Ask a VC: Staffing your Startup

jtestai /  Apr. 11, 2024

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As part of our Ask a VC blog series, we wanted to provide additional insight from the OUP investment team on how to staff your startup company. We spoke with Tech Partner Manny Stockman and Life Science Partner Anurag Agarwal to learn their perspectives on the first strategic business hire, how to incentivize and compensate employees at an early-stage startup, and where to find the right candidate for these roles. While some of their insights were similar, as with all individuals in the venture capital space, they did have differing opinions. The interviewees’ statements below have been edited for clarity and length by Jaimie Testai.

If I am a scientific founder, when should I hire someone with more business expertise?

Manny: Before you start a company, it is important to use your network as a researcher who has connections to industry and entrepreneurial peers to get some business insight for free. You want business insight as soon as you start thinking about developing your product, because there are research-level decisions that may change based on your business strategy. You do not need to be paying someone for this early advice, and you should be getting it as soon as possible to prove to yourself that you are on the right path and to demonstrate to your eventual investors that you can be a sponge for information and talent.

Anurag: Hiring earlier is better. But what business expertise do you need to hire? In an early-stage company, you may need someone to negotiate the license, raise money, and execute science at an industry level rather than an academic level. When you think about that person, you may think of them as a CEO, but they are not necessarily a CEO. These individuals can come in various forms; you can hire a CEO, a CSO, or partner with a venture fund that has done this before. It depends on what the needs are and what you are trying to accomplish.

Manny: Exactly, you want someone who is asking business-related questions about the technology. The idea that technical and business expertise are distinct and separate is not true in my mind. You can find people who are business oriented and highly technical, and it is never too early to hire one person like that. In most physical science spinouts, it can be the CEO or someone who is more product oriented, like a VP of Product or a Chief Product Officer. It is someone that really understands product market fit. These individuals are good at shaping technology into products that customers will ultimately buy at a fast enough speed at a high enough dollar value.

Should I utilize a consultant for this business expertise?

Anurag: You can use a consultant for anything. But whoever will eat, sleep, and breathe this company is somebody who has skin in the game and is incentivized as much as you are. The consultant will get their consultant fee and be done. If you just need someone to pay the bills, a consultant works. But they should not be the person making strategic decisions, because they do not have the same alignment as you. In some cases, if you do not have the money to hire a full-time person, individuals will work as a consultant until the company is able to raise money and then join as a full-time employee.

If I am a scientific founder, should I try to fill the CEO role (or another C-level executive role) by taking it on myself?

Anurag: When you are just externalizing the science, a scientific founder can take any C-level role. But how long does the scientific founder want to stay in that role? We have seen a few professors become exceptional long-term CEOs and CSOs, but they are extremely rare. Generally, scientific founders can add more value staying as advisors or consultants to the company while utilizing their academic lab to expand the biological understanding of the technology and push the science in areas outside the company’s immediate focus. As a scientific founder, you should consider which role would add the best value to the company. If you can hire an experienced CEO or CSO, that generally serves the company better in the long run.  

Manny: I consider scientific founders as researchers involved in spinning a company out – be it a graduate student, postdoc, or a professor. If you zero in on professors, they have gained exceptionally relevant skills at the university to help them run the company well for the first couple of years, but it is just unlikely to be a long-term solution. If it was a long-term solution, they would probably not be professors anymore. In the not-too-distant future of the company, they are going to anoint someone the CEO to manage that likely transition. It can be a graduate student that takes it on at that point, or the graduate student runs the company from the get-go. In a review of our portfolio of tech companies, we found that we have invested in graduate students as CEOs more often than we have invested in professors as CEOs. Those graduate student-led companies have tended to do well, just as well as the startups that have been founded by repeat entrepreneurs. Our portfolio is a small sample set, but we believe that there is some signal in this data that we are implementing in a specific way into our decision process.

Is there ever an optimal time to hire a CEO (or another C-level executive)? Should I hire this individual before I fundraise?

Anurag: If I had the option, I would always want them to be a part of the company before the fundraise, because they will bring a level of creditability. However, it can be challenging to find the right person before you fundraise. This is where partnering with a venture fund can be very helpful. The fund could put in seed money without any executives and have one of their EIRs or venture partners run the company before the full-time team is hired.

Manny: If you do not feel like you have the right person, you can still raise on your strengths but call out your weaknesses clearly. Without an outside CEO, you would likely be presenting the strengths of your technology and what the company should go after in the market, but you need to message that there will be a time when your technically minded leadership may need to step aside for the right CEO. We want to see a level of modesty and transparency in the academic founders of our companies as well as a willingness to surround themselves with great people. It shows a level of humility that resonates with many investors.

