Lessons Learned: Hiring

By Frank Demmler

“It’s management, management, management.”

That’s the phrase that many investors will cite when asked what is the most important element that they evaluate when considering an investment in a company. Variations on that theme include,

Š      “I bet on the jockey.”

Š      “I’ll take an A management team with a B idea over a B team with an A idea every time.”

If it’s so darn important, how come we continue to make so many mistakes?

Nobody’s Perfect

You are going to make hiring mistakes. It comes with the territory. Yet, rarely does a first-time entrepreneur’s plan reflect that eventuality.  Most plans imply that every hire fills the necessary slot forever. 

Have you included personnel turnover in your plan?  Have you incorporated:

Š      People leaving your company?

Š      Having to fire people?

Š      The cost of severance?

Š      The inefficiencies of having to replace someone with a new hire who needs to be trained?

Š      Costs of recruiting (advertisements, headhunter fees), if any?

Š      The financial impact of having multiple slots unfilled at any time?

This is the reality and it will have a significant impact on your company’s operations. First-time entrepreneurs should anticipate that at least one out of four hires will not work out and will need to be separated from the company. When one takes voluntary departures into consideration, it would not be unreasonable to assume 50% turnover in each of the first two years.

The “good” news from an investor’s perspective is that at least nine out of ten companies will be under their spending forecasts because their staffing will be behind plan.

Why I’m Wary of Milestone Investing

In the beginning of my career working with early stage businesses, I believed in milestones and tying investments to their achievement. Conventional wisdom was (is?) that milestones help to keep the management of early stage ventures focused.

That assumes that the milestones agreed to at the closing remain the company’s priorities.

In my experience, though, that’s rarely the case.

Things change. Priorities shift. In some cases, strict adherence to the milestones may hurt the company. The conflict between the specifics of the milestones and the company’s needs are often difficult to resolve. 

If you’re a first-time entrepreneur, all you know is that getting the next round of funding depends on hitting the milestones.  The fact that things have changed is troubling, but you can’t tell your investor that you were wrong (even if the changes had absolutely nothing to do with anything you said or did).  You fear that if you try to change the milestones, it will be seen as a sign of weakness. Instead of admitting and addressing the important issues, you play ostrich and forge ahead with meeting the milestones.

How does this relate to hiring?

Well, if you’re like 99% of first-time entrepreneurs, you do not have a complete management team in place when you seek your initial funding.  A potential investor will point that out, and after discussion with you, you’ll agree that recruiting a vice president of [fill in the blank] by a specific date is a perfectly reasonable milestone.  The deal is set.  You close on the first tranche (a fancy word for a closing).  And away you go!

As your cash dwindles and the next closing approaches, you can often find your standards for filling the agreed-to position begin to erode.  After all, getting cash into the company is critical, so that takes precedence. Bad move.

I was on the board of a company that had a milestone to hire a vice president of sales by a certain date.  We even had a budget to engage a recruiter to help us find the right candidate.  Long story, short, we narrowed the selection to two candidates. The selection committee from the board, including the investors who had set the milestone, met with the candidates individually, and we endorsed the CEO’s recommendation. 

Milestone met. Next round of funding closed.  All is good… NOT!

To this day, it is my opinion that this specific decision led to the company’s ultimate failure (and the loss of over $5 million of investor money).

Why?

Within 45 days, the CEO knew that the hire wasn’t going to work out, but he was reluctant to bring this to his board’s attention. He was afraid it would undermine his relationship with them.

I advised the CEO to work with the VP.  Surely he couldn’t be so bad as to not be able to do an adequate job.  After all, the recruiter found him and confirmed his past accomplishments.  I had interviewed him, and while he had some experience gaps that I knew were potential liabilities, they didn’t appear to be insurmountable. 

Remember my comment earlier about playing ostrich?  Well, that’s what I was guilty of.

The VP’s inadequacies were not obvious to the board until about the fourth month.  Finally, he was let go before the end of six months.

So what’s the big deal? Hiring and firing is an everyday occurrence.  I’ve even said as much earlier in this article.

Well, the big deal is that we had to unwind the sales organization that the VP had put into place.  That took about three months.

So it took us nine months to hire, fire, and return to the status quo of where we had been before we hired the wrong VP.  That’s nine months of burning cash.  That’s nine months of market evolution without us being a meaningful participant.  That’s nine months of telling customers one thing and then having to retract those statements.  We went from a leadership position, to one of a follower.  We never caught up.  The company failed.

I believe that the hiring milestone led to us hiring the wrong person.  Since then, while I have reluctantly participated in some milestone-based deals, I have never allowed filling a particular position to be one of the milestones.

The Groucho Marx Syndrome

Groucho Marx is remembered for many witty sayings. [I’m probably dating myself with this reference, but I hope not.  Groucho should not be forgotten.]  With respect to the topic of this article, I’m referring to: “I’d never belong to a club that would have me as a member.”

The individuals that you want to join your company have no interest in joining your company. The first-class individuals that you should be seeking are already in good jobs.  They are being recruited for senior positions with companies that are much more established (read, “less risky”) than yours.  There’s no way that they’d ever consider your company, is there?

Yes there is. You are launching a “kick-ass” company, aren’t you? [If not, why are you reading this article?] You will embrace capable professionals who will join your team and help to shape the company’s future.  Being part of your company will be exhilarating, challenging, and fun. Your recruit’s current position can’t come close to the kind of satisfaction that can be achieved in your company.  That’s why the recruit will join your company.  You just have to convince him that that’s the case!

By the way, the inverse of Groucho’s Syndrome, while not absolute, is worthy of consideration.  “Anybody who wants to join your company may not be someone you want to join your company.”  Think about it.  

Advice to entrepreneurs

Frank Demmler is Associate Teaching Professor of Entrepreneurship at the Donald H. Jones Center for Entrepreneurship at the Tepper School of Business at Carnegie Mellon University. Previously he was president & CEO of the Future Fund, general partner of the Pittsburgh Seed Fund, co-founder & investment advisor to the Western Pennsylvania Adventure Capital Fund, as well as vice president, venture development, for The Enterprise Corporation of Pittsburgh. An archive of this series of articles can be found at my website.