In my last article, I told you that you don’t need a CTO yet, and I received some interesting responses. In one discussion, someone pointed out that this doesn’t just apply to CTOs but could really include any C-level position that the founding team doesn’t already have covered. I agree: I chose to write about the CTO role because it’s closer to my experience, so I end up discussing this function with startup teams, but you could just as easily say, “Don’t hire a CFO yet.” As this person pointed out, you need to take care of the functions that are covered by these roles, but you don’t need to create the titles until they’re absolutely necessary.
So let’s assume you took my advice (because you really should). The logical next question is: when should I hire a CxO? The actual timing varies by your company and situation, but here are some pointers to tell you when the time is right.
When the hat gets too big
“We all wear a lot of hats around here.” I’ve heard this enough times that it might as well be printed on a poster and issued as part of the Entrepreneur Starter Kit, along with a case of ramen noodles and a framed picture of Larry Page and Sergey Brin. Any company, no matter how small, includes basic functions like sales/marketing, finance/accounting, HR, product development, and customer support. Leading the company means ensuring that every one of those areas runs effectively, so every leadership team has to cover a lot of ground in the early days. And if your founding team didn’t come with those skills built in, then someone has to do two or more jobs (i.e., wear more hats).
As your company grows, the needs in each area naturally grow, as well, but not all at the same pace. HR functions are hard to set up initially, but the difference between one employee and ten isn’t that great. Going from 10 to 50, however, adds a whole new world of complexity as you suddenly become subject to federal leave laws and other requirements. Finance and accounting are really no more than bookkeeping until you start making a profit or bring in significant funding. Then your investors start expecting quarterly finance reports, you start talking about the differences between GAAP and cash accounting methods, and the government starts asking for its share.
The function’s criticality should dictate the seniority of the leader.
As your company’s needs grow, you’ll need people dedicated to each of these functional areas: it’s impractical for the CEO to also be the bookkeeper for a 20-person tech company. But when do you need a full-time leader? Here are some signs that it’s time to delegate a function, but even then you may not be ready for a C-level hire. The function’s criticality should dictate the seniority of the leader. If a function is time-consuming but necessary, then you may be able to get away with a director-level leader who can later join a larger department (operations is a great example of this). However, if the function is core to your business, then hire a senior strategic leader who meets today’s needs and has the capacity to grow the function for the next few years.
- The function is critical to your company strategy but outside of your wheelhouse. In the early multi-headgear days, founders can get away with playing to their strengths (product strategy, financial planning, sales, etc.) while competently covering the other parts of the business. As you start to see success, though, you need to build a team that’s strong across the board. Too many companies stumble just as they’re gaining momentum because their founders are afraid to admit their weaknesses and cling to leadership when they should delegate to an expert. If you’re leading a software company and you aren’t a technologist, then hire one before you become the problem.
- Trying to cover the function part-time has become an impediment to the company’s growth. Even competent leaders become incompetent when they’re overtaxed. Ask your teams to tell you when you’re becoming a bottleneck. When company progress is delayed because certain areas aren’t getting enough attention, then it’s time to hire a new leader.
- The team is too big to manage part-time. When a functional team reaches the size where you can no longer manage them with part-time direction or where keeping that team on track takes up a disproportionate amount of your time, then it’s time to offload the work. Find someone with both the domain expertise and the people management skills to keep the team running efficiently with general guidance from you.
When your investors tell you to
After reading my last article, several people replied, “Why even worry about this? The VCs are just going to replace the entire leadership team anyway, aren’t they?” While slightly hyperbolic, this statement points to an underlying truth: investors want a strong leadership team, and they aren’t shy about taking action when necessary. It even makes sense from the investor’s point of view: they have an investment to protect and they can’t have your underpowered team screwing it up.
So if you don’t have the right leadership in place — or even if you think you do — be prepared for some changes when you take on large investors. In case no one mentioned this, large-scale financing is a direct trade of control in exchange for money and experience. Your investors have strong opinions on what works in your industry, and they’ll expect you to listen when they make “suggestions.” The upside is that they also have a network of experienced leaders that they can bring to bear on your leadership problems, so use them.
I’ve seen several companies “bring in the adults” without thought for how they would blend with the existing team, with disastrous results.
Just make sure that you don’t trade too much control in this process: this person still has to fit in with your team and your company culture. I’ve seen several companies “bring in the adults” without thought for how they would blend with the existing team, with disastrous results. You don’t want to hire a new leader and leave them with no one to lead because the entire team fled.
Before your investors tell you to
If you want more control over your team-building, then consider hiring ahead of your needs. Going to investors with a strong leadership team that’s clearly ready for the next phase of growth can speed up the financing process and minimize board-level meddling later on. This approach requires you to spend more money up front, since you’ll be looking at people who are overpowered for the current position, but hey, you have to spend money to make money, right?
If you plan to assemble the superteam before seeking that next round of financing, then focus on the areas that are both critical to the investment thesis and weak points in the current team. Do you plan to increase revenue by 400% in the next three years? Then make sure you have a superstar Chief Revenue Officer. Planning to disrupt an entire market with proprietary technology? Then you need a business-savvy CTO and a Chief Scientist or Product Architect with a stellar resume in your proprietary approach (a couple of patents can’t hurt, either). You don’t need to fill your boardroom table with CxO name cards, but you need to have the right people in key positions if you want to set your investors’ minds at ease.
Hiring senior leaders should always be a careful blend of financial planning, insights into current and future needs, and a comfortable fit within the current leadership team. Take your time and do it well.