How One Bad Hire Can Kill your Start-up
There is a situation in the book “How will you measure your life” by Clayton M. Christensen that caught my attention.
The author talks about one of his early start-up ventures where he made the mistake of hiring the wrong person for scaling up his production facility. This decision nearly killed the company.
After 2 years of start-up building, he was looking for a Vice-President (VP) of Operations, a person who got the responsibility to scale the production facility from lab-scale to full-blown production.
After three months of searching, they narrowed the search down to two people:
The first one was referred by their investors (VC). Let's call him candidate A. A very capable man, who used to be an executive Vice-President of Operations for a multi-billion dollar business unit that spanned the globe. The guy had a great reputation, an expert in plant management and a lot of knowledge about the kind of products that the start-up was trying to produce.
The second option, Candidate B, was the former boss of one the engineers working in the lab. According to the engineer, this guy had been on the front lines in the field and literally had dirt under his fingernails. He had hands-on experience with shutting down plants, deconstructing them with his bare hands and building them up elsewhere. He has faced a lot of troubles in these efforts but he always managed to finish the project within time constraints. This guy however, didn’t have a polished résumé, an MBA or plant management experience.
The Power of the Money
The engineers in the start-up were leaning toward the guy with the dirty fingernails while the VC was strongly in favor of Candidate A, the former VP.
So what happened? The VC won the case and the start-up chose candidate A, spending lots of dollars to relocate him to the new place where the start-up was established.
After a year it became clear that they made the wrong choice. The ramp-up of the process was badly managed to a point that the start-up was facing bankruptcy.
But why was candidate A not the best fit in this case? Candidate A had a perfect track record managing plants that produced billions of revenue, year after year. The problem is that he has presided over a massive operation, but one that was in a steady state. He had never started and built anything before and as a consequence, he knew nothing of the problems that one encounters when starting up a new factory and scaling production of a new process.
Looking at résumés however, Candidate A clearly blew Candidate B out of the water, but that didn’t make him the right choice in this particular case.
Candidate B understood the very basic processes because he had experience building them from scratch. Unfortunately, by the time they understood the value of this, candidate B was long gone so they had to find somebody else, quickly.
A Joint Venture - Disaster
The same happened on a larger scale between two multinationals; Intel and SAP. For a joint venture (Pandesic), each chose their very best people to create a new company to serve a new market. Pandesic’s mission was to create a more affordable version of SAP’s enterprise ERP software, targeted at small- and midsize companies.
But none of them had experience launching a new venture. None of them knew how to adjust a strategy when the first didn’t work. None of them had to figure out how to make a brand-new product profitable before growing it big. As a result, Pandesic was shut down in 2000 after failing to find a "timely road to profitability". Or in other words; None of them had experience with product/market validation. They just believed that the existing company processes could be applied to a start-up too. Start-ups are not smaller versions of large enterprises however. They are still looking for the product / market fit.
So what Intel and SAP had done was handpick a team that could run an equivalent of either of the giants, but not a start-up.
Experience is important, but it is even more important to dedicate the right experience at the right time in the start-up process. In a start-up company where there are no processes in place to get things done, you can’t immediately use people who have been working in resource- and process-rich environments. You need people with hands-on experience. Builders who have a different set of processes who are used to work in resource-poor settings. Not managers.
Disclaimer. I'm not claiming that all managers from large companies suck in building start-ups. At my former company Cloudalize, we attracted a sales manager who was a former VP Sales in a Fortune 500 company. Contrary to what we expected, he was able to get back to the basics and get things done. Exceptions exist.