1.2.10 The Role of Early Hires


So I’ve talked about why the founding team is so important but another issue you need to think about is your first employees in a company, and those are just as critical as getting founding team issues together, in a variety of different ways. So there’s something known as Thiel’s law, which is named after Peter Thiel, the famous angel investor, and he said, a startup messed up at its foundation cannot be fixed. And years of evidence and research and entrepreneurship have found this to be true, so the founding issues you start up matter a huge amount. It creates form imprinting we actually have evidence that organizations that are 300 years old Still have the same basic structure that were set up in their founding days as a company. So it’s really fascinating, really important to get this stuff kind of right early on because if you fail to put the time in at the beginning you’re going to pay for it later. And early hires are especially important for three main reasons. First of all, just as a practical sense, these are the people you’re going to be working with every day. So you want to be able to get along with them, you don’t want to feel resentment for them. You want to have an organization that’s more than the sum of its parts. The second issue is to realize that performance differences between employees is huge. So trying to get it right and get the right form board will make a big impact in your company. And then finally, there’s this issue of role inertia which I’ll discuss, but it makes a huge difference who you hire and what their roles are because that might fix the roles in your company for all time. So let’s talk about this performance difference issue first. So we actually have a lot of evidence that talks about performance differences between people in organizations. And probably, the most famous are for technical people, for programmers. And I’m actually reproducing here some charts of attempts to measure programming ability. And what you’ll see there is the dots represent a billion various sets of tasks. And you’ll see this green box that represents the 75th percentile, the averages. What’s interesting to note is the repeated studies found things like the differences between the programmers in the top 75th percentile and those in the bottom 25th percentile, can be as much as 27 times points at some measures. Now, a 27 times performance difference is huge, we don’t find that in all cases. Sometimes it’s ten times, sometimes it’s three times, but getting a good programmer on board versus getting a mediocre programmer can actually make a huge difference in the productivity of your company. The amount of errors you spot, and if one person can be as good as three or four or five less-well-talented individuals. Getting the high talent people on board is critical to making things successful and it’s not just about technical like programming. So I have done a set of research looking at the video game industry, trying to understand what explains performance differences between video games. So let me walk you through how I thought about this issue. So let’s imagine a bunch of different games and those games have different levels of revenue. So some games are earning more than others, some games are more successful than others. Now I’m a game player myself, so I controlled for all the sets of factors that makes games different from each other, the genre of the game, how much money went into developing them, what platform they’re on, a whole bunch of other factors, what type of game it was. And there are still, even after you control for these factors, big performance differences. So if you think of a conventional strategy, an entrepreneurial strategy that tells you the difference in companies and performance often comes from the company itself. So let’s take a look at companies and imagine company green, company blue, and company purple are all different video game developers and what you can see is you can start to tell a pattern. Well, it looks like green’s production’s going down, purple’s doing well, so this looks at things only at a company level. I thought well what if we look at the individuals, the actual people who make these games. And specifically let’s look at two different roles within the game industry. Let’s look at the middle manager role. So in this case a middle manager is what’s called a Producer. So these are people who help coordinate things, help run schedules, coordinate between a senior manager and lower level people within the organization. And what you can see is that middle managers might move between different games in the organization. They might do similar games for similar companies or move from one company to another. And then there’s also a creative role in the organization. And I apologize that I’ve used pictures from the Black Eyed Peas album cover to represent creative individuals that I make no statement about the Black Eye Peas’s level of creativity. But it is nice pixel art, so on the innovator side, we have the people who we call the designers of the game, so these are the people that are doing creative work, and coming up with creative ideas inside the organization. And so, I’m able to statistically pull apart what part of the difference in revenue in a game is due to the game itself and the company that produces it, how much is due to the middle manager who’s on the project and how much is due to the designer on the project. And what I found was, I think, interesting. So, 21% of the variation in performance of games, products, was explained by who the company was, 22% was explained by who the middle manager was and barely significant was the design art which was about 7%. So, what this tells you is that even in a really creative industry, with lots of variation like video games, who the middle manager is matters a lot. They can explain 22% of the variation in for performance and these are billion dollar products sometimes. So 22%, $220 million, in whether a game succeeds or fails can be attributed to these middle manager roles. So getting your middle manager right, and I’ve found that they actually take their skills with them. So when they move from one company to another, they actually take that ability with them. So, figuring out not just who the designers are, who the programmers are in your company, but actually hiring the right early managers makes a huge difference in the long term outcome of your company. So you need to think about these sets of issues and we talk about hiring in other places during this course, but it’s worth thinking about these issues and realizing getting this stuff right matters. It doesn’t just matter because people differ in productivity and often differs because of what we call Role Inertia. Imagine a founding team member and you’re trying to decide who you’re going to hire to fill an absolutely critical role in your company, which is Human Resources. Who’s going to be the head of HR in your company? Now HR can mean many different things. An HR person can handle just recruiting, so getting people into your organization and hiring them. They can handle the administration, they can handle the legal aspects of the company. So that you might have a HR person who’s a lawyer and deals with employment law. So let’s imagine that you’ve hired somebody for this role and it’s an HR person who does not handle the legal issues, so your company starts to grow, and this HR person does a great job. They grow this company with you, they do a great job at recruiting which is what they specialize in, and you end up having to hire a lawyer to handle the legal aspects of the Human Resources job. Now, after a while, you end up, your HR person decides to leave the company, and now you need to hire someone to fill that HR role. What you’ve now done is, because that HR person has left and because they had a particular set of skills, you built the role around these skills. So now you can’t hire an HR person who does the legal aspects of your company because you hired a lawyer to do that. So it will be overlapped in the roles in your company. So you’re now limited only to HR people who don’t handle the legal aspects of your company, this is what we call role inertia. By leaving after you’ve built the company around this person they have left a hole in your company that’s just the shape of what their skill set was and that means from now on you have to hire people to fit that skill set. So it’s very hard to change an organization’s structure in hiring. The choices you make when you’re first hiring your first 20 employees actually dictate how your entire company is organized in the future. So, you need to think about the roles and design your company around these sets of roles so you’re not just hiring a person for the job, but you’re hiring a person to help create a job for the future. So another reason why early employees are so important.
7:42
So when you make your first hiring decision, it’s very important that you hire slow and you fire fast. So before a role gets set, if somebody’s not working, get rid of them and spend your time doing hiring right and not just hiring random people because you need bodies right now. There’s often a lot of pressure in startups to staff up as early as you can and get people into your organization as quickly as you can because there’s a lot of jobs to do. And this can be a mistake, because if you’re not thinking about the issue is the productivity difference. And you’re not thinking about the role inertia that you’re creating. You could end up making choices that will haunt you later on. So, generally in hiring, good enough isn’t, right? So, if something’s good enough that’s not the standard you want to use. You need people who are excellent. You need to think about the roles that you’re doing and you need to design carefully to make sure that the choices you make early on don’t haunt you forever.

Jim Rohn