There are many myths and unicorns in the startup world, and one of the most pervasive ones is the myth that you can recruit the top 1% in your city if you make a really great effort.
You might believe it is possible to hire a team of 3–5 people in Stockholm or SF in a month or less for any startup.
Unless you are extremely well connected and persuasive the odds are against you, and there is a very high chance that it’s just a recruitment delusion.
My VC told me to hire a local team
Most VC’s actively promote the idea that you MUST have a local team in your city and that you shouldn’t outsource/contract any work to external companies or individuals.
The idea is to hire a few developers in a few weeks, sit together in a living room (or coworking space) and get shit done.
There are a few parameters that are not taken into consideration when there is a discussion about local vs contracted or outsourced teams:
- It’s very hard to recruit great people in big startup cities like SF and Stockholm. Hiring the top 1% is a fantasy.
- Even if you decide to recruit a developer or designer internally, the cycle time can be anywhere from 1 to 9 months if you have any decent quality criteria. Very often it’s closer to the upper limit.
- Having an internal team doesn’t guarantee any results without the right recruitment, onboarding, training, management, and culture. All of this is harder than it sounds.
- Your team might be short-lived and hired by Google, LinkedIn or Spotify in their attempts to compensate for their own employee churn.
- Due to the developments in the gig economy, freelancing is a widespread phenomenon and there is a huge fragmentation in the supply of talent and many people don’t want to have a regular job anyway.
- The cost-efficiency of having an internal team is often underestimated and there are “hidden” costs that are not baked in the calculation.
- Risks of having an internal team are often not considered, including Legal and Financial risks due to the contracts and terms.
- There is an equity cost of having an internal team due to incentive structures.
However, the biggest phenomenon in these discussions is that nobody talks about the outcomes. It’s one more example of form over function.
It’s about the outcomes
What is the outcome you want to achieve as an early-stage startup?
I believe that the first outcome you want to achieve in your startup is to launch your product (prototype) as soon as possible and collect feedback to decide whether to pivot or persevere.
You should have a 4-6-week release cycle for the MVP and a good approach to get first users and collect data.
Do you need a fully local team for this? No.
A startup is an experiment in business, and survival is questionable. Since we treat our products as pivotable experiments, why are we thinking that the team we have is different from that?
The MVP (and the team that is executing it) is just an experiment to discover the right direction for the company.
So, what about hiring a team after the MVP? or even later?
Why would you over-invest in recruitment and retention of a team if you don’t know your startup will survive 12 months from now?
In the end, most startups die due to fixed costs (finances).
The biggest cost for startups are employee salaries.
I believe that we need to go back to the drawing board and consider the outcomes we want to achieve and be more pragmatic. The only fixed team in an early-stage startup should be the co-founders.
What about the product team? You should combine the best team across different locations to get the capabilities you need for your needs. There is nothing wrong about local, but global hiring gives you more options to get a great combination of skills and experience.
Hire for outcomes and not headcount.
The collective learning argument
One of the most common arguments to hire an internal local team is that the learnings and IP will be kept in-house.
While that makes sense, companies are just a bunch of people working together.
In the end, nothing prevents an employee from leaving the company and taking the beloved company IP with them. The risk is the same regardless of the way people are employed or contracted.
Great companies document learnings and create systems that operate regardless of who does a specific task.
Collective learning is a function of documentation and operational procedures to make sure all the IP is collectively understood, and not locked into any individual brain.
Saving money
One of the common arguments is that it’s cheaper to employ an internal team than an external company or individual freelancer.
We observed that founders always calculate salaries against the fee/cost charged by a consultancy/contractor.
This is a simplistic calculation.
Make sure to calculate all the blended costs of an employee and not just the salary cost. The blended cost must include (but are not limited to):
- Salary + Bonuses + Benefits
- Equity compensation cost (yes, options and stock programs are a cost)
- Operational costs (e.g. a fraction of management salaries to run the team)
- Administration costs
- Rent
- Equipment and Licenses
- Legal and other costs (e.g. if there is a litigation these costs become significant)
- Costs of continuous training
- Costs of replacement (e.g. due to churn you need to have a recruiting process that is not free)
- Costs of employee/performance management (HR costs)
- Severance/Termination costs
Blended costs for external contractors are very often much lower than your internal blended costs.
