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Red Flags in Leadership Hiring

25 Mins


By Team Artha

Never hire someone who knows less than you do about what he’s hired to do.

Malcolm Forbes

In all the startups that I have been a part of or seen from close quarters, hiring the right people for leadership roles has almost always been the biggest challenge. It is also the place where any error can create irreparable damage. Here are some of the interesting lessons I learned along the way.

The inability to ask smart questions and participate in a two-way conversation is a red flag.

Some individuals just don’t seem to have any smart questions. They just come for the meeting, assuming that they just need to answer questions. When you prod and press them for questions, they may come up with a few check-the-box kinds of standard questions. And especially if you are the Founder, it could be, “how would you describe the culture of your organization”. Irrespective of how you respond or what you say, they would nod and not engage in a follow-up. If a candidate for a leadership role does not engage in a game of brain tennis – whether about the role, about the way the company or function is structured, about the strategic direction of the firm, about the competitive landscape, about what is expected of them in the first 30 days, or the culture, or for that matter anything insightful –then it is a warning sign.

Often, such individuals are lured by news about a startup receiving funding and by the headlines it is making. They would never have bothered to understand what your startup is really doing, the business model, or the competitive landscape. The best hires in my experience have, without fail, demonstrated energy and curiosity. The interview is then never about asking questions and expecting “correct” answers. It then becomes an insightful conversation that moves from point to point and topic to topic, steered delicately by both parties. Smart candidates are willing to challenge your assumptions and business model. They don’t just come looking for a job.

Building for scale is infinitely more challenging than managing in a scaled environment.

When a startup gets past the tipping point and begins to scale, there is a scramble to hire talent that has managed scale before. This is where the startup needs to be extra careful. There is a need to be careful because candidates that fit this profile generally play extremely good brain tennis!! And on top of that, they are very articulate. For those that haven’t experienced or seen scale, there is a natural tendency to be easily impressed and carried away by candidates who have handled scale in large organizations. A lot of startup folks may not understand that not everyone that has worked at a large firm knows how to build for scale. They may have just ridden on the back of platforms, processes and infrastructure with no understanding of how to build these from scratch. These are individuals who can manage scale in an enabled ecosystem. They would struggle as badly as anyone else in an ecosystem that they need to enable.

There are two very important things scaling startups need to keep in mind when hiring leadership for managing scale. First of all, the timing is important. If you get someone senior well before there is an opportunity for her to display her skills, people around her will begin to wonder why you recruited her; and may even start getting frustrated when they realize that they are paid a minuscule of what she is paid. The senior hire you have recruited too starts getting impatient and a tad insecure. If you hire this person too late, then you may run the risk of stumbling and losing the plot.

Assuming you have got the timing piece right, you need to figure out the kind of person you need. Getting this right is critical. The senior lateral hire needs to earn the respect of the early hires who have worked in the trenches, built the business so far and brought it to where it is currently. The lateral hire needs to recognize and appreciate the tenacity, loyalty, love of uncertainty, and single minded focus that this group of an extraordinary bunch of early hires demonstrated in getting the startup to where it is. If this internal team does not respect the new hire, then there is very little that the new hire can do, especially if the disrespect is not an isolated case of a particular individual being upset at having to cede reins to someone from outside. The lateral hire needs to have a proven track record of skills needed for managing scale, along with an ability to think ground up on new issues and an inherent liking for the startup environment of chaos and fluidity.

With some smart interviewing, this can be figured out even if there is a margin of error. This can then be validated with informal reference checks. Informal reference checks are extremely crucial. There is no way you can figure out everything in a ninety-minute meeting. It is not particularly difficult for articulate individuals to bluff their way through meetings and sounds very credible. Therefore, it is very important to talk to someone you know who has worked with this candidate or seen her closely at work. It is very difficult to be who you are, not day after day. There are cases where we decided to drop someone’s candidature based on an informal reference check. There are also cases where there were small red flags, but not strong enough to reject someone. But in most such cases, eventually, things did not work out because the little red flag we ignored came back amplified to bite. References provided by the candidate are mostly of little use. While you can go through the motions hoping to pick up some signals through careful probing, mostly they did not yield any insights that could help with decision making.

In one of the startups that I worked for, we were looking for a global head of sales and seemed to find the perfect candidate after a long and expensive retained search. We were all excited. In such a situation, no one wants to be the one expressing a doubt (the perfect situation for the fallacy of a false consensus). One of the founders even took this candidate on a fishing expedition to Cape Cod to observe this person in a different setting. Everything went well. It came down to negotiating an offer. I felt uncomfortable. The candidate had insisted on business class travel (when the prevailing company policy was coach from the sales rep to the CEO), was negotiating for higher vacation days, a termination clause to include a hefty severance pay, non-compete etc. These were big red flags. All of us turned a blind eye to these. An offer was made and accepted. In less than seven months we had to let go of this person. An ability to be hands-on and first principle thinking are qualities that should not be compromised when you hire leaders for managing scale. The other variable that we were grappling with here was the million-dollar question that every company with a sales force grapples with, namely, does industry domain trump expertise in the horizontal sales processes or vice versa. This becomes especially important if the industry is yet under-developed and the talent pool is not large enough to include sales leaders who are good at both. We opted for sales expertise. He never understood the domain well enough to make an impression in meetings with prospects. The buyers who made decisions were typically those that took great pride in their expertise in the industry domain. The sales head we hired had to rely on the junior sales reps to create the wow on a domain. And, we thought that the sales head would be the one making the impact and doing the heavy-hitting. No wonder the sales reps lost respect for him very soon.

