Walking the talk on talent

Everyone agrees talent is the most important part of business, but few people really walk the talk. The best startup CEOs are both obsessed with and continually acting on talent. I realized this in meetings with two of our strongest CEOs over the last week. We didn’t talk about sales or product. In both cases, they wanted to talk about talent – the gaps they had, recent hires they made to fill gaps and challenges they have in “leveling up” their teams. Both CEOs were visibly excited about recent key hires. Here are the good and bad talent themes we see in startup leaders.

Common themes in CEOs who walk the talk on talent…

  • They respond to talent intros within minutes and hire fast. They understand that the best candidates have options and that by responding quickly, they are sending a message on the candidate’s value and the firm’s culture. Hiring recs are usually closed in a few months, even for senior roles. Introduction –> screening interview –> in-person office visit often takes less than a week! Not kidding.
  • They develop talent internally. The best CEOs hire people who can develop over time into more senior roles, and they install mentorship programs and provide in-role experiences to enable this.
  • They constantly upgrade at every level. The best CEOs don’t protect underperformers or people who no longer fit the mission. This is tough in a startup where the vision, market and direction go through multiple eras over the company’s life cycle. When team members are not able to develop with the challenge, team members are transitioned.
  • They encourage managers to hire better than themselves. When hiring any role, the best companies/CEOs ask the question “With time could this person be better than their manager?” I know one founder/CEO who recently hired so well, he soon decided that the hire should replace him. Another CEO I know is excited that he has two C level execs waiting in the wings if he gets hit by a bus.
  • They hire great people opportunistically. We don’t control when we fall in love… nor do we control when we come across the best talent. Even if the role isn’t needed yet, it will be. Great CEOs make the hire. They also constantly network for talent, not just when hiring.
  • They don’t care about sacred cows. The best CEOs know that underperforming team members – no matter how long they’ve been around, or even if they are founders or the CEO’s own co-founder – demoralize other team members. Great CEOs recognize that transitioning sea anchors actually gives startup teams confidence in their leadership.

… and watchouts on those who only talk the talk:

  • Hiring recs remain open forever (like 6 to 8 months). Yes, they say they have a talent gap. Yes, they put out a hiring rec… but it takes forever to fill. There are always excuses, however, the reality is people spend their time and effort on the things they think are important. If it takes that long, what is one to conclude?
  • They overvalue trust and loyalty. A CEO who only talks the talk will agree that someone isn’t the best but then say something like “I can really rely on them” or “they are really committed to the company.” Fine, high performing people will fit both of those descriptions too… and do lots of other stuff better.
  • They protect underperformers. In addition to over-valuing loyalty and trust, some CEOs also say “it would be too hard to train a new person now”, “they are an important part of the culture”, and “people would really be surprised if we let them go” – variations of excuses abound. They don’t understand that it is never too early to make a change once you know there isn’t a fit. Unfortunately, we sometimes see protecting of underperformers on founding teams – problematic because double standards are worse than poor standards.
  • They blame recruiters for hiring problems. Recruiters become the outsourced piñata for hiring blame: “The recruiter doesn’t understand our company, isn’t delivering good candidates, isn’t moving fast enough.” I translate this as: “CEO didn’t spend enough time with the recruiter explaining the company/industry, defining the spec, setting expectations on quality/throughput and riding the recruiter for results.” To be fair, there are a lot of bad recruiters too, but it’s up to CEOs to hire good ones. And in the end, recruiters only source candidates. It’s up to the the CEO to run a great process and hire great people on time.
  • They hire people who look like themselves and let their managers do the same. The best teams are built with diversity of experience (function, industry, demographics, etc). It is a natural human default to hire people with a similar background as ourselves because it is initially easier to trust and work with them. However, this is not usually the best way to build a company in the long run.
  • They use the “culture” card excessively. A CEO or hiring manager saying someone doesn’t “fit the culture” may be an easy way out of hiring someone more experienced, driven, or capable than they are. For many young teams, “culture” is often used to call candidates “old” when young teams are intimidated by talent older and more experienced than themselves.

It is hard to turn the mirror on your team and company and ask “are we really committed to finding the best talent?” It’s hard because it raises the question of you and your team’s own performance. Is every person in every role the best person you could have in that role? Are you the best person to be in yours? Asking these questions is the first step to solving a talent problem. The next step is getting the hiring process right.

Is your startup cash efficient?

With cash now running rampant in the startup and venture world, cash efficiency is often overlooked for pure focus on revenue growth. Yes, revenue growth is critical in startup growth and proving product/market fit – Brad Feld had a great post recently tying revenue growth and levels to product/market fit milestones for startups – but what about the cost side?

It turns out that it matters whether it takes $10M or $4M to get to $250K in MRR. If it takes $8M, you might be headed for a flat or down round,. It probably also means an LTV/CAC ratio below the magic 3x and retention rate below 100%. Both are much talked about litmus tests of a healthy SaaS business. But they are also Murky Metrics. How do you estimate LTV on a one year old business? What do you include in CAC? Do you include pilots in retention? There are always ways to make these SaaS metrics look good… even when things aren’t.

I had this realization the other day when looking at a seed stage startup that launched 6 months prior and had $10K in MRR. I remembered they had raised $1M 18 months ago, and I thought “wow, they’ve really done something with that money.” Product development, launch, early growth. Then I found out they had raised another $1.5M six months ago and burned most of it. Ugh. Not cash efficient, and my heart sank. But they could point to great LTV, CAC and growth numbers… murky.

Basic cash efficiency matters – not only because it’ll help you raise less money and keep more ownership of more of your company – but because it is a critical sign of product/market fit. In a recent post on product/market fit, I mentioned PMF is when you can add and retain $20K/month in MRR at the same cost as the $5K/month you added 12 months ago. It’s a sign that you’ve hit a vein with your customer base. Of course this implies improved LTV and CAC, but the most transparent efficiency measure for a SaaS business is to see how much in new net MRR you can add per monthly burn. It’s hard to make that ratio lie.

So what is good and what is bad? Simple math:

Most series A SaaS companies we consider are doing $50 to 100K in MRR. A typical Series A we do is $3M in size (yup, Midwest). Success for a Series A SaaS startup is to grow fast enough with the Series A they raise to get to a Series B. These days it takes $250K in MRR at a trailing YoY growth rate of 200% to be highly likely to raise a nice Series B. That means wild success is growing from $50K MRR to $250K MRR in 18 months with a $3M investment. So…

Net MRR Added / Net Monthly Burn = (($250K-$50K)/18)/($3M/18)

                                                                     = $11K Net MRR added per $167K burned per month

                                                                     = 6.6%

This is an average metric over the 18 month Series A runway. If you assume the desired exponential growth (9.4% monthly revenue growth) instead of linear, you add $4.7K in month 1 and $21.4K in month 18! With constant burn, the ratio goes from 2.8% in month 1 to 13% in month 18. Sweet! When an investor sees that kind of performance, the check book comes out. Generally, at any point in the curve of a Series A or B stage startup, I’m excited when I see 10% but struggle below 5%, especially if the number isn’t rising quickly.

In the Valley, valuations and Series As are larger. So the right Series A size to metric for is $6M. That halves the ratios. Yup, Valley startups are simply less cash efficient. Geography and context matter.

I’d love to see someone do this math for e-commerce or marketplaces.