Lesson #34: How Best to Recruit Employees For Your Startup

As a startup, odds are you will not be able to afford a dedicated HR person or 30% headhunter fees, and will most likely need to be doing the recruitment yourself.  In today's post, we will offer a few tips on how to find the right talent for your business, in a way that brings in the best candidates and reduces any distraction from your main business focus.

There are lots of different job posting sites out there, some are huge (e.g., Monster, Career Builder, Craig's List) and others are small (e.g., job boards for trade magazine sites).  Some offer national candidates, and others local candidates.  And, some are targeted to senior executives (e.g., The Ladders, Netshare, Execunet) and others for specific entry level jobs.  So, before randomly placing a job posting, figure out which audience is most relevant for your position. 

For example, I may go to Dice or CraigsList for technology developers, LinkedIn for mid-level managers and the Travel Industry Association website for national travel agents.  But, in most cases, I will first look for local job boards in your home city (e.g., Chicago Interactive Marketing Association for marketing people in Chicago), since I will not have budgets to relocate employees.  Unless national job boards are your only option, and then I will detail no relocation budget within the posting, so candidates know we cannot afford to relocate them or pay for their travel to interview with you.

And, let's not forget the power of working your network and word of mouth marketing via LinkedIn, Twitter, Facebook or otherwise.  It is a lot better to find a "colleague of a colleague", with first hand references in place, than to start blind with a random candidate, where you can.  Frankly, sites like LinkedIn are my favorite recruiting sites, simply because I can learn a lot about the candidate, above and beyond their simple resume data.  How many connections do they have?  Who are those connections, and can they help me?  Do I have any overlapping connections that I can call as a reference?  Also, it provides really good insights to how socially engaged the candidate is and the types of connections they can bring to your business.

Once, you have identified where you want to be recruiting, now you need to figure out what your job posting should say to: (i) stand out from the thousands of other job postings a candidate may be looking at; and (ii) limit the clutter of resumes coming into your office, to simplify the screening process.   I would not be vague in your copy, and disclose as much as you can to ensure the reader knows all the plusses and minuses, so only the most interested will apply.  That means, disclose your company name (so they can research your business on your website) and disclose the specific salary range (so people desiring a salary above that range do not apply).  The only time you need to be more confidential in your posting, is when you don't want an existing staff member to know you are recruiting a replacement for their position, or if you are worried about a competitor learning you are hiring for certain skills.  But, as a rule, more disclosure is better than less for all involved.

Also, if there is specific information that would be useful to you in screening candidates, make sure you ask for such information to be provided in your posting.  For example, if you need a technologist with strong C# coding experience, make sure that is detailed as a requirement for all candidates, and that they need to rate themselves on a scale of 1 to 10 for that skill in their cover letter.  If there are many skills that are required, and can easily be assessed by some simply Q&A, set up an online Q&A recruitment form on your website, so you don't have to waste time on the phone asking the same questions over and over again (since answers can easily be screened via the online responses).  I also think video can be a very effective tool to dig deeper than just a resume.  So, maybe set up your Q&A form with a video-based recruitment site, like Expressume, where you will get video responses to your questions, and can learn a lot more about the candidates' communication skills and personality fit in the process (again without wasting time on the phone).

The big picture point is:  waste as little time as possible in the minutia of recruitment, as that is time better spent on your business.  Put processes in place that allow for very efficient screening of candidates (e.g., detailed posting, Q&A forms, video responses), so only the most appropriate candidates apply, and they can easily be screened from there.  Then, once you find your favorite three candidates, now is where you dig in and spend quality time learning more about the candidate. 

Finding the right team members for your startup are critical for its success, so you have to invest the time here to get it right.  But, make sure that time is most efficiently spent (e.g., interviewing the best candidates, and not on preliminary screening of all that apply).  You never want to rush a hiring decision or take a marginal candidate just to fill a position, as long term, it will never work out for either party's long term interests.  And, it is a lot more expensive and time consuming to remove a poor performer down the road, than to get it right the first time.

In a following post, I will help you learn how best to screen a resume, so you are asking the right questions.

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Lesson #33: The Importance of Customer Service

This may sound pretty obvious, but don't take your customers for granted.  They are your lifeline, especially for a startup, and you need them to help serve as good references and to spread positive word of mouth.  Today, I will give you a couple examples from iExplore of how offering premium levels of customer service, helped to build long term customer loyalty and drive repeat sales and word of mouth for our business.

