The Underhiring Dilemma
By Matt Greenfield, Managing Partner, Rethink Education
We all know that many startups raise too much money and hire too many people too fast. Underhiring is a somewhat less commonly discussed problem. In my experience, underhiring is a surprisingly common mistake at the strongest and most promising startups.
Perhaps the most common form of underhiring is for a company to have two or more executive team vacancies. I have asked several growth equity investors how many senior vacancies their portfolio companies typically have, and the answer is an average of one. But I am acquainted with a number of fast-growing, well-positioned startups where there are two, three, or even four senior executive vacancies.
Why Startups Struggle with Underhiring
The Perpetual Postponement of Executive Searches
Underhiring has several causes. One is just that executive searches require a lot of work, and the executives currently in place are insanely busy — they simply don’t have time to conduct more than one or at the most two senior searches. This is obviously a self-perpetuating doom loop. The longer the searches get deferred, the busier the current executives get. There is a strong argument to be made that in a fast-growing company, hiring should always be the top priority.
Chasing the Illusion of the ‘Perfect Hire’
Another cause of underhiring is the inflation of job requirements. It may seem quite rational for a great startup with 10 million dollars in annual recurring revenue to go looking for a chief revenue officer who has previously taken another company from 10 million to 100 million dollars in revenue. But those people are quite hard to find, and not all of them will be a good fit at the startup level. Many of them have gone on to run sales for larger companies. Some are too rich or too exhausted to want to start over again with a smaller company. Some of them were just lucky the first time around — they boarded a rocket ship that was already in flight. And some are eager to try again but may be unsuitable for other reasons — they are a poor cultural fit, or they don’t have the capacity to understand the product and the sector. Having done a great job in the past is no guarantee of future results. A CRO who insists on running exactly the same playbook again may be headed for disappointment. Sometimes it is important to be able to unlearn the things that made one successful in the past. Every great new startup is great in its own way.
I have seen many executives who looked great on paper turn out to be disastrous hires. I remember one executive who joined a private database technology company as an SVP right before its IPO. It seemed like a real coup to recruit him into an early-stage startup for the same role. But it soon became clear that he had never understood the database company’s products, and he never understood the startup’s products either.
Adhering to Shifting Norms in Tech Team Structures
Another cause of underhiring is a shift in tech industry norms. In the early nineties, a pre-seed company would often start with a relatively full senior executive suite. Now, I often hear entrepreneurs and venture investors debate whether a company with tens of millions of dollars in revenue should hire a chief financial officer, or whether they should wait until the company is closer to an IPO. I also see quite a few companies with over 10 million dollars in revenue that do not yet have a head of marketing or a vice president of business development. I am not in general an advocate of profligate spending, but I think talented executives generally save multiples of their salary.
“In my experience, the right way to hire a senior executive is to look for potential rather than for specific past accomplishments. If you are a CEO, look for the curious, intelligent, flexible, empathetic, ferociously hungry person — the one who reminds you of yourself. I usually call these promising candidates ‘natural athletes’ or ‘rising stars.’”
Matt Greenfield, Managing Partner, Rethink Education
Strategies for Effective Recruitment
I can suggest some strategies for recruiting more of these ‘natural athletes’ and creating a deeper bench of internal candidates for senior roles.
Placing Bets on the ‘Natural Athlete’
The first strategy is extremely simple: recruit a ‘natural athlete’ as chief of staff for the CEO. And one might also want to hire chiefs of staff for other C-suite executives. The chief of staff role originated in politics, and the essence of the role is to shadow the leader through the day, learn about the organization’s priorities, and control access to the leader. Often a corporate chief of staff can solve an employee’s problem without ever involving the CEO or can send the employee to talk to someone else in the C-suite and save the CEO a bit of time.
The beauty of the chief of staff role is that no specific domain experience is required, and one evaluates candidates for the job purely on intelligence, energy, tact, and a propensity for solving problems swiftly and effectively. It turns out that when one hires such people and allows them to shadow the CEO, they very rapidly take on independent projects and go out and solve problems across the corporation. Following the CEO around turns out to be a phenomenal training technique. Quite often these people rapidly become senior executives based on what they are actually doing, without having any of the ordinary credentials or experience required for the position. I have watched chiefs of staff move into VP and COO roles within a year or two.
There are other ways to bring in ‘natural athletes.’ I saw one company hire an intelligent recent MBA graduate to manage sales analytics, and within under a year she had been promoted to VP of Operations. A few years later she moved to another company as COO. Business development roles are also a great place to recruit smart raw talent. The essence of this talent development strategy is to define as many roles as possible that are open to exceptional people without specifically relevant job experience.
Challenging the Corporate Hierarchy
A second strategy is to rethink the idea of a hierarchy and taxonomy of roles within the corporation. One could emulate the flexibility of America’s special forces . Special forces operators are trained for a world that is volatile, uncertain, complex, and ambiguous. Often a small team on the front lines will make enormously consequential, binding decisions. And sometimes an ad hoc team or task force will form, often with a temporary leader who is technically junior to many of the other members of the team. Many people think of the military as rigidly hierarchical, but today’s American military, where the special forces are increasingly important, is continually shifting shape, with hierarchies flattening out and even inverting.
An interesting and extreme innovation in corporate structure is Valve Corporation, the enormously profitable videogame developer and distributor. Valve allows its employees to choose what to work on. Projects coalesce around people who are inspiring and visionary enough to attract other employees to join them. There is debate about how effective this organizational strategy is for game design, but the company has billions of dollars in revenue and a deep moat around its distribution business.
America’s special forces and Valve Corporation are both edge cases, and both work only because of their extremely rigorous selection criteria. But their organizational structures are key to their ability to attract exceptional talent. Borrowing at least a little from their hierarchy-flattening strategies could give a startup an edge in recruiting and retaining exceptional people. The best antidote to underhiring can be internal promotion.
It would be productive for investors and entrepreneurs to begin talking about underhiring in a more public way. Underhiring is a common mistake, especially at the very most promising startups. Gaining a fresh perspective on how to avoid underhiring could be transformative for your business.
Have thoughts or opinions on underhiring? Reach out to share them with us: education@rethink-capital.com
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