29Sep
By: Matt Moore On: September 29, 2015 In: Matt Moore's Blog Comments: 0

Startups need to adjust their recruiting strategies for different inflection points in their development

By Matt Moore, SPMB Client Partner

There comes a time in every startup’s development when its founders need to expand their initial team by bringing in additional executive expertise. These early recruits – whether in engineering, product, finance, marketing or sales – are usually the most critical executive team members that companies need to propel them through hypergrowth.

The timing for filling these key positions varies somewhat. But most startup companies progress through a series of inflection points, or pivotal stages at which their personnel needs change dramatically, along with their ability to successfully recruit for those positions. At SPMB, we define these inflection points in terms of several broad annual revenue categories:

  • Pre-revenue: No sales
  • Early revenue: 0-$20 million sales
  • Scale-up: $20-$100 million sales
  • Pre-IPO: $100 million+ sales

Hiring the right person at each of these inflection points can make all the difference for companies trying to move from one stage to the next. In 2013, for instance, I helped Virident Systems recruit KenGrohe as VP of Worldwide Customer Operations. In less than 6 months he had significantly increased Virident’s sales and helped propel the company from early revenue to scale-up mode, which positioned them to be acquired by Western Digital for $685 million.

Much depends on timing

Companies need to be realistic, however, about the talent they can, and can’t attract at each stage in their development and whether it is even the right time to bring in a high-powered executive. Hiring is about mitigating as much risk as possible, and Virident didn’t bring in Grohe, a former EMC sales executive, to kick-start its global sales efforts until the company was already generating about $10 million in annual sales. The truth is, you couldn’t have gotten Grohe into a company that didn’t already have a significant revenue stream. He also, more than likely, wouldn’t have been as successful if the foundation hadn’t already been in place.

Proven sales executives typically want to mitigate their personal risk by joining a later-stage opportunity, and the likelihood you’re going to be able to mitigate your company’s risk by convincing a top 1-percent sales exec to join a pre-product company is very low. Likewise, most startups aren’t going to be able to attract an IPO-caliber CFO until they’re generating at least $50 million in annual sales and beginning to prepare for an exit.

Jason Lemkin, author of the SaaStr.com blog and a Partner at Storm Ventures, urges company founders to not even try hiring an experienced VP of sales until they reach at least $1 million in annual sales. In a video of a 2014 presentation he delivered, Lemkin suggests that founders start out by leading their own companies’ sales efforts, since you simply “can’t attract anybody good when you’re at that stage.”

Elite talent can be choosy

Every startup company would like to burst out of the starting gate with a full lineup of experienced, top-notch executives. But that almost never happens. In today’s booming tech market, elite talent has many, many options, and the best candidates can afford to be choosy.

Dave DeWalt, for example, sat out of the job market for nearly two years and reportedly turned down 40 jobs before SPMB helped facilitate his hiring as CEO of malware-protection company FireEye in late 2012. DeWalt – who in his previous role as CEO of McAfee sold that company to Intel for $7.68 billion – waited until FireEye was bringing in well north of $50 million in sales and had strong IPO prospects before taking the reins at FireEye.

When early hiring helps

The good news for early-stage startup companies is that it can actually be easier for them to recruit top-tier engineering and product leaders at the pre-product stage, when much of the innovative design work is still being done and the incoming exec can have more control over the company’s success or failure.

Three years ago I helped flash-storage firm SolidFire recruit Daniel Berg as VP of Engineering when that company was still at a very early stage. Although the former Skype CTO was a non-obvious candidate on paper, when you met Dan you knew he would turn out to be an amazing hire. Now serving as Chief Product Officer, Dan has helped SolidFire become a market leader in all-flash storage, with a staff of more than 400 and product bookings increasing by 50 percent per quarter.

There’s always exceptions, but in general, startup companies need to understand that during their early development stages it’s going to be harder to recruit elite sales and finance executives, and relatively easier to get engineering and product talent. As their company grows and matures, that situation should gradually reverse. (Marketing talent tends to be more case-specific, and is harder to correlate with either easier or more-difficult recruiting.)

For most companies, it makes sense to develop a recruiting strategy that takes advantage of each kind of talent when it’s most readily available to them. In many cases that may mean waiting a bit longer to hire that sales or finance executive you’ve been eyeing. But for those companies that must, for whatever reason, recruit “out of
season,” here is what typically happens:

  • You over pay for top talent. Early stage companies are often forking over up to a 2 percent equity grant, compared with the more typical 1 to 1.25 percent.
  • You hire the up and comer. This is riskier, but the downside can be substantially mitigated by drawing on our 40 years of institutional knowledge and reference data.

Although neither of those options is likely to be what a CEO wants, startup companies need to realize that in today’s ultra-competitive executive talent market, that’s simply the price of trying to recruit elite, game-changing executives.

Summing this up, don’t beat yourself up trying to over hire at earlier stages. Play to your strengths and hire for stage appropriateness. You’re better off in the long run.

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