Go The Extra Mile:  iExplore had sold a horseback riding trip in South Africa to a mother and daughter.  On the day of departure from the U.S., we had a panicked call from the mother while at JFK airport that her crying daughter had forgot her horseback riding boots at home, and wondered if there was any way we could help.  We could have said, that is not our job, we just sell travel.  But, we took the extra effort, tracked down a horseback gear retailer in Cape Town, and had a pair of boots waiting for the client upon their arrival at their hotel.   The client was thrilled.

Add A Personal Touch:  You always want your customers to feel special, like they are getting something above and beyond the norm.  So, when we were selling tours, we would always include something in the client's trip, that they were not expecting from their purchased itinerary.  For example, maybe it was a bottle of champagne and fruit basket waiting for them upon their arrival.  Or, a special private dinner in a tented camp while on safari.  Or, a free tour book with their pre-departure materials.  Pleasant surprises go a long way to instilling long term loyalty.

Own Up To Your Mistakes:  When things go wrong with your customers, how you go about resolving these errors will dictate whether or not the customer will buy from you again.  If you show you sincerely care about them and making right by them, that is almost more powerful to long term loyalty, than had nothing gone wrong in the first place.  As you can imagine, when selling travel, there were a lots of places where the trip could go awry (e.g,. missed transfer, bad hotel, poor food, unpleasant guide, missed activity).  And, when they did, we would compensate the client with cash refunds and additional perks to make up for it.

Take Responsibility for Your Suppliers: In one extreme example of customer service, one of iExplore's sub-contractors in Alaska had gone out of business, and the client had already passed through their monies to the tour operator for their trip, scheduled to leave the next month.  It was a double problem of a client losing all their money and the client losing their valuable vacation time in Alaska.  Even though our contracts clearly stated issues like these were not iExplore's responsibility, we in fact found another tour supplier and paid for the trip out of iExplore's pocket.  That customer was very grateful, and we had numerous repeat bookings from that family.

Get Yourself Directly Involved with Customers:  There is no better way to learn about your product and interact with your customers, than to put yourself directly into the customer experience.  At iExplore, we had a "Travel With Our CEO" promotion, where I personally led trips with 8-10 customers at a time, in various destinations around the world.  It was a way for me to better learn about the business and our customers, and a way for our customers to get a special experience of traveling with the head of the company.  So, a win-win for all involved.

A good customer experience, will lead to 2-3 new customer referrals from positive word of mouth.  And bad customer experience, will lose you 8-10 referrals from negative word of mouth.  And, your litmus test to how well you are doing on customer service, is how quickly your repeat sales and word of mouth sales are growing.   So, make sure premium customer service is instilled into your company's DNA from day one.

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Lesson #32: How to Value Your Startup Business

One of the questions I get, more often than not, is what is the appropriate valuation of my business.  Typically related to an upcoming financing or pending takeover offer.  And, the answer is quite simple: like for anything, your business is worth what somebody is willing to pay for it.  And, the methodologies applied by one buyer in one industry, may be different from the methodologies applied by another buyer in another industry.  In today's post, I will give you some key drivers on how to value your business, in a way that will make sense to you, and will be in line with investor expectations.

To start, let's not forget about the obvious: the natural economic principles of supply and demand apply to valuing your business, as well.  The more scarce a supply (e.g., your equity in a hot new patented technology business), the higher the demand (e.g., multiple interested investors competing for the deal, and taking up valuation in the process).  And, if you cannot create "real demand" from multiple investors, "perceived demand" can often work the same when dealing with one investor.  So, never have an investor think they are the only investor pursuing your business, as that will hurt your valuation.  And, before you start soliciting investment, make sure your business will be perceived as new and unique to maximize your valuation.  A competitive commodity business or "me too" story, will be less demanded, and hence require a lower valuation to close your financing.

Related to the above, is the industry in which you operate.  Each industry typically has its unique valuation methodologies.  A next generation biotech or clean energy business, would get priced at a higher valuation than yet another family diner or widget manufacturer.  As an example, a new restaurant may get valued at 3-4x EBITDA and a hot dot com business with meteoric traffic growth could get valued at 5-10x revenues.  So, before you approach investors with valuation expectations, make sure you have studied the valuations acheived in recent financing or M&A transactions in your industry.  If you feel you do not have access to relevant valuation statistics for your industry, engage a financial advisor that can assist you. 

