Early Employees are Tougher than Early Customers

new-employee4Ideally you need people in your team who are better than you, or at least very good.  But how would you figure it out?  And why would good prospects want to work for you?   For larger companies, or VC funded companies, this becomes much easier as there are enough resources that can come together – You can be more flexible with the compensation package, and you can get other people from the VCs network to interview them.  And finally, good prospects need to have proof that you, the employer, are good at what you do; VC funding provides some though inaccurate evidence to the prospective employee.

For start-ups hiring is more difficult than for mature firms, for many different reasons.  Economic theory labels various aspects of the hiring process as ‘search costs’.  These arise from asymmetric information, that is, the employee and the employer have different levels of information about each other. This asymmetry of information can give rise to either a simple mis-hiring – wrong person for the wrong job.  Or it can give rise to problems of moral hazard, that is one of the parties does not deliver to the levels for which the other party has contracted him for.  This problem of moral hazard in turn can be reduced if one of the parties is able to signal properly what he brings to the table.  This in turn enables the other party to do a good quality sorting of the many options available to them.  In the end, you need to sort well through many proepects.  At the same time, the good employee also sorts through the many prospective employers.  Start-ups typically lose out in this sorting, if they are not extra careful.

I rarely use terms used by economists in most of my writings.  But increasingly I find that management schools or company advisors don’t share the basic stuff with would-be entrepreneurs.  Entrepreneurs would do well to appreciate the importance of these problems, and a Google search will reveal the tomes written in economics literature on these issues.  Perhaps that would help them understand better what I will allude to throughout this blog.   What follows should be the first class in a course on starting a venture.

The initial hiring I did all came from my network.  I told everyone I knew I was looking for people who had quantitative skills.  Many referred their junior colleagues, friends and family members.  I ended up hiring some of them, but that was not adequate.  Next I visited the major educational institutions, but I was unknown to them and soon realized I was only getting people who had few other job options or prospects.  Paying more did not help as I still would not get the good people.  So I ended up hiring a few but scaling back how much I was willing to pay them.   Why pay more for poor skills?  This is a classic prisoner’s dilemma, again an economics term which is rooted in the problem of asymmetric information.

There are many areas where prisoner’s dilemma plays out.  Let me illustrate this in the context of hiring.  The employer does not know very well how good the future employee is.  Similarly the future employees do not know how good a new unbranded non-networked employer is.  And so, unknown start-ups tend to be at the bottom of the more capable employees’ job consideration set.  Since such an employer knows that this is how employees will think, and he will only be able to hire the less capable employees, it would make most sense to pay less.  In other words, even though the employer is willing to pay more for the more capable employee, he will end up hiring the less capable one and pay less.

How would you, the entrepreneur, solve the problem? First, if you have a capable and well known investor, the matter can be partially solved if he takes an active interest in hiring.  Because then the employee gets a credible signal that a person of some standing is putting his money in the entrepreneurs hand, so this entrepreneur must be good.  Two, if the hiring is through the social network there are people in the network who will attest to both the employer and employee that the other person is good at what they do.  Three, the entrepreneur can hire, observe employee performance for a few weeks, and relieve him if the employee is not up to the mark.  Four, the entrepreneur hires those who otherwise would not be hired, and trains them intensively, and retains them only if they become capable.

To all of this, I had another problem in the early days – I did not know what skills I required! Because in the early days, the medium term requirements were not known well enough.  I needed data skills, I needed computing skills, writing skills, research skills, analytic skills, and business development skills, but how much of what was a question mark!  I could also not go to anyone for help, for no economist I knew had ever succeeded in setting up a for-profit firm!   And then there was the classic entrepreneur’s problem, I was so busy doing so many different things, that I had little time to spare for hiring.

Using an economists lingo – I had informational asymmetry working against me, I had product uncertainty working against me, and I had limited resources (time) conspiring against me as well.

——

So how should we deal with this problem?  A good manager would work to remove the informational asymmetry constraint, by hiring other professionals who know the way out of these problems, namely a head hunter.  But for a start-up the problem is deeper, a good head-hinting firm and a start-up are also susceptible to the same prisoner’s dilemma problem!  Even if you end up tying up with a good firm, they are unlikely put their best people on your job.  They reserve those for their larger clients.

So how does the entrepreneur deal with it?  Stop fretting or whining and go ahead with what you have!  This is what I did and it worked wonders.  I used my network, gave ads, pitched hard to the interviewees, trained the people hired very hard, and released those who would not make the cut, as quickly as I could. As a consequence Indicus was always in the hiring mode.   After many tries a small crack team evolved, a few people who may or may not have had the grades, may not have attended branded institutions, but were inherently skilled were identified, trained hard and retained.  That team later led to many great things.

We did one more thing at-least in the initial years, reduced the human capital element in our product and service offerings.  I would myself do the more complex tasks – planning econometric analysis and final writing was done by me for many years – leaving the less complex but highly time intensive tasks for the team.  As work increased and I could not handle this however, Indicus therefore reduced the complexity of the output we would promise clients.  In other words, we reduced the requirement for high level human capital, by changing our product/service mix!

Simply put, at whatever stage of the start-up lifecycle you are at, it will be extremely difficult to hire good people.  And this reality should be built-into your overall strategy.  If a check list helps for basic tips for hiring, here goes:

  1. Spend about 20-40% of your time hiring, even when you think you do not need people, keep looking.
  2. If you ever find a good person who is willing to work or you, hire her on the spot. Then figure out how you will create the resources.
  3. Treat an interview of a potential employee as a pitch – the start-up employer needs to pitch very hard, even harder than you would pitch a client.
  4. Get someone with a very good profile or well known to help you in the interview.
  5. Do not use the employees to interview people, they will not get the above 4 points, and will throw off the interviewee (I discovered this after many years).

Needless to say, with time as you and your start-up get branded better, or achieve greater renown, the above will play a smaller role, and hiring will get easier.

Note: Some entrepreneurs are unable to relieve people even if they perform poorly.  If that is the case with you as well, then make sure that you are training and pushing your staff much more than the competition.  If that is also not feasible, it is better to close shop.  No start-up can succeed without carefully selecting its team, because in the normal scheme of things, they will end up hiring below average skill sets.

(To be continued)

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