The landscape for hiring has shifted dramatically in the last decade. For many companies, 20% of people do 80% of the work. These vital few can be hard to come by when you’re sifting through endless resumes or trying to identify potential hires in your network. And while it’s always been critical to hire the right people, the need for the right people has grown tremendously.
For startups, this new hiring environment has been impacted by a few variables. In episode 3 of HR Heretics, Tomasz Tunguz—General Partner Theory Ventures—elaborated on these shifts. In the past, startups had better access to capital and the ratio of doers to managers was different. Startups had plenty of cash to hire experienced managers and were often encouraged to do so by their VCs.
“As a function of the capital markets environment in the last 10 years, we had these environments where capital was readily available,” said Tom. “And if I can raise a lot of money, then…I will hire a pretty senior exec team because I have the capital to be able to have a VP of Sales and VP of Marketing.” Each of these senior execs would then build out their teams with 3 - 5 people, right out of the gate. And the plan for these departments would be to double or triple in the next 12 - 18 months.
Because capital was so affordable in past years, startups would hire leaders from the beginning to position the company for tremendous, fast growth. “Efficiency [was] less important,” said Tom.
Today, the state of hiring is different.
“Now we’re in an environment where efficiency matters,” said Tom. Headcount growth plans are smaller than they were just 2 years ago. And this directly impacts how productive each member of the company must be for the business to grow. “The productivity per person and the efficiency per person is the North Star metric,” said Tom. Now, startups are asked to hire a hands-on director who will need to both manage a smaller team—2 to 3 people—and deliver individual contributor work.
“In the heyday of free money, you were looking at ARR per employee was around $90 - $120k as the benchmark,” said Tom. “$300 - $500k per employee is now the expectation.” And with the automation of customer support, marketing, and sales work with AI, Tom expects that number to grow even higher.
But startups face more hiring challenges outside of raising capital.
Executives need to see a clear ROI before they join a new business.
Even with enough capital to hire a senior executive, many tenured leaders are wary of joining companies unless they are early stage or already public. The fallout from very high valuations is still impacting many senior hires. “If a company has raised a lot of money…and they’ve taken a lot of investment…the valuation of the company is very high relative to current multiples. That can be a difficult entry point because of the economics,” said Tom.
“For a lot of strong executives who are typically going in and out of startups, that mid-stage is actually financially relatively unattractive. You have this barbelling where many of the senior executives are either going to very early-stage companies, founding their own, or deciding to go with a public company,” said Tom. Choosing a public company comes with a significant cash compensation and the equity for these leaders is already liquid.
Searches for new hires are also lengthening. In the past, startups might hire a recruiting company and have an executive or new hire in place within 60 - 90 days. “You were probably paying [your new hire] in the 75th or the 90th percentile of compensation,” said Tom. And that comp would drive higher every year.
Now, those new hire searches last longer. Senior leaders are more discerning—they are looking at how they can generate a better return with each company they join. “They’re investing their most valuable resource—time,” said Tom. Other executives question the fundraising plans for each business. “What I see are executives wanting to talk to the existing board to understand how committed they are to sustaining the business in the case that they can't raise [enough capital],” said Tom.
When you don’t get hiring right, it’s costly for the business.
“The average executive lasts about 18 months,” said Tom. If it takes 3 - 6 months to hire, another 3 months to onboard, and then you only get 9 months of true work from that executive before you decide to terminate them, it can be costly to hire the wrong person. “Then, usually the team then churns out and you start the cycle all over again,” said Tom. He shared in another podcast that most businesses are going to get 1 out of every 4 executive hires wrong.
So how can you avoid high turnover, even higher costs, and the time-suck of looking for the right hire?
Hire the right talent at your startup with these 4 tips.
1. Look for flexibility of mind.
Tom’s first advice for startups looking to get their new hires right the first time—look for someone who’s flexible. You need leaders who will take what they’ve learned in the past and apply it to the business they’re in now. An executive who has been at a long list of companies might already have a playbook of how to build a company or run a specific org. But if they aren’t flexible in listening to what the new business needs, it’s not going to benefit your startup to hire someone who has years of experience.
“It's less about how successful somebody has been in the past and more about their learning mindset in the past 10 years,” said Tom. The default for VCs for years was to encourage companies to hire someone who has done it before. “And that’s true in a hyper-growth environment where the cost for teaching someone on the job could be 10 - 15 percentage points of ultimate market share, especially at the executive level,” said Tom. Now, the growth rates and the cash balances of most businesses have come down tremendously. “So the relative attractiveness of actually teaching somebody on the job has increased,” said Tom.
→ Your task: find a leader who will take the time to listen to the organization and understand the nuances of the business.
2. Do your due diligence.
Too many new hires don’t work out because whoever hired them didn’t do enough due diligence. “It’s about getting the right chemistry to work,” said Tom. One of the areas he recommends spending more time on is understanding the dynamics between the founders and the new hire. “How healthy are those relationships? How deep? How long? Can they sustain the inevitable ups and downs and disputes and confrontations?” said Tom.
The other key piece of due diligence? Asking the right questions to a new hire’s references. “My favorite question in a reference is to ask about a person’s strengths,” said Tom. Then, instead of asking about weaknesses or areas of opportunity, Tom likes to frame the question this way—what kinds of people does this person need around them to be successful? “We all work together in teams and great teams work in tension where the strengths of one balance the weaknesses of another,” said Tom.
→ Your task: get clear on the chemistry of the new hire with the founders and ask the right questions when you talk to each reference.
3. Realize what you actually need.
Too many companies have to let new hires go because they didn’t realize what they really needed. And sometimes those terminations can help startups get really clear on what doesn’t work.
For example, some businesses might think they need an enterprise sales leader and find out that most of their business is in the mid-market. “It can take somebody coming in to show them that they needed the wrong DNA,” said Tom.
→ Your task: figure out what your business needs before you hire an expensive executive. A hiring advisor can help you assess your business and hire the right person.
4. Find people that fit into your culture.
The final tip for hiring the right talent at your startup is to ensure you find people who align with your company culture. Managing teams, building quotas, and so much more goes into shaping your company culture—it’s critical that you know what that looks like and the type of leaders that will help you continue the culture you want to see at your business.
“You have certain leaders who manage more through authority and respect. And other leaders who manage more through camaraderie and friendship. And both of these can work,” said Tom. “But it just has to be the right fit.”
→ Your task: understand the culture you have or the culture you’re trying to build so you can hire talent that will support your vision.
Make a plan to hire the right talent for your startup.
The best leaders are the ones who will anticipate the needs of the business and learn those skills before the business requires them. This is the same way your startup needs to think about hiring—think through the skills you need from your people to get you through the next 1, 3, and, 5 years.
A hiring advisor can help expedite your process and find the right talent for your business. Need help hiring an executive? We can help. Click here to find out more.