Top founders know a secret when it comes to hiring and fundraising: give prospective employees and investors homework and make them earn it.
Hiring:
We got an update from a founder recently describing how they had to fire a major recent hire. What seemed like a layup turned out to be a nightmare that lasted six months. Kudos to the team for cutting bait and admitting to lessons learned, which could have been avoided in the recruiting process.
Here’s how to mitigate hiring risk by making prospective hires “earn it”:
- Give homework — ask the prospective employee to perform a task or project. Incredible what one can learn in a week or two about a person’s work ethic, ability, vision, and strategic bent by giving them something to execute.
- Bring prospective employee in for a day or three — hard to take time off a current job, but the more someone wants in, the more he or she will figure out a way to spend time with your team.
- Spend time with prospect outside firm — it doesn’t matter what you do — baseball game, bowling, lawn darts (careful) — but do something competitive together or as a small group and watch how the candidate acts.
- Have them give you three to five references— we’ve found three people you’ve worked for/with in the past is easy but five digs deep. Make the person call in some favors and you’ll see how much past personal credit they’ve banked in the past.
- Take one step at a time — only fools get married after one date. Be clear and upfront that both of you will take one step at a time, which can sometimes take a long time. Many candidates will lack the patience required for this step-by-step process, but the ones who want it the most will stay strong to the end.
Fundraising:
The same principles apply to making investors earn their spot on your cap table:
- Ask for introductions — investors should have an expertise in your space through prior investments — flag the investor’s portfolio companies you feel would be good partners/customers for your business. Ask the vc to introduce you and see how quickly this happens.
- Test their feet — does the investor only want you to come to their board room/corner cofee shop or do they physically visit your office and spend time with the entire team? If they can’t venture into the wild, they most likely won’t go out of their way to help you in the future.
- Test their time — every good financing round gains momentum and builds energy into closing. In these well-run raises, most investors have to shorten their normal due diligence process and make decisions quicker than they would like. The good investors know when to jump and won’t wait for every Monday partner meeting to make decisions.
- Ask for three founder reference checks — we’ve written about this before, but have them give you two founders where the startup has succeeded and one that failed. In good times and bad, investors should be helpful.
- Watch their allocation flexibility — the best rounds all have investors wanting to invest their full investment amount. Many of these rounds leave many hungry investors on the sidelines and require those who have earned their spot to cut back their allocation to fit in additional value-added investors. During a recent follow-on round that Promus Ventures led, a sizable investor wanted a better deal than the other insiders investing in the round or else this investor was not to going invest at all. The founders took the “not going to invest at all” option and decided to move forward without them. The piece was filled by someone else and this investor’s actions spoke volumes.
One of the best ways to unearth tenacity is to assign homework to a prospective hire or investor. What results is usually binary: action or apathy. And we all know how far inertia gets you in this world.
Recipients of this post are not to construe it as investment, legal, or tax advice, and it is not intended to provide the basis for any evaluation of an investment in any fund. Prospective investors should consult with their own legal, investment, tax, accounting, and other advisors to determine the potential benefits, burdens, and risks associated with making an investment in any fund.
