Before you know it, it's too late: A guide to hiring executives at growth stage businesses

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My mom used to tell me that if I ever got lost in the woods the best book to have is the Boy Scout’s Handbook.  I still have a copy in the house.  If a zombie apocalypse happens it will be the first thing I throw in my bag.  I’ll be the guy in the woods people come to when they need to learn how to tie a sheep shank knot.  It’ll be great. 

There are several books that claim to be the equivalent for founders.  For me, the best is The Founder’s Dilemma by Noam Wasserman.   In his book, Professor Wasserman discusses the topic of recruiting in detail.  He calls out the challenge that founders face as they grow their leadership team:

Overlapping social networks reduce the diversity of information received by the team; limit its potential contacts with potential customers, hires, and investors and may decrease innovation.

TLDR: Instead of hiring the best, founders hire the best they know, often to their detriment.

Many of the CEO’s we work with struggle when deciding to hire outside leaders.  There are a variety of reasons to not look outside the company:  CEO’s want to show the ability to advance internally, they may want to avoid increasing the burn rate, or may feel threatened by outsiders.  With so many reasons to not act, we set out to discover why founders make the decision to hire outside executives.  Over the last month we interviewed a number of founders, investors and board members of growth stage companies in Chicago, Washington DC and New York on the topic.  Our goal was to provide a framework for other growth stage company CEO’s to use when making the decision.  Here is what we found:     

Lesson 1:  Wait until you have figured out product/market fit

This is fairly obvious but bears highlighting:  Don’t bring on an outside executive to help you figure out your vision or to execute on your initial sales strategy.  Both things are the responsibility of the founder.  When you have figured out your product vision, the right size contracts and your customer targets you can and should start thinking about scale.  As one founder we talked to said, “once we had product/market fit we started needing roles that could only be filled by outsiders.  Every day we waited to make those hires we were wasting time and money.”

Lesson 2: Plan for 6-12 months ahead and measure outcomes

We often hear that by the time a company decides they need a role they are already behind.  We asked our respondents to identify growth stage companies that had gotten ahead of the executive staffing dilemma.  Our favorite response was simple: “None.”  The founders we spoke with echoed this and said they wished they had spent more time thinking about business strategy.  They also mentioned how strong silos became in their organizations, even when their companies were small.  One founder said it best, “We didn’t do a good enough job of looking at where the company wanted to be.  We relied on teams to tell us what they needed and ended up over-hiring middle management.  We began to  succeed when we pulled back and figured out what senior hires were needed to get us unstuck.” Another founder had a similar opinion on upgrading existing talent: “We (founders) get blind spots because we know our team personally.  I made the mistake of saying ‘we have a marketing person so that box is checked’ without taking the time to evaluate performance – if I would had taken the time to think through the importance of the role and measure results I would have hired a more senior person much sooner.”

Lesson 3:  Be transparent about your goals for the business

Many founders admitted to making the mistake of giving away titles too early leading to challenges.  There is a very simple solution here – don’t do it.  If you plan on growing to 300 people and you give away the CTO title at 10 people you are setting yourself up for trouble.  

When you do make the decision to hire an outside executive to manage an early stage team member there are ways to avoid drama.  First, be honest about your needs - hurt feelings are always a risk but the more transparent you are the less likely you are to disrupt the business.  One of the founders we spoke with put it best, “When we need to hire above someone… we are transparent and open with current leadership, if they get on the bus we make sure they feel valued and include them as a key decision maker in the our recruiting process.  Sometimes they don’t (get on the bus) and self-select out.  Either way, we are always honest and let the needs of the business drive our decision making.”  Many of the investors we spoke with were supportive of the idea of looking internally but required that companies spend time calibrating the role before making a decision.  As one said, “just because a person has been with you from the beginning does not make them first in line for the role.  I have seen this fail a bunch.  Founders have to ask themselves, is this person capable or have they just been here the longest?” 

Lesson 4: Remember, what got you here won’t get you there

The founders we spoke with were in the mid to late stages of their startup journey – they survived most of the growing pains and were leading organizations that were financially stable.  With the exception of one, all reported that less than 30% of their current executive team members came from the early team.  CEO’s buck this trend – investors had a bias against replacing Founder CEO’s unless necessary.  As one pointed out, “Founder CEO’s typically have sufficient influence… and are responsible for the morale and vision so it may not be healthy to replace them too early.”  With the rest of the team however, the story is different for two reasons.  First, people that are interested in building something from scratch are not generally interested in optimizing a complex, stable organization.  Second, people, even highly creative ones, may tap out when confronted with multiple new problems simultaneously.  As one CEO remarked, “When people start getting into situations they have never been in before, some get creative, talk to outside experts and develop solutions.  Others come to me and ask me what to do.  The latter are the ones that will eventually need to be replaced or report into a more experienced boss.”

