Lou's Views

The Upside of Hiring Risk

“How Google Works”, a book written in 2014 by Google Executive Chairman Eric Schmidt and former SVP of Products Jonathan Rosenberg, is an anthology of lessons learned by the authors during Google’s meteoric growth. In one vignette, before departing to London to meet a group of Rhodes Scholars, Rosenberg contemplates how he will determine which Scholars to invite to interview at the Googleplex. Sergey Brin solves the dilemma stating, “Why decide at all? Offer all of them jobs”. The scarce resource for Google was intellectual capital, not financial capital.

Startups are typically constrained by both intellectual and investment capital (an underappreciated skill that will assist a startup CEO is knowledge of finance). The CEO is challenged to allocate every dollar of investment capital to maximize company valuation, building the IP portfolio, using open source software to decrease development costs, minimizing customer acquisition costs, hiring the proper number of proper people at the proper time, etc.

Let’s look at a hiring scenario that might occur in a latter-stage startup. Product introduction for this startup is successful and the founding team, which does not include an experienced sales manager, hires several seasoned account executives, who then win a small number of trophy accounts. The CEO/Cofounder decides to hire two Regional Sales Directors (RSD) who will report to her. At a later time, the CEO will hire a VP Sales but she decides to be creative in hiring the two RSDs as one (or both) may qualify as internal candidates in the future VP Sales search. Given the scarcity of “great” RSDs, she can hire an RSD who fits the stereotypical profile of a “good” Sales Director or she can hire an “innovative” RSD whose potential for “great” sales management (e.g., due to intriguing short-term accomplishments in an adjacent domain) is higher but accompanied by greater downside due to the absence of a significant track record and the burden of a domain learning-curve.

Assign probabilities to the stereotypical Regional Sales Director of 20% being “great”, 70% being “good” and 10% “failing”.

To the innovative Regional Sales Director, assign probabilities of 50% being “great”, 10% being “good”, and 40% “failing”.

at least 1 RSD is great at least 1 RSD is good both RSDs fail
hire 2 stereotypical RSDs 36% 63% 1%
hire 1 stereotypical RSD + 1 innovative RSD 60% 36% 4%
hire 2 innovative RSDs 75% 9% 16%

The table shows the superior rewards that accrue to the startup by hiring at least one innovative RSD. Of course, the premise is based on the ability of the organization to assign a risk profile to each candidate. The exercise to establish a risk profile forces the hiring team to quantitate candidate accomplishments and assess the portability of such achievements to the startup’s business model. If a risk profile cannot be established, the startup has gained knowledge about hiring barriers in its business plan.