National Business Incubation Association; Your source for knowledge and networks in business incubation

Building a start-up's management team: As with everything else in life and work, networking is key

by Meredith Erlewine

April 2000

As the chief technical officer of a billion-dollar corporation in Chicago, Johann George pulled down a healthy six-figure salary and enjoyed the usual corporate perks: access to the company jet, a substantial support staff and a multi-million dollar budget at his disposal. After six years, he decided to chuck it all to move to Evanston, Ill., and start a company in a business incubator on the campus of Northwestern University. Why?

George craved something he could only achieve through running his own company. "I love building teams and watching teams work well. That's probably what draws me the most," he says. "There's a magic that happens when you bring a bunch of people from different environments to work cohesively as a team to produce something they never could have done by themselves. It produces amazing results."

George's decision to hop on the entrepreneurial roller coaster was by no means uninformed. Before his foray into the corporate world, he already had started two successful, fast-growth companies. With his new company (and another that he's started since), George needed to convince exceptional executives to leave big paychecks behind to work for reduced or no salary at a start-up. He learned that plenty of capable prospects felt just as he did – that the entrepreneurial culture is more appealing than corporate culture.

With the least to gamble in finances and the most to gamble in the future of the company, hiring key management team members can be a daunting process for the founders of a start-up. NBIA asked incubator managers, entrepreneurs and other experts how start-ups handle the recruiting process and what the incubator's role is in that process. Here's what they had to say.

The talent pool

The recruitment process starts – and often ends – at home. While start-ups occasionally utilize recruiting agencies or Web sites like Monster.com, many founders discover that their contacts will reach far enough to pluck exactly the person they need to bring on. The people who are ripe for the picking might be early-retired executives from larger companies; multi-time entrepreneurs who have succeeded with prior start-ups; university faculty, staff and students; or professionals looking to change careers or make an investment.

Jim Robbins is executive director of three California incubators: the Panasonic Internet Incubator, the Software Business Cluster and the Environmental Business Cluster. "The first thing we do is use our existing network of business contacts, both of the client and the incubator staff," he says. That networking may turn up a professional who can help out on a volunteer basis, a successful entrepreneur who would like the chance to get equity in a new company or an angel investor interested in playing an active role.

Robbins says there are plenty of semi-retired people who have been extremely successful and don't have the need or desire to work full time. They may be looking for the right business opportunity to which they can bring their expertise. For example, Edward McLaughlin, the retired dean of the Louisiana State University (LSU) College of Engineering, went to work for Electrokinetics, a client of the LSU-affiliated Louisiana Business & Technology Center. McLaughlin served as vice president of special projects and as a board member. Four years later, he continues to assist the company as a part-time advisor.

While the needed expertise often exists in most communities, the sources will differ geographically. Start-ups in major metropolitan areas may look to the corporate world, while rural start-ups may recruit from major industries or nearby learning centers. Sam Pruett, president of Memphis Incubator Systems in Memphis, Tenn., managed the GENESIS Technology Incubator in Fayetteville, Ark., for 10 years. Although Fayetteville is somewhat remote, it has its own sort of high-level talent pool.

"Having the [University of Arkansas] to draw on was key," Pruett says. "We were able to bring on the best students and faculty. We worked with them enough to know who was good at what." Universities house a variety of potential employees, from faculty to staff to graduate student interns. University spouses, too, represent a potentially highly skilled, underutilized labor pool.

"Plus, we had world-class companies like Wal-Mart and Tyson," Pruett says. Often, he says, large corporations have employees who "might have that entrepreneurial itch that they'd like to scratch." And in many cases, they're in an extremely good position to do so. "There are several individuals [in Fayetteville] who became quite wealthy through Wal-Mart and Tyson. Now they're looking for other opportunities."

Venture capital firms and angel investors serve as sources of management expertise, too. In fact, Bob Calcaterra, CEO/President of the Nidus Center for Scientific Enterprise in St. Louis, Mo., recommends that his clients select a venture capital firm based on its ability and willingness to prop up the management team. "Bringing on the right people can make or break the business," he says.