Lesson 5:  Talk with people who have been there (and listen)

As one Founder CEO said “for a new C-Level hire, the only person doing the ROI analysis is the CEO.  It’s hard to step back, plan and say, ‘I need a CMO’ – the bottleneck to growth becomes my brain thinking through things which is bad.  I overcome this bottleneck by talking to outside advisers… it’s a huge help.”  Investors echoed this strategy saying they all tried to add value in this area without overstepping boundaries.  Over and over we heard the value that advisers can bring.  The danger of going alone was also highlighted:  “Companies that… brought on senior people without the help of their advisers often brought on the wrong person that added much less value than they were paid to deliver.”

Lesson 6:  Weigh cost and value

Every founder I spoke with admitted that they had delayed a senior hire decision at some point because of concerns about burn rate.  What did investors and board members have to say about this?  All of them wished that founders approached them sooner.  One investor was very direct, “Money concerns do not and should not stop a founder from hiring the right person.  Some founders are cheap… you need to pay for A+ talent to get A+ performance… the only time you are overpaying for talent is when they aren’t performing… people never complain about paying for rockstars.”

Lesson 7: Make a decision, make changes, but don’t rush it

It can take a few months to do a search, a month between offer and start date and 3-6 months for an executive to get up to speed.  That means the gap between the decision to hire and the person making an impact may be 9+ months.  Many founders noted how surprised they were by this the first time they hired an outside executive.  One investor told a story about a company in their portfolio where the founder recognized that he needed a new leadership team.  He hired that team over a year and took another year to get that team on the same page.  Three years after the decision was made they are cooking with gas.  If that seems like a long time, it’s because it is.  However, there is danger in too much change too quickly.  Another investor pointed out, “a company will outgrow many of the internally promoted people… the addition of an experienced outsider can move the company forward… however, adding too many outsiders at once often disrupts culture.”  The lesson is simple:  Make the hard decisions, plan for the future but don’t change so quickly that you lose sight of what you are trying to build.

Founders, investors, board members, other business leaders, what do you think?  We would love to hear your thoughts in the comments section below.

For those looking for a more financially driven analysis of this topic we highly recommend checking out Guy Turner's blog post on vcwithme.co – it’s full of great information.

Your recruiter should help you say "No":  The case for case studies

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I was talking with a friend who runs an executive search firm recently. He told me a story about another recruiter he used to work with.  This recruiter hated the idea of testing candidates – in his mind, “testing just gives the client another reason to say no.”  I was taken aback, as was my friend.  That recruiter no longer works at his firm.  As a partner to companies looking to hire leaders, the job of executive search is to find the best, not close deals. 

A good search involves several key components.  At IAR, we believe the case study process used with all our clients to be among the most important.  This comes from years of practical experience.  Before starting IAR, I implemented a case study process at every company where I ran recruiting.  Everyone, from CEOs to interns, did a case study before they got an offer.  I want to share this process with you because it has proven to be a wonderful tool to assess candidates.  Try it out and let us know what you think.  We are here to help if you have any questions.

What is a case study? 

A case is any test that allows the hiring team to evaluate real world performance of a candidate on the practical skills needed for the job.  You may have seen this used on software engineering teams.  A hiring manager will give out a coding test before the first interview to make sure a candidate’s skills match the needs of the role.  Our process is essentially the same but scaled up for executives.  For individuals we recruit (C-level executives and their direct reports), the case study is more strategic in nature and used as a selection tool in the final stage as opposed to a filtering tool at the early stages.   

Why should I do it? 

The first reason is because it works.  I have several anecdotal stories that illustrate this but want to focus on the data.  While researching for this post I came across a meta-analysis done by Smith and Robertson.  A summary of their findings is below.  As you review the chart, keep in mind:  A validity of 1 means a perfect fit between the criteria and what it is predicting; 0 shows no relationship; 0.4 and above is respectable (thanks to the folks at Opp in the UK for helping translate this).  

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The analysis shows that work sample tests (or as we call them, case studies), give the best predictor of performance.  They yield better results than personality questionnaires, references – even years of experience.

