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.