[originally written for Mass High Tech]
SHOULD YOU HIRE A senior executive OR grow a junior level role WHEN BUILDING A GROWTH-STAGE COMPANY?
In our role as executive search consultants for growth-stage companies, one of the questions that seems to continually vex the CEO is how best to build out their team. This question often narrows to a discussion around whether it would be better to hire a senior level person first in each of the key functional roles in the organization chart, or rather to hire a more junior level person and hire at a higher level once the company has built up some “traction.” For our purposes, traction can be defined as any or all of a number of indicators, including revenue, funding, or product development milestones.
Short answer: “It depends…”
When asked this question, the CEOs and venture capitalists we talked to universally responded, “It depends….” So then the question became, “On what?” The answers came back and included the following key variables to balance when trying to decide on whether to hire high or low when you first fill a key position in your early-stage venture—
Key Variables to Deciding Whether to Hire a Senior Executive or Train a Junior Level Role to Grow
- Funding—Money is certainly a gaiting factor for most early-stage companies, and often the largest line item on the P&L is salaries & wages. Putting in a leadership team too early all at cash compensation that runs north of $150,000 can certainly create a net-cash-burn that would rival the bubble days. However, “talented people hire talented people,” says Lou Volpe, Managing General Partner of Kodiak Venture Partners. And talent doesn’t necessarily mean ‘experienced.’ Talent alone is usually less expensive.”
- Composition of the Incumbent Team— You need to have a balanced team. Companies are often referred to as “engineering culture,” or sales, or finance-driven. This speaks to an inherent imbalance in the leadership team. Kodiak’s Volpe emphasized that, “you need to think of the entire picture, the entire team. You need to have it balanced. If you have too much strength in one function, you’ll be out-of balance and the company will suffer accordingly.”
- Stage of Company— If too early-stage a company, it may be difficult to attract the world-class talent you need. This conflicts to some extent with the current thinking today popularized by Jim Collins in his book, Good to Great. In one of the areas Collins explored with the “great” companies he studied, he and his team learned that these companies focused on “getting the right people on the bus,” then deciding where they were going to drive it. David Power, a Partner at Fidelity Ventures, qualified Collins’ observations, saying, “If you’re a charismatic enough leader, you might be able to get everyone on the bus BEFORE you start to drive, but every company doesn’t have that privilege, especially when young, and often capital-constrained/higher-risk. You need to be able to give talented executives that you are seeking to attract some general direction, to be able to explain to a ‘hire-high’ A-player why the company and role should have great appeal to the candidate.”
- Which Function It Is -- There are certain functions in an early-stage company where hiring the best is critical early on. One such critical area is hiring into the leadership roles responsible for the product development in the company—engineering in the case of technology product, or science in the case of biotechnology/life sciences. CEO Tuan Ha-Ngoc said that it was critical for Genpath’s success to get the best Chief Science Officer they could find, and they did. One of the VC’s commented however that the finance function is a perfect example of where hiring low is often the right thing to do—the company only needs a part time finance person at its earliest stages, then a controller later on, and then if the company is looking to go public, a world class CFO.
- Speed of Anticipated Growth— If the company is anticipated to grow slowly, it is possible that a person can grow in parallel with the company. However, given the often-cannibalistic nature of technology and sciences companies, “slow” is often not an option due to fears of product obsolescence, time limits on patents, or pure competitive pressures. Globespan’s David Fachetti put it clearly, saying, “Hire higher for fast growth companies. The opportunity will grow into the people, rather than the people grow into the opportunity. Talented and experienced executives will bring up the level of the opportunity to meet their needs, and in so doing will accelerate the company’s growth.”
- Price point of Product /Service— Enterprise software or very expensive hardware sold into the C-levels within the Global 2000 may put pressure on the upside of the high/low spectrum. Kodiak’s Lou Volpe feels that if price-points are high, it is likely the company will need more senior/experienced talent to get it to market.
All those interviewed agreed on a number of best practices. The one that stood out most is the need to hire what was referred to as “quality.” There are two primary axes on candidate qualifications briefly mentioned earlier—the first is quality or “talent,” and the second is experience. If you hire someone with both, this defines the “hire high” approach. If you hire someone with only quality, but less experience, it points to the “hire low” approach.
Hiring quality: Defining it
Those we spoke with also included several other must-have characteristics further define “quality.” Fidelity Ventures’ David Power ticked off the first four:
- Ability to produce results
Joel Rosen, veteran CEO and former venture capitalist at Charles River Ventures added two more:
- Passion about the business
- Cultural fit with the rest of the team
One other CEO punctuated the list:
- Work ethic
Though no doubt there are many more, these rose to the top of the list when trying to describe what “quality” in a hire looks like.
Hiring experience: What to Look for
The other half of our working definition of “hiring high” we’ve termed earlier as “experience.” David Fachetti at Globespan Capital articulated four key areas he probes to determine whether candidates he interviews have what he defines as experience:
- Lifecycle experience: prior experience at a similar stage of company development
- Domain experience: prior experience in the same industry sector as the current company
- Functional experience: prior experience playing a similar functional role (marketing, sales, technology, finance, etc.)
- Relationships experience: has the individual worked with others on the team before?
Don't underestimate the value of leadership experience
One more key experience criterion, especially when “hiring high,” is leadership experience. One CEO emphasized that, “experience and skills aren’t a surrogate for leadership. If you’re going to be growing a team, you’ll fail without it.”