The second “why” is a more obvious - a good case makes the candidate put “skin in the game”  driving up engagement.  It doesn’t take much to say yes to an interview.  It takes real effort  to spend personal time solving a business problem.  Candidates won't do it unless they are serious.  At the same time, candidates who go through the process are more likely to say "yes" when presented with a fair offer.  They are invested, have a clear idea of what their job will entail, know the challenges, and have already thought through solutions. 

How do I develop a case study?

I am going to skip the initial phases of recruiting and get to the point.  Let’s assume IAR is recruiting for a Chief Human Resource Officer for a growth stage SaaS company.  We have vetted candidates, gone through several rounds of interviews and have identified our top three.   This is where the case comes in.  At the kick-off of every search we establish the core competencies that a candidate will need to be successful.  For a CHRO this may mean (1) being an effective coach to leadership, (2) hiring and retaining the best and (3) ensuring that the culture of the organization scales as the company grows.  Using this criteria as a guide, we will build a custom set of real world challenges that the candidate will likely face in their role (e.g. What type of system would you set up to scale recruiting?  What type of metrics would you use to measure the success of your team?).  As part of the case, we ask the candidate to develop a plan of attack using their prior experience and knowledge they have gained during the interview process – generally this plan covers the first 90 to 180 days.

Case studies can take many forms.  We suggest keeping it simple - a written prompt with relevant information will suffice.  For the process to be effective there are several things that must be done:

  • Reserve the case for your top two or three:  Your interview process should do the filtering.  The case study is meant for the very best candidates to see how they will act in the real world.     
  • Communicate the process early:  Preparing a case means a significant investment of time and energy.  If candidates make it past the first-round interview let them know a case study will be part of the final evaluation process.  Prepare them for the time commitment in advance. 
  • Ensure your questions reflect the needs of the role:  If you are not specific about the real-world challenges the candidate will face the less validity the test will have.  You will be wasting your, and the candidate’s, time.    
  • Make it transparent:  Let the candidate know how they will be judged.  If you have multiple questions let them know your priorities.  Communicate the process early - prepare them for the time commitment in advance (ideally once they pass the first round interview).  Finally, make it open book -  ensure the candidate knows that they can ask questions as they work through the problem.  Encourage them to reach out.  If the candidate gets hired they will have access to you and the team to ask questions – the test should be no different.
  • Let the candidate get creative:  Give candidates a minimum of 5 business days to come up with a solution.  The goal is to see their planning and execution in action, you can’t get that by giving them an hour to work on a problem in the office.  Also, leave the format up to them.  Visio, Word, PowerPoint, whiteboard, it really doesn’t matter as long as the delivery is coherent.  Limiting your candidates will place needless restrictions on people that are (hopefully) creative problem solvers. 
  • Time box candidate workload:  Let candidates know what you expect in terms of time commitment.  At the executive level, we ask candidates to spend no more than eight hours total working on the problem we present to them.  This serves as a good gut check as you are coming up with the question(s).  If the problem feels like it will take longer than eight hours to address, narrow the scope.
  • 50% presentation, 50% Q&A:  We recommend an hour total for the case presentation.  30 minutes for presentation and 30 minutes for Q&A.  Make sure the candidate knows they don't have an hour to fill.  For internal purposes, budget two hours total in case things go a little over and to ensure that you have time for you to have an…
  • Internal discussion immediately after:  This is key.  After the candidate has left, ensure that the selection committee spends time discussing the evaluation criteria and the candidate’s performance.  If you are the hiring manager, let the team go first to ensure you are getting unbiased opinions.
  • Follow up ASAP:  You owe timely feedback to candidates who have committed the time to a case.  This call should happen in no more than 48 hours after the case.  If you don't have a final answer for the candidate let them know the specific timeline for a decision.  
  • Do it – every time:  The case only works when you have all your final round candidates complete one.  An apples to apples comparison is key.
  • Have a pipeline of additional candidates ready:  Don’t pop the champagne and call it a day once you have locked in a case study schedule.  If done correctly the case will reveal candidate’s strengths and weaknesses.  You may come out of the case finding that your top candidate isn't a fit.  The last thing you want to do is start over completely.  The best way to avoid this is to have a group of “warm” candidates ready to introduce to the team without a significant delay.

We would love to hear your thoughts below!  What has worked for you?  What questions do you have for us?

