August 2011


Last week I had lunch with a prominent recruiter who was interested in working with startups. We had a great conversation about ideas and the issues, and at the end I told him I would poll my startups to see if there was any way to structure a relationship that would be palatable for the startup and make sense business-wise for the recruiter.

In polling my startups, I was hoping to find a solution to help combat the problem that people are always having problems hiring and that finding great people was near impossible. Certainly hiring a good recruiter to expand one’s networks would be a good thing, if it could be made workable.

The email I sent out was:

hey all,

today i had lunch with a recruiter who helps VCs find personnel for their startups. we talked about recruiting for early stage and how hard it was, but also that it was nearly impossible for them to justify engaging traditional recruiters due to cost mostly, but many also don’t deliver very well either. this guy has worked with some top VC firms in the valley so i somewhat believe him that his network of personnel to reach is pretty good, probably better than most recruiting firms.

but this recruiter wanted to help out early stagers and wanted to find a way to do it that made sense. to that end, i told him i would throw out a quick survey to my cos and contacts to see if something might work out.

one issue is paying them for their services. he was willing to back off that for early stagers, because he had normal contracts with bigger companies who could pay the bills but he had time to help out startups and also wanted to do that personally.

if anyone has worked with recruiters before, that can be anywhere from 10% to 33% the hired person’s salary which is too much for early stagers.

we talked about accepting equity potentially but the risk of taking early stage startup stock or options is pretty high and most will fail, leaving him with nothing for his efforts if that is the only payment for his services.

so my question to you would be, what would you be willing to pay for their services? maybe something like 5% salary + 5000 options perhaps? or flat fee $5000 + 5000 options? would love to hear your honest thoughts, noting that you won’t get their services for free but you must pay something either in equity and/or cash…

thanks in advance!

I have an email list of all my contacts at the startups. There are 62 people on the list, representing 25+ startups and companies.

Of those 62 people, 9 people responded. Here were the results:

1 would not pay cash at all
3 would never pay options for recruiting.
1 suggest deferring payment either until financial position better or next funding round.
2 would pay up to $5K, preferably less.
1 would pay 5% of salary but not more.
1 would pay options if there were future services/longer relationship
1 would pay options with no expectation of future services/longer relationship
1 would be happy to pay the normal recruiting rate 10-33% of salary

All are concerned that recruiters would deliver good candidates at all. Their experience with many recruiting firms was that they were not able to deliver great candidates. Also, there could be conflict of interest in that if recruiter is compensated on % of salary, a recruiter may negotiate for higher salaries. Or they just find you any candidate whether they are good or not, just to get paid.

2 suggested – was there a way to reward recruiters more for a good hire (ie. lasts longer than a year, and performing well) and rewarded little for a poor hire (ie. let go within a year).

One person suggested, could recruiter fees be paid by VC firms as part of their services or use of funds?

In looking at the responses, the consistent message was that startups were very cash strapped and did not want to, or could not, pay any cash at all. Or they did not want to pay until later. Everyone had a different opinion on whether or not they were willing to pay options and what paying options meant.

Looking at it from the recruiter side, there are definitely issues with working with startups:

1. For startups, many times it’s low salary and high equity for the new hire. If a recruiter is getting 10-33% of hiring salary, then how does recruiter make money if the new hire salary is much lower than what they would get at a traditional company?

2. Startup equity is notoriously risky. If a recruiter only takes equity for payment, much of that payment will be forfeit since most early stage startups fail.

3. Recruiting is a cash based business like other consulting services. You need upfront cash to survive but startups are reluctant to give you any cash at all.

Given what I found out here, I am not sure that the current recruiter model can work. Some other comments and options I have found interesting that are out there:

1. Incubators and VCs already have recruiters on staff. Some of them are contractors paid through venture funds but some of them are actually on staff so they are not compensated like external, independent contractors.

2. StartupDigest is an email digest focused on startups, but there is a recruiting model hidden inside. It’s an application driven, VIP only members list of both startups and key individuals who get matched to each other.

