced understanding: "I think bootstrapping for some period of time is helpful. It makes you realize that every decision you make is a trade-off. You can't do everything. But if I could go back, I would have raised capital sooner to build up more capabilities sooner."

Those capabilities include:

• People development: Regular coaching and career planning

• Process optimization: Systematic approaches to recurring challenges

• Decision distribution: Pushing decisions down to appropriate levels

• Knowledge management: Ensuring critical information doesn't live in one person's head

What this means for you 

Gradient AI's journey from a 10-person team with no management structure to a Series C company offers several practical lessons for founders navigating the scaling challenge.

#1 Recognize the management investment point. Smith's biggest regret wasn't waiting too long to hire engineers or salespeople—it was waiting too long to build management capabilities. 

#2 Industry context matters. If you're operating in a regulated space like insurance, healthcare, or financial services, the flat hierarchy playbook may not apply. These industries demand documentation, compliance, and institutional memory that informal structures can't provide at scale.

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See you next week!

Rahul & Aryaman