In terms of techniques investors use to value your business, they will study things like: (i) revenue, cash flow or net income multiples from recent financings in your industry; (ii) revenue, cash flow or net income multiples from recent M&A transactions in your industry; and (iii) a discounted cash flow analysis of forecasted cash flows from your business.  As mentioned earlier, these multiple ranges can be very wide, and vary substantially, within and between industries.  As a rough ball park, assume EBITDA multiples can range from 3x to 10x, depending on your "story".  And, forecasted earnings growth is typically the #1 driver of your valuation (e.g., a 25% annual net income grower may see a 25x net income multiple, and a 10% annual net income grower may see a 10x multiple).

If there are no earnings yet, with your business plowing profits into long term growth, then revenue multiples or some other metric would be used.  Revenue multiples for established businesses are typically in the 0.5x-1x range, but in extreme scenarios, can get as high as 10x for high flying dot commers with explosive growth (e.g., Groupon).  But, that is, by far, the exception to the rule.  And, if there are no revenues for your business, unless you are a bio tech business waiting for FDA approval or some new mobile app grabbing immediate market share before others, as examples, raising funds for your business, at any valuation, will be very difficult.  Investors need some initial proof of concept to get their attention.

Worth mentioning, private company valuations typically get a 25%-35% discount to public company valuations.  While at the same time, M&A transacations can come at a 25%-35% premium to financing valuations, as the founders are taking all their upside off the table.

And, remember, at the end of the day, the investor will have a very good sense to what a business is worth, and what they are willing to pay for it.  As they see deals all the time and typically have their finger on the market pulse.  So, collect a few term sheets from multiple investors, and compare and contrast valuations and other terms, and play them off each other to get the best deal.  As a rule of thumb, expect to give up 25-50% of your equity, in your first financing round, depending on the size of the investment and the type of investor (e.g., angel vs. venture capitalist).

Most importantly, you need to put on the hat of your investor in setting valuation.  To get them excited about your startup vs. the hundreds of other startups they see each year, they are looking for that next 10x return opportunity.  So, make sure your 3-5 year forecasted earnings, will grow large enough in that time frame, to afford them a 10x return.  So, as an example, if you are worth $5MM today, post financing, and the new investor owns 25% of the company ($1.25MM stake), they are going to need a financial plan that will get their stake up to $12.5MM (and the company up to $50MM) within 3-5 years.  Which, as an example, could mean driving EBITDA up to $5-$10MM within that period.  So, do not show them a forecast that grows less than that, and make sure you have built a credible financial plan to acheive these levels before approaching investors.

There are too many nuances to valuing a startup business than I could do justice in this short post, but hopefully this post gives you a good sense to the high level issues in play.  If you have any questions for your specific situation, just ask.

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Lesson #31: The Power of a Pivot - Thinking Out of the Box

We are all familiar with the meteoric success of Groupon, the daily deals website.  But, as you can read in this Groupon case study at Business Insider, they were a struggling business in the group fundraising space called The Point.  Had, they not pivited their business model from a "tipping point" for fund raising needs, to a "tipping point" for consumer deals, they would most likely be out of business today, and not a company valued at $15BN.  Somebody inside of The Point had to be smart enough to realize their old business model wasn't working, and they needed to think drastically out of the box to create a winning long term business model.  And, as you remember, there were many other examples of successful business pivots that we discussed back in  Lesson #8 on startups requiring flexibility.  Today, we are going to tackle: (i) when pivots are required; (ii) how to identify what pivot opportunities may exist; and (iii) how these pivots can be minor or material in nature. 

I think it is pretty self explanatory, if limited revenues or traction is being made with the current business model, something needs to change, and fast.  But, is the business model flawed (requiring a pivot), or is the sales and marketing plan or the management team executing such plan the problem.  You need to do your best to assess the success of each of these elements in isolation, before resorting to a business pivot.  So, for example, if you have the exact same business model as several other successful businesses, your problem is most likely the wrong sales and marketing plan or management team.  But, in other examples, where the sales and marketing plan makes sense for your industry and you have a proven and competent team in place, if nobody is buying your product, that most likely means it is time for a business pivot.

In determining where the pivot opportunity is, you need to study the core assets of the business and how they may be applied in new ways.  In the Groupon example, it was the "tipping point" technologies used in a new industry (e.g., consumer deals, instead of fundraising).  There are other examples, where the exact same product wasn't working for B2B clients, but was demanded by B2C consumers.  Or, the product doesn't sell as a branded front end solution, but does as a white label back end solution.  Or, maybe your technology is too expensive on an installed license basis, but sells better under a more cost effective SaaS solution.  Maybe corporations don't need your solutions, but government or university clients do?

