A simple two-by-two approach to decide what kind of people to recruit for a growing startup, and to avoid the most expensive hiring mistakes
When founding my first serious startup, I made enough mistakes to fill the Encyclopaedia Britannica. But the most useful early mistake, as a learning opportunity, was that three of my first four hires were gone within ninety days. One of those was the head of marketing — let’s call her Michaela.
Michaela had a stellar CV. She’d been to a top university. She had a decade of career experience in the industry. And she’d worked for two of the top agencies in the world. She was way out of our league, and so expensive that the only way we could bring her was to pay half her current salary and to give her a huge slug of stock options to outweigh the loss of the other half.
Yet a couple of months after Michaela joined, things weren’t going well. We had no more customers than before, and while lots of strategies had been developed, we didn’t seem to actually be doing any more marketing than before. The dissatisfaction was mutual: by then, Michaela had had second thoughts about the half-equity deal she’d done. Within a few weeks, she was out of the door. (It was a decision she probably regretted, since the equity she left behind was later worth $10m.)
But Michaela wasn’t the biggest hiring mistake we made. When it came time to take the company public, I felt we needed a CEO who knew how to talk to Wall Street. So we recruited an authoritative, impressive guy who when you met him gave you a strong feeling that the boss had just walked in the room (even if the boss was in fact still you).
He declared his ambition was to ‘professionalise’ the business. In this, he fulfilled all our hopes. Wall Street was impressed. We were able to IPO the business on the NASDAQ. And within a year, we’d acquired our biggest competitor for $1bn.
There had been changes inside, too. The senior people started flying business class rather than economy. The company moved from a cheap and grungy warehouse to a glass and metal tower. And the new boss’s BMW sports car, paid for by us shareholders, had its own reserved parking space in front of the entrance, so people practically had to walk around it to get into the door. “I think it’s a great motivator,” he told me at the time. “People know that if they work hard, they too can have a car like mine.” A few years later, the new CEO had declared victory and moved on (with his car). But things weren’t so great. The company had burned through 75% of the IPO proceeds, the capital markets were firmly shut to new fundraising, and the stock price had fallen by 99%.
These incidents raise three of the hardest questions facing startup founders. One, which I’ve written an article on, is when to hire senior people. Another is how to avoid a train wreck after they join. But perhaps the most important is how to pick the right people appropriate for the stage your business has reached. In thinking about this, I’ve learned a little from my own mistakes, a bit more from the companies we’ve invested in at Walking Ventures, but most of all from discussions with the CEOs I’ve coached.
It’s how to pick the right people that’s the most important question
Paradoxically, VCs spend a great deal of time and effort trying to persuade the founders of their portfolio companies to hire more senior people, and to do so through a robust process (often including a retained search firm that will charge a third or more of the new hire’s first-year salary). The VCs’ impulse is mostly right; when you look back on Series A companies, the fastest-growing group tend to be those that hired plenty of senior talent from outside. That is consistent with the notion that while you need a certain iconoclastic zeal to upend a traditional industry (think Kalanick and Uber), you also need to build a robust company with processes and structures if you hope to be around for the long run. Founders who are resistant to hiring people more senior or more knowledgeable than they are don’t tend to do so well. But even when the founders get that memo, the success rate of those senior hires by startups is sadly low, and it’s worth asking why.
If you try to deconstruct the problems that come up when companies hire senior people, often from legacy companies, there are plenty of superficial issues that come up. Like costs: founders are often penny-pinching, while inbound executives often expect (and demand) big budgets. Or technology: young founders often know all the latest greatest tools to use, while older inbound execs often make you wonder if they’d be happier having a secretary take dictation and print out their email. But the bigger issues usually boil down to two things: executing versus managing, and innovating versus scaling.
The executing-managing axis
When you start your own company, there are lots of things you have to do yourself — from buying and plugging in your own computer to (famously, at Amazon) building your own desk out of a cheap door. The result is that founders tend to become polymaths, and to have a bias not just to action but also to doing stuff for themselves.
As the company grows, the way to get things done starts to change from doing things yourself to getting other people to do them —and that means that the success of people at the top of the business is defined most by how effectively they find, recruit, organise and motivate others.
The innovating-scaling axis
Early on in the history of a business, the most important mission is to find product-market fit — to build something that people actually want to buy and are willing to pay for. Figuring out what will work is much, much harder than it looks: so much harder, in fact, that the smartest people don’t try to do it. Instead, they try to build something that’s their best guess of what product will fit the market, and expect it to be wrong. And they devote their efforts to a rigorous process of creating, testing, measuring, making changes and going back to creating, knowing that if they work hard enough and go round the cycle long enough, they’re maximising their chances of success. That is a process of innovating.