An incubator's network, because it encompasses everything from volunteer advisors and local venture capital firms to university deans and incubator graduates, is perhaps the most fruitful human resources pool. In Denver, Colorado Venture Centers (CVC) has a Venture Guild of more than 160 business professionals. "Almost every and any aspect that a business goes through from start-up to developmental growth is covered by the expertise of these people," says Jonas Kiken, CEO at CVC. Venture Guild members often assist clients on a volunteer or reduced-rate basis, and sometimes wind up serving as a temporary or permanent management team member. Kiken knows each Venture Guild member's strengths and what potential help he or she could offer his clients. "I have interviewed each of these people," Kiken says. "I know who they are and what they're about."

Incubator graduates are particularly suited to joining a current client's management team. "In some cases, people affiliated with incubator clients or companies Intelligent Systems has invested in have recirculated and gone to other companies," says Bonnie Herron, director of the Intelligent Systems Incubator in Norcross, Ga. Herron says it's not uncommon for entrepreneurs to grow companies, sell them, make a lot of money and be eager to start the process again.

Sometimes incubator staff may even take a position at a client company. ChemFree Corp., a client of Intelligent Systems and the 1999 NBIA Client of the Year Award winner in the manufacturing category, hired former Intelligent Systems Vice President Frank Marks as its company president. "Frank had a strong background in product strategy and corporate development activities during his years at IBM and other ISC companies. As ChemFree moved from the product development phase into marketing and business development activities, Frank's skills were a great compliment to those of the founder," Herron says. "It was a logical step for him to move from part-time involvement to take on a full-time leadership role in a company that he strongly believed in."

Don't assume that the qualified people you'd like to attract will balk at the risk. There is life after working for a start-up, even if it doesn't succeed. "They often can go back to where they were, because there are so many opportunities for experienced people with qualifications," says Herron. "If it doesn't work, they go to another start-up or go back to the corporate world."

What does a start-up offer? Plenty

Why are so many star-quality people ready to tough it out at the perk-starved upstart? Surely, they must be receiving better offers from more stable, larger corporations. The fact is, those same corporations can't offer some of the things that a start-up can, and fortunately those things are attractive to exactly the sort of person an entrepreneur wants on his or her team.

There's the obvious lure of the potential monetary payoff, but money isn't the only thing that highly successful professionals crave. An executive might actually prefer to work for a start-up firm because the company can offer more challenges than a safe job at a big company. "It's not just that you can get rich. It's the idea that you're going to be a big fish in a little company, taking part in decisions," Herron says. "Lots of people want to be part of a high-energy start-up where they are their own boss. They may make a lot of money down the road, but it's not what totally drives them."

Rob Steir, CEO, MBA FreeAgents.com., helps high-level MBAs find employment opportunities and helps companies find top-notch hires. Approximately 75 percent of his corporate clients are bootstrap start-ups or venture capital-backed dot.coms, and guess what? About two-thirds of the MBAs listed on his service say they'd prefer to work for a start-up. Like Herron, Steir finds plenty of well-heeled corporate types who'd rather be in the thick of the game, able to watch decisions they make translate into results. Steir also believes that highly driven executives want the chance "to roll up their sleeves and test their skills."

George, who is starting his second company at Evanston's Technology Innovation Center (TIC), relates the story of an employee who came to one of his companies from a high-level corporate position. "In the corporate world, he felt like he worked for the company five days a week but only achieved one day's worth of accomplishments each week. In a start-up, you feel like you've made four days of accomplishments, and perhaps only spend one day dealing with pushing paper and other technicalities," George says.

The downside of going to work for a start-up: Not much, according to George. "Longer hours, and perhaps less pay," he says. "But a lot of start-ups these days are pretty competitive. It's not like you take a drastic pay decrease – you may take a little, but get a lot of options in return. There are few people who we haven't been able to capture away from big companies."

While the fact that you're offering a top-level position at a start-up company is enough to pique some executives' interest, that alone won't come close to closing the deal. You've got to convince the potential hire that your start-up will not only fly, but soar. "The company has to present a very appealing case to the executives," says Calcaterra. "They do not like to waste their time, which they feel is their most valuable resource." According to Herron, the entrepreneurs who are the most successful at attracting good people do it by selling their vision. "It's just like raising money," she says. "They know their story, are passionate about it and can convince people it's going to be a great experience."

And even after you've enticed a potential team member with the benefits of working with a start-up and sold them on your vision, you've still got to pay them.

