The Untold Cost of Having the Wrong People in Your C-Suite
Several years ago, during the board meeting for a seed stage cybersecurity company, I listened as the founder and Chief Executive Officer highlighted the biggest challenge facing his company. The annual customer churn was 20%, primarily due to technical issues with the software product, resulting in the loss of over $200,000 in top line revenue per year. Like any good executive, he laid out a clear four quarter plan to address the issue by shifting both resources and company focus. The initiative was to be spearheaded by the Chief Technology Officer, who joined the company shortly after inception. The Board of Directors nodded in agreement. Being a rookie VC, I took a mental note and said nothing.
Two years later I sat down with the CEO and founder to get an update. It was not good. The churn rate was still 20% and there were plenty of nasty 2nd and 3rd order effects as a result of his failure to fix the issues. Several developers had quit out of frustration due to the massive tech debt, the Customer Success team spent all their time calming down current customers instead of upselling, a top tier Series A investor pulled a term sheet, morale and productivity was at an all time low, the company raised a flat round due to missed projections…the list went on.
Most frustrating to me was the fact that the company had the same CTO, even though he was responsible for this critical priority. This was a personnel problem. While there could be mitigating circumstances, this individual had ownership of the project, had a two year-long chance to get things right, but was unable to deliver.
What was the true cost of this personnel problem? Let’s do a little math to find out:
Cost of the pulled term sheet: $100,000
Two years of CTO salary: $400,000
Two years of 20% annual churn: $400,000
Two years of reduced Customer Success upsells: $500,000
Wasted hiring costs: -$100,000 spent training and recruiting new employees
Two years of missing product roadmap and monetizable features: $1,000,000 in missed revenue
$2m off ARR projections: $20,000,000 loss in equity value
Founder dilution due to flat round: $10,000,000 of personal equity value
True Cost: $32,500,000
When we look at this objectively, the true cost of a key personnel issue is staggering. The 1st order effects of these decisions seem minor, but over time the 2nd and 3rd order effects compound in severity. These numbers may seem unreasonable, but they are not. The startup graveyard is filled with companies who failed to recognize and maneuver around personnel issues. The true cost of these mistakes, in many cases, is everything.
The company survived long enough for the team to recognize the issue and make a change.
What’s most interesting to me is that the CTO actually sounded the alarm and made the judgement call that they needed to be replaced. Not a second too soon. A few months later, after fixing the product and empowering the growth engine, the company raised a significant amount of growth equity and was off to the races.
At the time, I found it difficult to understand why the CEO did not make the call much earlier. After our conversation it was clear. Good leaders care deeply about the people in their organization and are exceptionally loyal. They recognize that everyone has flaws, but also see opportunities to grow, mature, and develop their people.
As an Army Officer, this philosophy was table stakes. We spent 90% of our time training, training the trainers, conducting leadership development training, going to schools, mentoring and supporting our Soldiers and their families. This worked, because we were not judged or valued based on revenue or profit. We were not beholden to investors or hamstrung by burn rate or cash flow. We never worried about funding, runway, healthcare costs or making the next payroll. We were evaluated by the readiness of our teams and had the stability to do this.
While there is nothing inherently wrong with loyalty or the desire to mentor and develop, leaders in early stage companies do not always have this luxury. Survival is far from guaranteed. Stability does not exist. For better or for worse, your key performance indicators are the financial health, performance, and growth of the company.
I am not suggesting that founders must be ruthless. Far from it. I am advocating that founders need to recognize the real consequences and tradeoffs of making the wrong personnel choices and, most importantly, failing to make timely and appropriate maneuvers.
Most of the companies I have either founded, advised or invested in have all had some form of personnel issues. In late 2019, CB Insights released an analysis on 101 startup post-mortems. The #3 reason why startups fail is because the company had the wrong team. I’d also argue that reason #2, running out of cash, is likely an artifact of having the wrong team which results in missing both deadlines and projections.
The difference for companies with team issues between success, stagnation, and failure is usually correlated with the time to correction.
From my work over the years, there are six key steps that startup founders and executives need to take in order to reduce the time to successfully maneuver key personnel issues.
- Communicate: Your team will not know something is wrong unless you tell them. So, communicate early and often. This means everything from at least quarterly performance reviews to stopping someone in the office and doing an informal check-in. The worst thing we can do as leaders is surprise one of our team members with festering disappointment weeks or months after something should have been done. Maintain the same transparency with your Board and Advisors. These folks have been around the block a few times, and are in a great position to offer advice, guidance and hands-on help.
- Clearly Define Expectations: When setting expectations with your team member, it’s critical to provide both your intent and your left and right limits. For example, “Your mission is to eliminate the tech support backlog, so our customer success reps can focus on upselling. You have four engineers and $45,000 of additional budget.” The point here is not to micromanage, but rather to remove ambiguity of direction and purpose. Think about shooting in the dark vs. aiming at a target and missing. It is much easier to assess someone’s ability to shoot in the second scenario.
- Quantify Success: Adding another layer of specificity is helpful. In the previous example, “tech support backlog” could mean trouble tickets in the queue longer than three days. Whatever the specific metric or KPI may be, it’s important to define success so there is no ambiguity about what the end result should be.
- Set a Deadline: Timing is the most important factor. Whether it’s three months, six months, one year or ten years, great leaders must balance giving enough time to execute on the vision while leaving ample time to course correct. There is no one-size fits all answer here. You’ve got to balance all of the variables including, project scope, burn rate, runway, market forces, cadence, schedule, and pace. If your project will take three months to complete and your company has 18 months of runway, then you have more time to maneuver than if you only had eight months of cash in the bank. In the 18 months example, you might feel comfortable setting a three month deadline after the project is supposed to be completed. With only eight months you should course correct after 30 days.
- Accountability: Your team member has a fixed target if you did your job as a leader by communicating often, setting expectations, defining success, and having deadlines. If they fail to accomplish the mission, then they owe you an explanation and you owe it to your company to do something about it. Did you fail them by defining the wrong problem? Do they not have the technical capability for the task or the competency as a leader? Not everyone needs to be replaced, but everyone needs to have product-market fit. Insanity is repeating the same action and expecting a different result.
- Have a Plan B: Long before you have the “accountability” conversation, you should have a system to replace anyone in the company. Have some recruiters pre-vetted. Talk to your board or investors about these issues right when they occur. Always keep a folder of great candidates even if there is no immediate fit. In a worst-case scenario, you’ll spend six months looking for the right hire after you spent 12 months waiting for a team member to finish a project. Do everything you can to reduce the time to maneuver after making a personnel decision by having resources in the wings.
While the company survived, it was only by a thin margin.
Most startups, without disproportionate luck, don’t make it two years with the wrong team. The CEO’s inability to objectively do his job, and put the right people in the right role at the right time, put his company at significant risk. Under stress and the influence of emotion, we are not good decision makers. Taking the time to make a management plan that has accountability, expectations, and communication at its core before you need it can be the difference between success and middling out.
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