3. Codeeval allows those seeking to hire engineers to post coding challenges and a place to upload solutions. You set potential coding hires to your section of the site and they solve problems that you create. They write code and upload the code to the server where it runs the code and publishes the output and the code for the hiring manager to evaluate.

4. Ovia HR is video based recruiting, but in an asynchronous manner. You upload videos of the hiring manager/recruiter asking interview questions and interviewees come and answer via video. Actual interview situations are mimicked because there is a time limit to answering a question so you don’t get time to prepare answers; you have to answer on the fly, just like in a real interview.

Still, in today’s world, hiring is a big problem for startups and likely to remain that way for a long time. The explosion of startups means that there are too many choices for prospective new hires to join. Using new technology to help find candidates is nice, but there is no substitute for the power of getting out there and networking yourself. Ultimately, people join your startup not only for the cool idea and opportunity, but for the opportunity to work with smart people whom they respect and can learn from.

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I was just reading Don Dodge’s post, How to get accepted at Stanford or Harvard, or how to get a job at Google or Facebook, which reminded me of the people who asked me about how to deal with the MIT Problem for Startups. The problem that Don describes is exactly that which we are facing in the startup world. There are way too many perfect SAT score, straight-A valedictorians vying for not nearly enough Ivy school entry slots; how does one get into the top school of their choice? Don’s suggestions are eerily the same advice I would give today’s group of super-genius MIT/Stanford/whatever graduate entrepreneurs trying to get funding.

Work on Something Truly Unique

Don says to Do something special. I agree.

There are way too many people chasing the same thing, or similar thing (even if you think you’re different and better, or more importantly can your customers figure out if you’re really better or different).

To woo an investor, you should find something to work on that is totally something NOBODY else has thought of. That not only makes you stand out because of your idea, but also it means that you’ve got a head start on any competitors that may follow or copy you.

Defensible, Unassilable Competitive Advantage

Along with uniqueness, you can think harder and work on something that has some truly defensible element to it. This is back to old school roots on building companies which is to have some sort of technological or business advantage that is very hard to replicate, requires rocket scientists (time to put your MIT/Stanford degree to work now!), and potentially can be patentable (even as much as we hate the current patent system). If nobody can copy you, or if it’s amazingly hard to copy you, or you make them pay you if they copy you, then you’ve probably got something there.

Some of you have complained that this is really hard, or even said that it would be an easier path to some sort of measure of success (ie. early exit, get a job at Google via acquihire, etc.).

First, entrepeneurism has never been easy. It could quite possibly be the hardest thing you’ve done. The genesis of entrepreneurism is the idea you come up with to work on. Given the proliferation of entrepreneurs today, you’ve got too many great minds chasing after ideas. All the easy ones are already being worked on. So you need to think harder and more creatively on a market need and/or problem to be solved that someone else hasn’t worked on yet.

Second, while there are many angels and early stage funds who would back you if your idea was smaller reaching, my goals with investing are unfortunately incompatible with startups whose trajectories are not world dominating. As a director of Launch Capital, I must think on how to maximize return for my investor all the time and the risk of failure at early stage means that a super-high failure rate forces me to invest only in ideas with large potential outcomes. And yes, finding world dominating ideas is very, very hard.

Don then offers up advice on what to do next, if you didn’t get into your school of choice:

There are many paths to success
Never stop learning
When a door closes a window opens

All this says to me that you should not quit, and that you should keep at it until you find something that makes sense to work on. This could mean that you should branch out beyond your current areas of experience to find that elusive idea that nobody else has worked on. It could mean that you should join up with someone who has found that elusive idea. Or perhaps you should work on something that is completely different than the area you’ve trained in. Entrepreneurism is not all internet or tech!

Certainly being patient can also bring rewards. Sometimes stepping away from all this idea generation can spark your creativity more than concentrating your brain on it until your head hurts from hours and hours of trying to figure out an idea to work on.

Or perhaps in a few years, entrepreneurism won’t be in vogue any more, and you may find that you’re one of the last few entrepreneurial folks standing. All those MIT/Stanford/etc. geniuses competing for money might just go do something else and it might become a great time to work on whatever idea you have.