Or, maybe there are dramatic changes that could lead to much better financial returns on your investment.  In one example, at MediaRecall, a digital video services and technology company serving the film studios and television networks, we learned that instead of taking an upfront cash fee for services provided, we could do the work for free and keep a 50%/50% revenue share on the resulting professional entertainment content.  These content royalties would ultimately result in 10x the overall revenues than what we would have received from the upfront for-fee services model, as the resulting content gets distributed and monetizing on sites like YouTube and Hulu.  So, if we could fund the upfront work, definitely worth the wait for revenues over time, instead of upfront.

So, when looking for your strongest assets, look enterprise wide.  Your asset can be a technology.  Or, in distribution and logistics.  Or, in search engine marketing.  Or, offshore product sourcing.  Or, in call center operations?  Or, whatever.  Just figure out what it is, and leverage the hell out of it in new industries, sales channels or applications.

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Lesson #30: When to Hire Employees vs. Contractors vs. Crowdsources

Employees are on-staff individuals working for your company, accruing benefits and where the company controls their working hours and how they are paid.  Independent contractors are individuals engaged as a third-party entity, not accruing benefits, setting their own hours and invoicing the company as they complete their work.  There is a good article on the  differences between employees and contractors on the IRS website.  A new category of workers, called crowdsources, are the same as contractors, but you have them in mass, with hundreds of potential workers competiting for work at typically much reduced prices. 

Crowdsources have been built in nearly every type of human work category, including graphic design (Crowdspring, DesignCrowd, Kluster, Fellow Force, 99 Designs, Genius Rocket), search bid management (Trada), banner ad creation (Data Pop), professional writing (Contently) and market research (Crowdtap), just to name a few.  These crowdsources are typically offering companies much more selection to choose from, at a fraction of a price.  As an example, let's say you need a new logo.  You post your need on one of the graphic design crowdsource websites, and you will get 100-200 logos to choose from (designed by 100-200 different designers trying to win your business), and only pay for the one you decide to buy (typically at a fraction of the price a logo design agency would charge for only a couple options to choose from).  Crowdsources are very clever businesses!

Now, when is it best to use employees vs. contractors vs. crowdsources?  The answer typically comes down to: (i) is the position long term in nature, or temporary; and (ii) does the complexity of the work require onsite management or not.  In all cases, you want to avoid adding employees, unless absolutely necessary.  Employees come with expensive payroll taxes and employee benefits, which are typically 20% more monies on top of their base salary.  And, when you terminate them, any unemployment benefit claims, will ultimately get paid by the company in the form of higher unemployment insurance premiums.  And, management level employees may also have big severance packages (which should be avoided, if you can).  Not to mention, the mindset of an employee is that they are a long term team member, and any layoffs will dramatically impact company morale for the remaining staff, if they see their friends cut. 

That said, employees are the way to go for permanent jobs, as employees salaries are typically a lot lower than the hourly rates that can be charged by an independent contractor.  As an example, if the company needs C-level management or an office manager, these are most likely long term jobs that will never go away.  These would be employee hires.

Independent contractors, on the other hand, are better for projects that are more interim in nature.  As an example, if you need a new website design, that is typically a three month project and then the designer is done with their work.  You don't want to take a person on your employee payroll for an interim project like this.  Unless your company has full time design needs (e.g., web site changes throughout the year, marketing materials throughout the year), it is preferred to hire an independent contractor in this example.  It makes your overhead that much more variable in nature, allowing your cost stucture to move up and down as your work needs ebb and flow.  This is much preferred to carrying fixed overhead.

Now, in terms of hiring an independent contractor or using a crowdsource, it comes down to the complexity of the work.  If it is something simple, like designing a logo or website header, that can easily be done by anybody worldwide, and it would be beneficial to get a bunch of different examples to choose from.  Not to mention the dramatic costs savings of the crowdsources, compared to independent contractors.  But, for complex work, like architecting your website backend and making all the database, network, hardware and software decisions, that is most likely best served by an in-house independent contractor working hand-in-hand with your CTO.

So, long story short, keep your long term overhead (e.g., employee base) as low as possible, and structure your human resources in as variable a way as you can.  While at the same time, maximize your selection of options and keep your costs low with crowdsources, when complex work is not involved.  Start researching crowdsources on the web, there is most likely one for most any of your needs.

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Lesson #29: No Matter How Bad It Gets, Persistence Wins

In my last post, we talked about iExplore's scary experience in the wake of 9/11/01, and the need for startups to expect the unexpected with enough cash cushion on hand.  I mentioned iExplore ultimately survived that negative impact on the travel industry, but did not give you the details of how we actually avoided bankruptcy and kept the business afloat.  I will highlight a few key points below, summarized as "no matter how bad it gets, persistence wins!"