Sending home the bacon (or perhaps stock options)

According to many incubator managers, start-up companies usually offer compensation packages that include a salary and a combination of other incentives. In general, companies that have established a customer base and revenue stream will favor more traditional salary arrangements, while pre-money companies and many dot.coms will augment modest salaries with stock options, bonuses, etc., according to Tim Lavengood, acting director of the TIC in Evanston.

Every compensation package will be different, depending on the individual. "Everyone has different requirements. Some are willing to take huge risks for huge rewards. Others are willing to take less, but some, risk," George says. "In a start-up you're balancing limited resources, so you must be a little more creative."

That creativity can take many forms, but usually includes some pay and some equity in the company. "Typically a big component is getting some stock options," Herron says. "We have several situations where people came in at considerably below-market salaries, but proportionately got a larger share of options in the company. In other cases, they came on with lower salaries but with the agreement that if they raised a certain amount of venture capital, their salaries would bump up to another level." The new hire is gambling on the company's future value – which is directly related to his or her capacity and willingness to help increase that value.

Since not every start-up expects or intends to go public, stock options may not be a choice for all firms. Privately held companies may choose to offer phantom stock. Employees own an economic interest but do not have voting rights (as they would have with "real" stock). The company defines a method for calculating what a share is worth, and when the company is sold or an employee leaves the firm the company pays the person the value of his or her earned phantom stock.

Calcaterra advises his clients to stay away from such stock. "It's replete with problems, and there are many lawsuits surrounding it," he says. It puts control in the founders' hands." He explains that U.S. Securities and Exchange Commission laws outline rights for stockholders, but with phantom stock, the employee is at the whim of the founders and the valuation that they decide on for the company. "A true stock eventually will be valued by the marketplace," he says.

Other incentives may include bonuses based on achievement of financial or strategic goals. "One of our clients has a plan that calls for a bonus and salary increase when the company acquires a certain number of customer deals worth a certain amount of revenue to the company within the first six months after funding," Herron says.

Profit sharing, which rarely happens in the first few years of a company's life, may call for a portion of the company's profits (after expenses) to be divvied up among certain individuals or groups of employees. "It's an incentive if, in fact, the company is likely to be profitable and doesn't need all of its cash to grow," Herron says. Profit sharing may be tied to overall firm profitability or to specific projects or division results.

According to Calcaterra, human resources issues generally don't come into play until a firm grows to employ six to eight people and is receiving substantial investments from venture capital sources. If health or retirement benefits prove to be a sticking point with recruits, Calcaterra suggests utilizing the services of an employment leasing firm. "There are national and local leasing agencies that provide benefits packages," he says. A firm can privately recruit an employee, then send that person to the leasing company. "For a fee [a percentage based on the employee's salary], that company will compensate the employee at the agreed-upon salary, provide full benefits and bill the start-up," Calcaterra says. Services like this may be the way of the not-too-distant future. Consulting firms are cropping up that make it their business to handle all of a start-up's office management tasks, from hiring an office manager to setting up a 401K plan to ordering office furniture.

The value of a compensation package to a particular individual may be affected by other factors, such as location. Pruett says that the relatively calm life in Fayetteville, combined with the scenery, proved to be a draw for some of his clients' hires. "The area itself is desirable, both the location and the quality of life, and that helps," he says. "You can look out the window and stare off at the mountains." For instance, the starting salary for many of his former high-tech clients' top managers was in the $75,000 range. "This might not work in Chicago, but in Fayetteville is a pretty solid base," he says.

Incubator managers are quick to point out that a potential hire's willingness or unwillingness to accept a creative compensation package may say a lot about how well he or she will perform. Herron says part of the test of whether they're right for the job is whether they're willing to take a reduced salary combined with or replaced by other creative methods of compensation. "If they are security people, they're probably not right for the company," she says. Kiken concurs: "If you don't want to be venturesome, then get the [heck] out of the kitchen."

The incubator's role

The incubator plays a dual role in assisting clients with building management teams. Clients first need help deciding what type of skills to bring to their team; then they may need assistance with finding the right people and structuring the deal. For the incubator manager, this assistance requires extensive one-on-one work and no beating around the bush.

"It's absolutely imperative that you be brutally honest with your clients about the skills they don't have," says Calcaterra, who requires that his clients attend mandatory one-on-one meetings at least once a month. "But 90 percent of the time we meet almost weekly. And if there are critical issues, it's daily," Calcaterra says.