But companies need to do more than innovate; they also need to get bigger. So as soon as you have a product for your customers (unless it’s something that is so automated that it can sell itself, support itself, and deal with its own billing and customer-service issues), you’ll need other people to deliver the product at scale.
Which implies that there are four kinds of people needed in a startup:
- Innovator-managers: People who can both come up with great ideas and also plan and organise. That is: people who can start and lead businesses. Let’s call them founders.
- Innovator-executors: To build your product, you may need developers, graphic designers, marketeers, content writers. Let’s call them specialists, since they typically have a short list of areas of expertise, but their job is to come up with great new ideas in those areas. They can perfectly easily be individual contributors (ICs); they don’t need to run teams.
- Scaler-executors: As your company gets bigger, the demands in each department or activity become too much for an individual. You need more than one customer-support person, more than one sales executive. Bringing in these people is the way to scale the business. Let’s call them operators because their job is to operate a machine that’s been built. It may get tweaked and improved, but for this week at least, there’s a defined process you want them to follow.
- Scaler-managers: So you’ve got a product, and you’ve got customers. And you’ve got a growing crew of operators that need someone to organise, motivate and direct them. That’s the typical profile of the senior hires that VCs are so keen to see their startups bring in. (Let’s call them executives, but note the irony of the word: executives aren’t executors; they’re managers.)
The mix between those people will define the culture of your company ten times more than the dress code or the office decor.
If you draw out the two axes, the results look like a two-by-two matrix:
The y-axis goes from innovating at the bottom to scaling at the top. The x-axis goes from executing on the left to managing on the right.
A natural journey for a company is to travel clockwise around the matrix starting at the bottom right. They start with founders only, who do everything themselves; then move left to hire some specialists as they get closer to product-market fit, who come up with new ideas but get stuff done by themselves. Next they move up to bring in operators as the business begins to scale, because they get things done using existing processes. And finally they move right to bring in executives to oversee the operators, because they manage teams of others and make the business grow.
In the real world, things aren’t always so neat. On the technology side, the developer who writes the code for a minimum viable product turns into a chief technology officer running a team of engineers. On the sales and marketing side, an inspirational advocate brings in the first few customers, and turns into the person who organises a repeatable sales process.
The difficulty in hiring in any particular area arises when the company is on the cusp of change. In sports, it’s hard to be a player and a coach at the same time. In construction, it’s hard to be a site manager and also a builder. And that’s where many startups run into hiring problems.
- One CEO I work with has hired a CTO who’s great at running the team but doesn’t write software. Six months in, he’s improved the processes a lot, but apart from lots of refactoring, the company hasn’t written a single line of new code. A lot of technical debt has been cleared, but customers are clamouring for new features and the board is getting impatient.
- Another CEO I work with has hired a new (and very expensive) VP Sales. Three underperforming sales people have been let go, and replaced with three much more senior sales people. The sales materials have been revamped, and a new CRM is in place. The probability-adjusted pipeline value report looks promising, but hasn’t yet shown up in real revenue.
In both these cases, the CEO is uncomfortable — and the discomfort arises partly from mismatched expectations. The first CEO hoped that new CTO would get their team to operate the tech side of the business better, but to keep innovating too — ie, to keep some of the tech team’s effort under the line between specialist and operator. The second CEO expected the new VP sales to be meeting a few client and bringing in some big deals too — ie, to be sometimes left of the line between operator and executive.
The moral for startups — and this is something to share with CEOs, if you’re a VC, or with cofounders if you’re a CEO — is that when you start a search for a new hire, try to mark the spot where the ideal candidate will appear on the matrix. If the founders and board can’t agree on the answer, that’s an indication that you need to discuss the company’s needs some more before finalising the job ad.
When you start seeing candidates, it’s also a good idea to ask them where they’d place themselves on the matrix. If their answer is too far to the left of your target, then they’re not senior enough. If it’s too far to the right, they’re not going to get their hands dirty enough. If it’s too far up, they’re not experimental enough, and if it’s too far down then they’re not expert enough in processes. But remember that these are your views, and you may not be right. It’s worth comparing your view with the candidates, and inviting them to give you their view.
If you try out this tool on your next hire, let me know how it goes.
I’m Tim, and these articles come from my work coaching Series A and B CEOs backed by VC firms in Europe, America and Asia. Since 2013, I’ve run a seed fund out of London that invests in SAAS, platforms, marketplaces and tools. I’ve backed 50 companies, sat on 19 boards, founded a startup, and taken it to an IPO on the NASDAQ. Before that, I worked for The Economist and the Financial Times and wrote business books.
About this publication
This is one in a series of blog posts covering nine of the most important skills I’ve seen in founders who successfully scale their companies. If you’d like to read more of them, please sign up for free below. If you’d like to read a free proof of my forthcoming book, send me a quick email introducing yourself.
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