Determine where you need your best executive dna allocated
Another common refrain was that--in an early stage company--there are at least three key roles where you want to hire high, rather than low. Dave Fachetti, Principal at Globespan Capital Partners, summed it up, saying, “For a company to have a solid foundation for growth, bench strength needs to exist at the highest functional levels in technology (VP Engineering/CTO), sales, and the senior P&L role of CEO. Scott Griffith, Zipcar CEO emphasized that each company can differ, so “get the strategy right, and THEN hire high into the key stress points of that strategy.”
One qualifier made by Genpath CEO Tuan Ha-Ngoc was the impact of the differences between technology companies and life sciences companies. In pure technology companies, there is an additional emphasis on the importance of hiring a high level of experience into the position where the technology meets the customer, someone who has the pulse and understanding of the market into which the technology will be selling. In life sciences, the pain of disease is more often self-evident, where technology can sometimes mistakenly be developed for technology’s sake, a “build it and they will come” approach.
Make sure executives can “zoom out and zoom in”
The individual has to be able to both lead a function and do the function. In other words, if the decision is made to hire a VP Sales, that VP Sales has to be able to “carry the bag” and actually do the selling, as well as hire, train, motivate, and manage a sales force when the time comes. Similarly, an early-stage VP Engineering should be able to code as well as architect early on, until more hands can be hired. Early on at Yahoo!, the company determined that one of the key hiring criteria for any employee was that they could “zoom in and zoom out.” Every new hire had to be able to think strategically at the 50,000 foot level, but also be able to go back to ground-zero and execute the strategy. Zipcar’s Griffith—a licensed airplane pilot—added, “You have to be a pilot, willing to get under the plane and check all the equipment yourself, take off, navigate, AND safely land in order to get successfully from point of origin to destination.”
Biases & Cautions in executive search and retention
Not surprisingly there were biases that had formed from the individual operating experiences of each CEO or VC with whom we talked. And interestingly, despite these biases, many gave examples of a hiring circumstance that ran counter to their bias that worked out particularly well, or a hire that fit their bias that failed. Following are some of the biases and cautions that stood out.
strategically hire at equal levels across the functional spectrum
There was a great deal of alignment on this issue, and it’s a chronic mistake the venture capitalists we talked to saw in their portfolio companies. David Power at Fidelity Ventures elaborated saying that “If a CEO hires a weaker player into a function where that CEO has expertise, say the marketing function, the CEO ends up still managing marketing instead of doing what the CEO should be doing—running the company. You want to hire at equal levels across the functional spectrum.” Joel Rosen at Charles River Ventures added, “younger companies don’t have a lot of training infrastructure. The company is running too fast to have the leeway to train much. Although this isn’t a law of nature, the biggest gaiting factor to growth is often bandwidth, particularly that of the CEO.”
Don’t hire talent too late
Genpath CEO Tuan Ha-Ngoc put it simply and elegantly—“It is rare that the company fails because you hired high-caliber talent too early. It’s usually that the company hired too late.”
leverage the depth of hiring a senior position with multiple responsibilities
One of the ways you can often get top talent in early-stage companies is to offer multiple roles that will allow the higher-level executive an opportunity to stretch their wings. Lou Volpe at Kodiak added, “If hiring a senior engineering executive early-on, think about giving them QA, support, and/or manufacturing, even product management.”
The probability of a successful high/low hire is predicated on the clarity of the task
Put another way, the murkier the goals, strategies, and tactics of a particular functional area, the more you will bias your hiring toward the high side of the spectrum of experience. Conversely, if the responsibilities of the position are well defined and clear, a lower-hire might be just the right fit. As EquipNet CEO Roger Gallo put it, “Is the hire going to be focused on fulfilling known initiatives,
or rather creating and forging entirely new ones?”
position "high" and "low" hires in tandem to allow for future scalability
To this point, no mention has been made of the obvious question when talking about whether to hire high or hire low—what about “hiring in the middle”? Kodiak’s Lou Volpe admits a bias to a combination approach of hiring a low with a high—“Hire high, and then do a step function, and hire low. In sales for example, hire the VP, and then hire one or two lower-level individual contributors, one or more of which can be step-up candidates into the middle role of manager or director further down the company development cycle.”
What about hiring high/low when it comes to hiring the CEO?
This question is complex enough to support itself as a single topic of discussion with the venture capitalists and CEOs we consulted. However, Fidelity Ventures’ David Power listed three circumstances where hiring a step-up/“low” candidate into the CEO position can work—
- When a particular functional area is important to the stage of company growth (hiring a VP Sales or VP Marketing into the CEO position when the company is just entering its revenue stage)
- When continual technological innovation/engineering is inherent to an industry sector (hiring a VP Engineering or CTO into the CEO position because of the pressures for recurring and sustainable technology innovation)
- When you can get someone who is traditionally “out of reach” (hiring a superstar VP level candidate into the CEO position because a step-up is the only way you can attract that particular talent)
With all of the above thoughts on best practices regarding hiring for early-stage companies, an image formed to sum up some of the wisdom of the CEOs and VCs we consulted. Perhaps it’s not too different from how many parents buy clothes for their fast growing child—you pick the color and the style, and then have them walk up the rack trying on increasingly larger sizes until the piece of clothing actually falls right off. You then step it back one size, and buy that one. It’s just small enough that it can be worn now, but it leaves plenty of room for future growth.