How do I incentivize a CEO in an early-stage company? What does compensation look like?

Manny: One privilege that university spinouts have compared to most other startups is they generally have a much more exciting technology vision. There is a significant ability to rise above the noise floor of thin-tech startups. Someone who is working at Meta is not likely to come across a brand-new material that is going to enable free energy from fusion for the rest of our lives, and I think we will find in the next decade that there will be passion-driven entrepreneurs who want to work for something that matters. University spinouts should leverage this to attract great people and incentivize them to work there.

Anurag: In terms of compensation, when you are first raising capital, you are looking for a CEO who will not take a salary and will work for equity. You are not getting paid as the scientific founder, but they are getting a salary? The best way to incentivize them is through inflection points – if they raise money, they will get a bonus or more equity than they would have otherwise gotten. You have a shared view of success when you are sharing the same pot.

Manny: Equity, if it is the right person, should be akin to what the founders had at some point. There are plenty of CEOs that I have seen come into a physical science startup after the Series A that get 10-20% of the company. If you are bringing in someone who you are less familiar with, you want your lawyers to make sure that the employee contract is vesting at the right schedule, and that the contract is not set up where they can leave 6 months later with 10% of your company.

What if I am a graduate student or someone who does not have the financial ability to rely on equity, how can I structure my compensation in a way that works for me and my company?

Manny: The reality is that startups are not right for everybody, and they do not have to be right for everybody. Some people cannot deal with the stress, and certain individuals cannot deal with the potential financial risk. If you really want to work at the startup, the only way that you can structure compensation is to bring equity down in exchange for higher compensation. But then you are making a higher salary at a volatile high-risk company. Why would you not just go make a higher salary at a less risky company?

What about other C-suite hires? Is there an optimal time to hire a CFO, COO, CMO, or CTO?

Manny: Often in physical science startups, the CTO is the technical founder. I cannot think of a single portfolio company where the inventors of the technology are not deeply involved in the company at the founding. That is because, whether it is a new chip architecture, a novel material, or an advance approach to machine learning, you cannot just read a patent from the university and go build it. There are no instructions for what people are building in the physical science world. It is a lot of tribal knowledge and turning screws in the lab, and you cannot just transfer that with a piece of paper.

Anurag: If it is an early-stage life science company, you should hire a CSO first. About 12 months before you go for your next big fundraise, you should start thinking about hiring a CEO to help you. At this point, it is not just about the science, it is about the financing. About 12 to 18 months before you are getting into the clinic, you should hire a chief medical officer (CMO). CFOs are the last ones to get hired, and small companies do not need a COO.

How do I find the right candidates for these roles?

Anurag: This is all about kissing enough frogs. You must try different things, and hopefully one of them clicks. There is no single formula. Use your tech transfer office. A lot of universities have venture creation shops that can help you find someone. AVX Exchange has a list of people that you can explore. Go to your local entrepreneurship meetings and network. Look at recent companies that have exited or shut down and reach out to those people on LinkedIn if you think they are a fit. Attend meetings. At medical meetings, people will come to your poster, and they could be a good fit. Ask your local angel and VC groups, even if they are not investing in you. Also, rely on references and the interview process. Spend a lot of time with the person before you commit. Perform reference checks. Talk to the other founders that have worked with them, people that have reported to them, and individuals they have reported to.

Manny: The best early recruiting comes from you. If the first time that you are trying to meet great people to hire is when you need them, then you have not done enough prep work to build a startup. You always want to be networking with people outside of academia; start meeting people who could potentially become your co-founders or one of your first ten hires years before you end up building your company. Build your industrial and commercial network to stack your rolodex when you need to hire.

Anurag: Ultimately, the right candidate will be aligned with you about the long-term prospects of the company, and you both need to trust each other’s decisions. There will be a lot of decisions. There is not going to be a right or wrong answer; there will be different answers, so you are going to have to trust that the other person will make the best decision. If you are going to fight about every decision, then that is not the right person. Academic founders sometimes think they can do it cheaper and faster than investors and industry professionals. Remember that this is what these professionals do day in and day out. They may not know the biology as well, but they have more experience with drug and company development. They have seen hundreds of companies. You are adding complementary expertise; listen to their expertise. In your lab, you make every decision; you can run it the way that you want. But companies are run by multiple people who are pushing it in the same direction. You are bringing these experts in because you believe they will help you move faster and better. That is why staffing with long-term alignment is the right approach.