Veterans vs. Up-and-Comers in Startups

The conventional Silicon Valley /  venture capital (VC) wisdom is that startups should not bet on first-time managers in just about any position, but particularly at the executive team level.  It’s best captured by the statement:  a high-growth startup is not the place to learn how to do your job.

This is the conventional wisdom because, while counter-intuitive to some, VCs are not actually risk-takers, they are risk-isolators.  A typical VC is trying to isolate risk down to one thing:  the unique value proposition behind the startup.  Those value propositions can vary considerably:

• Sometimes, it’s about the technology.  Mark Logic, for example, is a technology disruptor.
• More in vogue these days, it’s about the business model.  Salesforce disrupted the on-premises, perpetual license business model with SaaS.  MySQL disrupted the traditional license model with open source.
• Sometimes, it’s about both.  My friends at Clearwell will rent you an appliance that includes an innovative e-discovery application.

But the point is that VCs are trying to isolate risk down to the one key value proposition.  They do that by setting every other lever in the business to standard.  For example, per the conventional wisdom, a SaaS BI business model disruptor should:

• Hire standard managers with experience in big BI companies, and use equity to lure them from their cozy jobs.
• Develop a standard BI application/product that contains the features users expect.
• Build a standard enterprise sales force, hiring salespeople from the established BI vendors
• Implement a standard BI partnering strategy, with the usual suspect technology and systems integration partners
• Devise a standard marketing strategy, typical of those used by other BI companies but with a key emphasis on the unique value proposition.

Like most VC wisdom, at the first order the approach makes a lot of sense.  At the second order, however, it presents some problems.

• It encourages cronyism, where the first such experienced manager knows a whole clan of other folks who also are looking for jobs, often for the same reason he or she was (e.g., recent of acquisition by Oracle, a new CEO, a strategy shift).  While one of the benefits of hiring experienced managers is undoubtedly their networks, I’ve seen this work out both quite well and spectacularly badly.    The key issue boils down to whether you are hiring drivers or passengers.  Was the company from which you’re hiring successful because of these people, regardless of these people, or indeed in spite of them?  Are you hiring real results drivers or people who, Fooled by Randomness, have great resumes and think very highly of themselves, but who are incapable of solving your company’s problems?

• This cronyism often creates a divisive environment that drives out your top existing talent.  As the “Company X” mafia takes over, they typically show insufficient respect for those who got the company where it is, ridicule some past practices, and talk boisterously how easy it’s going to be to fix all this.  While problems in operational practices are easy to spot and fix, this approach overlooks the startup’s need for process maturity (e.g., size relative to Company X) and the startup’s strategic position in its market.  I remember when the experienced (manufacturing-oriented) managers from ASK took over Ingres (then a ~$200M company) and decided that implementing a heavyweight quality process was the answer to our problems.  In reality, our problem was strategic:  in a land-grab market we’d made some poor technology choices (e.g., Quel vs. SQL) that hampered sales and we had been too conservative about grabbing land.  Just as the Ingres executive team’s only hammer was technology, the ASK executive team’s only hammer was process.  Neither, unfortunately, was called for given the company’s situation.

• It limits career growth for talented up-and-comers within the company:  either individuals with management potential or existing managers with executive staff potential.  If every new management job will be filled by an experienced outsider, then insiders quickly feel trapped and unable to advance in their careers, making them — particularly the more ambitious ones — more likely to leave the company.

The answer to managing all this is, of course, balance.  Both the CEO and the executive team need to take some calculated risks in betting on up-and-comers in a number of posts.  This generally will cost the CEO some political capital (debited at promotion time and never credited back, even if the up-and-comer is highly successful), but will help him or her retain both institutional memory and some key people for the future of the company.

Having a stronger-than-usual preference for up-and-comers, I’ve developed a few rules for managing this process.

• Always do a external search.  You can turn the dial on how hard — from a check-the-network or calling a few contingency recruiters all the way up to a retained search — but you should always expend energy to see “who’s out there” so you have a sense of the market in making the veteran vs. up-and-comer decision.  You owe this to yourself, your board, and your shareholders.

• Run up-and-comers through the same process as the external candidates.  The only exception here is when you are restructuring in which case many people may be changing roles without following an interview process.

• Keep a mental balance of how many up-and-comer chits you have used and how many you think you have left.  You need to view them as a scarce resource, because they are.

• Ensure the up-and-comer is “all in.”  If you are going to bet political capital on someone they can’t either be [1] telling you what you think you want to hear or [2] be unsure of whether they can do the job.  You should only bet on up-and-comers who are certain they can be successful, and so certain that they will probably quit in the not-too-distant future if not offered opportunities.

• Limit up-and-comers’ ability to bet on other up-and-comers.  Force them to prove they merit their posts by demonstrating how they can bring in veterans.  This is a both a solid practice and a great test.  The worst outcome is that your up-and-comer hires no veterans for his team and you end up with a whole multi-level hierarchy of inexperienced people.  (I’ve seen this happen, too, though happily not in my department and it’s one heck of a mess because there is typically no organizational awareness that anything’s even wrong! )