Opportunity Cost
What’s the difference between founders and professional managers? While they differ in many ways from experience to risk tolerance, etc, you can boil them all down to one element – opportunity cost.
According to Wikipedia, opportunity cost is “the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen)“. As a founder, you probably have no opportunity cost. It’s not that your time is not valuable. It’s not that you couldn’t get a job. But if you are truly on a path to building something of value, then it’s a personal mission and you would not dream of doing something else.
It’s a totally different story for the management team that you build around you. Yes, early management additions should have a founder mentality and in many cases it makes sense to make them co-founders or quasi founders (ie. with a large equity grant). But anyone you bring in at the top levels of your company will by definition be a rock star. And rock stars have choices.
When it comes to building, and more importantly, retaining your all star team you need to explicitly consider and manage for their opportunity cost. This means i.) truly understanding their passions and career / life goals *before* you hire them; and ii.) having regular frank dialogues regarding the continued alignment between your rock star and your company.
I am fond of counseling people never to bet against human nature. If someone is truly passionate about something unrelated to your startup, it’s only a matter of time before they focus some or all of their attention on that passion. Often, they will do this when things are not going so well with your startup. The time when you need them most laser focused on you.
This is true not only for the management team, but any of your hires. Many startups allow developers to work on side projects. I have mixed feelings about this. On the one hand, if you love them set them free. On the other, especially given that, like Starbucks, there’s an accelerator on practically every street corner and essentially no barriers to launching a startup, it encourages people to abandon ship to start their own projects.
Understanding your key hires before bringing them on goes beyond understanding their passions. You also need to know their true natures. This goes beyond technical interviews and reference checks and gets down to their fundamental traits and values. You need to know that these are aligned with you and the culture you are trying to build.
Hiring for this involves spending a lot of time with potential hires, in different settings. And while there are a battery of tests and techniques in this area, ultimately it comes down to trusting your gut.
Implicit in all of this is the need to build a transparent and open culture. This starts from the first interview and starts with you. You need to be open and transparent. Without that, you won’t build the rapport and trust that is needed to truly understand your team. And thus, you will be totally blindsided when the opportunity cost equation has them handing in their resignation.
I was speaking with the co-founder and CEO of one of Canada’s most successful startups last week. He likened management teams to mercenaries. It’s not that they are bad people. It’s not they lack commitment. But they are a startup of 1. Manager Inc. And sometimes you need to do whatever it takes to keep them on board.
It’s not enough to focus on vision and mission. If things are taking off then your team might stick around while the times are good. But if things go bad (and let’s face it, they always do), your team will only stick around if you have aligned their passions and values with yours. In so doing, the opportunity cost equation will have them sticking around and making things right as part of your team vs. heading for the exits.
Remember, times are good (too good?). The best team members can go almost anywhere. Be focused on alignment and opportunity cost to keep your management team intact.