To set the stage, here were the key datapoints for iExplore's business at 9/11/01.  The company had about $5MM in debt ($3.5MM from venture capitalists and $1.5MM from creditors), a cash burn rate of around $250K per month, no revenues coming in (due to low demand post 9/11/01), a low margin business and no cash in the bank (with our $4MM committed venture deal falling apart post 9/11/01).   To say the situation was bleak was an understatement, and any normal business would have called it a day and closed the business.  But, I was passionate about the business and our progress to date, and knew the markets would ultimately recover.  All I needed to do was to restructure our business to give it a chance to succeed long term.

It terms of the $250K burn rate, that was net of any discretionary spending like marketing that we had immediately cut.  It was largely the expenses related to our 45 person staff.  With no cash in the bank, and no cash in sight, I had no choice but to layoff 100% of our staff, including myself.  That got the burn down close to $50K per month, a much more reasonable level to find a "white knight".  I basically told nine of our employees, that if you are willing to volunteer your time over the next couple months, they would be rehired (and paid any unpaid back pay) if a new financing closes.  But, no promises, proceed at your own caution.  Believe it or not, those nine employees were as empassioned about iExplore as I was, and agreed to stay on for no pay, on the hopes of having a job on the back end.  Those were some really terrific people!

The second thing I needed to do was come up with an alternative revenue stream, to make the business more attractive to investors.  So, I evolved the business from a 15% travel agency (selling third party trips) to a 35% margin tour operator (selling iExplore branded trips).  And, at the same time, entered the 75% margin online advertising sales business, selling banner ads on the iExplore website.  Those two changes allowed us to present a profitable business plan, even in the low travel demand environment post 9/11/01.

The third thing I needed to do was to settle our debts at much reduced levels, as new investors would not touch our business with a $5MM noose around our neck.  For the $3.5MM of venture debt, those investors agreed to convert their stake into equity in the going forward business, if I could find new cash investors.  This debt was intended to convert to equity anyway, albeit not at the much reduced valuation that was required post 9/11/01, so the investors ultimately agreed given the company's dire straits. 

Settling the $1.5MM of creditor debt was a lot trickier, as they were not board members and did not have a vested equity stake.  The good news was, these creditors were not iExplore customers or going forward vendors.  They were 100 old vendors that we did not plan on using going forward (e.g., old advertising agency, unneeded software/hosting vendors post our reorganization).  So, we hired bankruptcy counsel who filled in a 75 page draft bankruptcy filing and sent it to the 100 creditors with a cover letter that basically said, "we all know what happened at 9/11/01, iExplore is illiquid and needs to raise cash, new cash has been identified but only if you settle your debts at $0.10 on the dollar, and if you don't agree, you are sitting behind $3.5MM of senior venture debt and will get zero when this draft document gets filed".  It was basically a huge game of "chicken" with what would become 100 hostile and pissed off creditors.  But, after lots of calls by myself and our CFO, we got 100% of the creditors to agree to the settlement, since $0.10 on the dollar was better than zero.  And, we turned $1.5MM of liabilities to $150K of liabilities, a lot easier for a new investor to digest.

The final thing we had to do was raise the new capital, which was torture in the wake of 9/11/01 when the whole financial market basically went on pause.  I had made 400 phone calls to my venture capital colleagues looking for anyone to listen, and they were just too worried about the long term impact on the travel industry in a world of increased terrorism.  So, I had no choice but to call my uncle, who was one of my advisors, that was willing to fund me $50K per month, assuming he could see material progress in our business.  That was our lifeline, that gave me the time to ultimately find $1MM of new venture capital that was willing to fund the business in January 2002.  These investors got more comfortable the longer we got away from 9/11/01 and they could actually see revenues starting to recover.  Not to mention, buying into established iExplore (with over 1MM visitors a month) at much reduced valuations, could lead to juicy financial returns when the market fully rebounded.

So, that was how iExplore survived 9/11/01 and lived to fight another day.  And, as we all know, it ultimately became the largest website in the adventure travel space, and was sold in 2007 to TUI Travel PLC, a $25BN company and largest seller of leisure travel in the world.  The investors who saved the business after 9/11/01 made a good return on their investment.  And, I now have a success story on my resume and not a failure.

This clearly demonstrates that no matter how bleak a position you think you are in, persistence will ultimately win the day.  And, with a lot of hard work and creative thinking, a phoenix can indeed rise from the ashes!

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