According to Herron, analyzing the founders' skills is a subjective process that depends on the manager's own expertise and experience in running a company. She and two of her colleagues at Intelligent Systems help clients make these decisions, based on their own prior business experience. "The three of us have been involved in [a total of] 60 different companies as operating people," Herron says. "We know what we weren't good at, and can discern what our clients are having trouble with. It's mostly a gut feeling, but based on experience."

Sometimes the incubator can help fill management team gaps in the short term by having assembled an aggressively structured network of professionals. ARCH Development Corp., a nonprofit subsidiary of the University of Chicago, is an incubator without walls charged with commercializing the university technologies. ARCH considers management the most important factor in structuring a start-up, and calls on a stable of volunteers, contracted individuals, corporate strategic partners, venture capitalists and others to provide the CEO of each client company business support so that he or she can concentrate on product development.

The support includes writing a business plan, locating funding sources, conducting market research, interpreting legal documents and providing office and computer support.

Advising clients on team building goes beyond rounding out the team's skill sets to building a team with not only the correct sum total of skills, but that can work together. The significance of company culture is often new territory for the founder of a start-up.

"Nine out of 10 of my clients are technology brains," Kiken says. "So we've got to teach them about company culture." He asks clients what kind of company atmosphere they envision – one with a fiercely competitive climate or one that is familial and democratic. "And they've never thought of that before," Kiken says.

Incubator managers often must serve as facilitators in this area, understanding the client's values and finding people who are compatible. "One of the critical skills that an incubator manager must have … is the ability to judge the proper chemistry between founders and potential new executives," Calcaterra says.

When George is hiring a new team member, he says that person's values, and how he or she will blend with those of the company, are the most important factors. "We'd be more inclined to take someone who fits well with less experience," he says. He insists that potential team members talk with as many current employees as possible. "We're not trying to sell them on something, but to be really honest about the place and see if it's a fit," he says. "By talking with lots of people, they see many different perspectives, plus we get lots of feedback. And we weigh all of it."

Once clients know precisely the type of person and skills they're looking for, the incubator can help them find that person. Offering information and training to clients on the subject of recruiting can help. If clients are well informed about the recruiting and hiring process, it will be less confusing when it comes time to bring someone on. Robbins offers brown bag seminars on recruiting at all three of his incubators. The sessions focus on three areas: employment law, the recruiting procedure itself and recruiting sources – helping clients understand the different ways they can recruit (from typical recruiting firms to networking to the Internet).

More than anything, an incubator manager should stay well connected with every potential labor pool in the community, and know the individuals well enough to know who is good at what. Ensuring that staff and clients are constantly broadening their networks will guarantee that when a client needs to bring on a management team member, someone will have a good idea where to start.

"We do a lot of things that foster collaboration between companies. I feel that if we've done our job right, by the time an entrepreneur has been here for two years, they know a lot of the officers of a lot of the other companies [in the research park]," Lavengood says. "And because we're relatively large (56 companies), the incubator is something of a network itself. It is part of our goal to provide vehicles that bring companies together in hopes that gradually they will find connections and pursue them."

What does a top-notch professional want?

There are lots of experienced business professionals who want to work for a start-up. In fact, there are enough of them to prompt people like Rob Steir to start companies like MBA FreeAgents.com. MBA FreeAgents.com (MBAFA) helps companies find seasoned business professionals and helps MBAs find job opportunities that match their skills, interests and career goals. Many of the nearly 8,000 MBAs who list their curricula vitae with MBAFA are specifically interested in key management positions with start-up technology and Internet companies.

To find out why experienced business professionals might like to work for a start-up and the type of compensation they would expect, NBIA recently conducted an informal poll with the help of Steir, CEO of MBAFA. We received 180 replies within 48 hours of our request.

The results provided some interesting perspective. For instance, of the 99 percent of respondents who indicated they would like to work for a start-up, 40 percent specifically would like to join the management team at the idea stage, where the vision can still be shaped. An overwhelming majority of the respondents said the following three qualities, in order of importance, are what attract them to start-ups:

  • The entrepreneurial culture is more appealing than corporate culture
  • The chance to take a risk and make a lot of money
  • The chance to gain equity—M.E.

Keywords: human resources -- client, management team building/compensation, networking, service provider network

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