Auto-Scaling
Cloud systems have an amazing feature called auto-scaling. Your infrastructure/servers scale up-down immediately based on usage.
This concept can be applied to recruitment too. Your startup team’s fixed salaries are a liability and you can’t guarantee your whole team will be fully utilized.
As teams grow it’s very common that there is a huge amount of waste due to underutilization.
Also, what are you going to do if you didn’t hit your targets and you need to reduce the team? Firing is hard.
Having a contracted team enables auto-scaling.
Depending on the runway you have and the roadmap you can increase or decrease the number of team members dynamically.
Save money. Live long.
Remote team concerns
Many companies are reluctant to hire external teams because they believe that remote work and communication are inefficient.
Remote will happen, regardless of internal or external teams.
The trends in remote work and the gig economy tell us that it’s ubiquitous among internal and external teams. Your internal team will most likely expect remote work benefits to cut on commute time and provide for a better lifestyle.
If your goal is to build a global company, there is no reason to not start right away by having a distributed team. This enhances diversity too.
There are many companies (e.g. 37 signals) that publish best-practices for remote work.
Any remote work issues are just disguised operational issues. It’s the tip of the iceberg of a bad operational and communication process. It doesn’t have anything to do with remote work.
Remote just makes other issues more visible.
For example, if you don’t write meeting notes after meetings, it’s something that can have no consequences in an internal office culture, since you can catch-up at the watercooler. However, this is a big issue for a remote team, since it will be out of sync. Is this a problem of remote? No. It’s just a lack of good process around sharing information.
Focus is key
Every startup has 3 key problems — Recruitment, Product and Fundraising.
If you can choose 1 or 2 problems to focus on what would they be?
I would always choose Product and Fundraising because without a sustainable product and marketing there is no point in having an internal team. You might fire the team after a period of time anyway.
Your team is just a mechanism to get things done until you figure out your product-market fit and you have enough runway to think about company-building.
Focus on the right things first.
Having a contracted external team is very often a good way to hedge the risk of company sustainability with easier up-down scaling.
Some teams pull it off
It’s true that some teams can hire quickly in San Francisco or Stockholm, but those are outliers.
The top 1% startups can certainly recruit anyone locally or globally.
With sufficient traction and funding the best startup in the market can do anything. A strong brand powered by PR helps too.
Is your startup in that category? probably not. It’s a winner-take-all phenomenon and it’s at the expense of the other startups in the market.
Should your strategy be aligned with the best-case scenario? You might be top 1% today, but bottom 50% tomorrow.
Recruitment needs to be sustainable. The global pool is much larger than your local pool.
About alignment
Most founders want their teams to be super-committed to the mission and to deliver value continuously and go beyond the contract.
The truth is, very few people will work super-hard without the right incentives unless they have extreme intrinsic motivation. It doesn’t have anything to do with employment or being local.
Who prohibits you to give equity to contracted teams or individual freelancers? Can you figure out other ways to motivate an external company you are working with? You will get similar results as with a local committed team.
It’s about leadership and sharing future gains.
Many consultancies, contractors and freelancers have the right mindset to work extra-hard and commit long-term to product success if given the right incentive.
Not all contracting/outsourcing is the same and you could find external teams that have a high intrinsic motivation to work on your product.
Timing is everything
In startups timing is essential. If you launch a great product in a great vertical, it may still fail if the timing is wrong and users are not ready and willing to use the product.
It’s the same with recruiting an internal team.
Remember, fixed costs (mainly salaries) kill companies.
There is a right timing to form an internal team, and that is when you have enough financial security to make sure you can cover for the risks involved, and even then, you should question the trade-offs of having employees.
What time is right? Well, it’s usually after larger funding rounds or after you have significant revenues to cover costs.
When you are not an experiment anymore it could make sense to hire your own internal team and build a stronger culture.
But, what about embracing a globally diverse remote workforce instead of fighting the trends?
Great people are everywhere, and the super-power is in combining local with global for different needs.
In the end, you choose what to do, but don’t believe in myths without a deeper analysis.
Have a nice recruitment.