The way a candidate negotiates compensation can provide some great insights into the character of the individual.

Then, there are the so-called startup lovers that just can’t put their money where their mouth is. They would say all the right things about the culture at startups and the excitement of creating something new. But the way they would look at compensation is a clear give-away. They would subtly, or not so subtly, underplay the value of stock options. This is when you could get them to trade off stock options for cash compensation. The best fits are the ones that are not too finicky about the cash component. There are some that are ready to give up some stock options in exchange for higher cash and these are the ones who are at least clear about their risk appetite and are honest. The worst are those that are not ready for a risk-return trade-off. These are individuals that are not willing to take any risk but want to be rewarded as well as someone who has taken a risk. This attitude, and philosophy, reflects in the way the person approaches things once on the job – tends to be self-centric, covers his backside most of the time, and is a poor team player. The correlation between the way a person looks at compensation and the subsequent behaviors on the job is very strong. No, I am not implying that negotiation on compensation is bad or that a candidate shouldn’t negotiate. It is the manner in which a negotiation is conducted, the inability to make trade-offs and the need for instant gratification – in an ecosystem where postponement of gratification is the very essence – is what should raise the red flags. In one of the startups that was in a hyper-growth phase, we were looking for a COO. One of the candidates we interviewed was a CXO at a large telecom company. We explained the fun and benefits of being a part of this startup that was redefining the space in a new industry. He was in complete agreement and said all the right things. To us, it appeared that he had missed the boat in similar startups that had redefined industry contours in the recent past, and was now very keen to be a part of something like this. His current base was around 250 K US. Hesitatingly, but surely, he started his expectation from stock – $10 million over a 4 year period! When we explored whether he was willing to take a pay cut, he was like, “my family is used to a lifestyle, and it would be very difficult to take a pay cut”. In reality, he wasn’t even ready for coming on board at the same pay with substantial stock. And, it wasn’t as if he was walking on water. He had a very low degree of self-awareness and an exaggerated assessment of his own abilities. He wouldn’t have got into our shortlist even by a long shot, even if it weren’t for the compensation mismatch. This was a case we were so glad that we took the right call. Making amends for missing the red flags in the case of the global head of sales described earlier.

You need to spot good people even before you have a role for them.

You get to meet people at conferences, seminars, networking events or through simple introductions. These are the places where the guard is down and people are more natural. You need to keep your eyes and ears open for good people who may be unhappy in their current roles or are looking for a change. Most founders (especially the young founders) I have come across seem to be rather good at this. You need to go out and meet people. Grab opportunities when good introductions come your way. There may or may not be a fit for an existing opening. It may or may not result in a closure. But it would have started off a relationship. Great salespeople believe in cultivating relationships much before there is a concrete sales opportunity. Hiring talent is no different. And, at senior levels, you don’t always hire for an open position. It is much more flexible than that. You can always carve out a role for an extraordinary person. I have seen startups grow and take shape by bringing great people on board through this approach. In the worst case if there is no concrete outcome, you would have learnt a thing or two. You can actually learn much more than a thing or two!

The right leader can make an incredibly big difference.

The extent to which the right leader can make a difference to the business at every level is just unbelievable. If the leader does all the right things, her direct reports would slowly but surely learn to do all the right things. “Observe, Imitate, Improvise” is a commonly accepted learning model. Over a period of time, the performance of the entire team (even 3-4 levels below) would be good. Recognizing and deeply understanding this takes time. And, once you get it, you can actually turn average leaders into good leaders and good leaders into outstanding ones with a few simple interventions.

I have seen so many cases where a business was facing a problem, and upon a detailed investigation of what was going wrong, the root cause was the failure of the senior-most leader in the region.

In Conclusion

In one of the scale-ups, the business had been carved out into nine independent business units (BUs), each managed by a BU head. We noticed that of the nine BUs, five of them demonstrated consistently high performance on all the operating metrics. Two consistently demonstrated poor performance and two were borderline. We picked one poorly tracking metric at a time and dived deep, and each time we reached one or more of the following conclusions:

The BU head had not demonstrated clarity of thought and elementary problem-solving skills (which was really about asking questions, framing hypotheses, gathering data to test these hypotheses, and initiating corrective actions).

The BU head had been dragging his feet in dealing with underperforming direct reports (providing candid feedback, setting timelines for improvement, and calling out consequences)

The BU head was too trusting of the BS one or more of his direct reports were feeding him, and had not bothered to check. A good leader dives into detail to check when something is not tracking well. If a leader does not do this, there is something fundamentally wrong.

This example illustrates that problems in startups are often attributable to errors in leadership hiring.

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Team Artha