Dollars and Sense: A simple model for negotiating salary with startup executives (and everyone else)

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I recently read a blog post by the CEO of a startup. His message was simple: “If you can’t accept the fact that you will make less at our company to be part of something great you probably won’t be a fit for our culture.”  This ludicrous assumption made me think about the very real challenges founders face when it comes to paying top talent.  Being part of a growth story is exciting - that said, excitement doesn’t pay the bills.   As startups mature they start targeting candidates with greater experience.  These candidates are motivated by the “soft” stuff – the opportunity to learn, the experience, etc.  They also tend to have a mortgage or kids planning on going to college.  What is a CEO to do?  Ignoring a segment of candidates that could be transformational to your business is irresponsible.  Rather than ignore these high performers there are a couple of steps that CEOs can take to ensure compensation isn’t a barrier.

Step 1:  Clearly define the role and Take the time to do a market scan for salary data. 

Stay away from online national salary surveys.  In our experience they overestimate compensation by anywhere from 10-20%.  Go with a local resource that focuses on your market - this task is made easier in Chicago where the Illinois Technology Association releases an annual salary survey that specifically focuses on growth stage technology companies in the Chicago area.  If you aren’t lucky enough to live in Chicago take a look at Glassdoor or some of the free tools offered by Google.   If, at the end of this process, you find that you are priced out of the market it’s time to decide – hire someone more junior or find a way to make the investment.  Whatever you do don’t hire a more junior person and give them a C-level title.  You will regret it when you are finally ready to hire their boss.

Step two: Have the conversation about compensation with candidates EARLY and OFTEN.

 At IAR, we generally bring up compensation at the end of the very first interview.  You can do this tactfully and with respect:  First, set the stage - tell candidates at the beginning of the interview that you will discuss compensation during the conversation.  Second, be direct.  Let them know that your discussion about compensation at this stage is driven by a desire to avoid wasting time.  Third, show your cards first.  Let the candidate know the range you have decided on.  For instance, if you are a small software company in Chicago looking for a CFO, the conversation may go along the lines of: “Based on our research, we are targeting an annual base salary between $190,000 and $210,000, a bonus target of 15% and a meaningful equity package.  Is that in line with your expectations based on your current compensation?” 

One of three things will happen:  1.  The candidate will divulge their compensation to you, your range will be lateral or a step forward and you will agree to pursue the opportunity.  2. The candidate will be above your salary range and you will need to decide if the conversation is worth pursuing, or 3. You won’t be interested in a second interview with the candidate so the data won’t matter.  I know some of you are thinking “If I go first, and they are making less I could end up paying them more than I need to!”  The counter argument is simple – if the market is paying a certain amount and you hire them for less, the chances of them looking for a new role after a year (or less) with you is very high.  Better to match market rates and keep good people than try to save a few thousand dollars in the short term. 

Anyone who has recruited an executive at a growth stage company will quickly notice that I have left off a conversation about equity during the first conversation.  We generally avoid going too deep on equity right away.  Believe it or not, we have found that most people (yes, even executives) don’t know their equity value off the top of their head.  Rather than have them guess on the first call (which usually leads to overestimating), we ask candidates to come back to us in the second interview to discuss their current equity position and our equity target. 

Step 3:  review a sample offer before you make the final decision. 

We generally recommend doing this after the candidate is close to the final stage of the interview process.  Again, prepare your candidate - let them know that, if things go well, you will want to discuss the terms of a potential offer.  Be clear that this is an exercise in alignment and not a formal offer.  Using the same CFO example, the conversation should go something like: “The team’s reaction was great, we are close to making a final decision.  Before we go down that path I want to discuss what the offer will look like if we get to that stage.  If you join our company, your base salary will be $200,000 annually, with a 15% bonus target and an equity stake of X shares/options currently valued at Y.  Is that an offer that you would feel comfortable accepting should we get there?”

Our message is simple:  First, just because a candidate has a hard line on salary doesn’t mean they won't be amazing.  Second, savvy candidates know what the market is paying – you should too.  Once you know what a position will cost you can make an informed decision about making the investment instead of wasting your time trying to find a great person at a discount.  Third, communication is key.  Compensation is a sensitive topic because we make it that way.  If you are open with your candidates about compensation in the first conversation and stay consistent you can save a lot of time and avoid a last-minute scramble to negotiate.

Up next:  Getting the most out of your interview process.

How to Hire Executives Quickly

(Hint: You don’t always have to hire us)

Things rarely go as planned in the recruiting process - this is especially true in executive search.  To mitigate uncertainty and guarantee quality, founders and CEO’s often partner with a search agency.  I can say from experience, having worked with multiple search partners, quality and certainty are not always guaranteed.  I founded IAR with the belief there is a better way.  Over the next several weeks, we are opening the doors to our process.  Our goal is to give all companies a way to execute a better executive recruiting program.  Of course, if you need help at any time we are only an email away.

Leveraging process and technology to move faster

By the time a client comes to us, they typically wanted the person in seat yesterday.  Traditional executive search firms may take as long as 3+ months.  For companies doubling in size every year that just doesn’t work.  Growth stage companies (particularly those backed by venture capital) require speed and quality – a notoriously tricky balancing act.  Luckily there are a few simple steps, that when combined with the right technology, allow us (and you!) to achieve the same result in far less time. 

Step 1:  Ensure the business is aligned BEFORE the search starts

One of my favorite quotes about hiring comes from Noam Wasserman, author of the Founder’s Dilemma: “Hiring the world’s greatest cellist could come back to haunt you if you’re not sure whether you are an orchestra or a marching band.”  If you and your team lack aligned goals, the process will drag out.  We recently kicked off a search for a technology leader at a growth stage company in Chicago.  We purposefully did not present candidates at that kickoff meeting.  Instead, we met with the CEO to understand his needs.  That same day, we met with the rest of the technology leaders to learn their vision and ensure it matched that of the CEO.  This process often uncovers differences that can be identified and clarified before the search begins minimizing days and weeks of search time. 

This process then allows us to establish….

Step 2:  A clear competency scorecard.  Clarifying, articulating and sharing the way you will judge candidates is of utmost importance, both internally and externally.  During the kickoff meeting, we ask “What will this person need to accomplish in their first six to twelve months to make them successful.”  With that information, we define ideal candidate competencies.  From there, we establish a competency scorecard that is distributed to the team within 24 hours.  Our goal is to solicit feedback while the conversation is still fresh.  If goals change during the search (a common occurrence), we adjust the scorecard and share changes with the team.  We also share the scorecard with candidates who make it through the screening process.  This may seem counter-intuitive but makes total sense for multiple reasons.  First, we are recruiting executives - in our experience it's a group of people that value candor and honesty.  Second, the best candidates generally have stable, well-paying jobs.  Very few executives will push hard to get themselves hired for a role they believe will leave a weak spot on their resume.  Sure, an over inflated ego may lead a candidate to stretch the truth to convince you they meet your criteria.  That said, a thoughtful interviewing process will weed those candidates out.  Last, showing candidates the scorecard allows them to opt out saving you and the candidate a lot of wasted time. 

Once all of this is in place we start…

 Step 3:  Researching!  Here is where technology starts to play a more significant role.  LinkedIn is great for certain searches but we know that there are better tools to help us move faster.  We begin by using Relink which leverages machine learning technology to help us target how and where to look for the best candidates.  Next, we have a variety of search tools that help us create a targeted pool of candidates.  One of our favorites is Hiretual which allows us to create Boolean strings to locate candidates who meet highly specific parameters.  Hiretual has the added benefit of searching beyond LinkedIn to look across a variety of social media platforms.  This research process requires an investment of time on the front-end but will yield a higher quality candidate pool saving you time over the course of the search. 

Now that we have our candidates we…

Step 4:  Reach out and track.  LinkedIn messenger may seem like a good fit here, but if you are anything like me, you check your LinkedIn email less than you check your answering machine (hahaha, get it, no one has an answering machine.  OK, moving on).  Since most executives are passive candidates you must ensure they get your message and actually read it.  We use a tools like Hunter or Hiretual to find email addresses that people actually check.  Once we have useful contact information, we take the time to personalize every email emphasizing quality over quantity.  Since we already have a well curated list (see previous step) we don’t have to rely on impersonal blast emails to drive interest.  The resulting yield is much higher (think >30% response rate as opposed to <5%).  Finally, we borrowed a tool from the marketing playbook.  Marketers have been using Hubspot to track email open rates and measure the success of messaging for years.  We started using it and the results have been astounding.  We have tripled our candidate response rate simply by taking the time to target and refine our message.  We don’t want to reach out to 2,000 and hear back from 100.  We would much rather reach out to the best 200 and hear back from a great group of 75. 

One of my very first managers gave me advice I always keep in mind when I face a tight timeline: “In a year from now, no one will remember if it took six weeks or eight to hire the right person, they will only remember if you hired the right person.”  She was as right then as she is today.  Quality should always take precedence over speed.  That said, if you stick to a clear process and use the right tools, you will quickly realize you can accomplish both without sacrificing either. 

Up next:  Dollars and Sense:  Taking the pain out of salary negotiation