It’s been nearly two years since the U.S. economy skidded into recession, and the overall unemployment level remains in the double-digit range. While the construction industry finds itself at the top of the unemployment pile, white-collar jobs such as those in the information sector recently posted a sobering unemployment rate of 10.4%, according to a recent U.S. Bureau of Labor Statistics news release. Professional and business services (at 12.4%) fared even worse, and a drop in the number of finance-related jobs saw unemployment rates in that sector jump from 6.8 in March 2009 to 7.7 in March 2010.
That’s the bad news. But there’s good news, too. Due to the trimming of corporate ranks, C-level talent once out of the price range of fledgling startups is now available. “It’s the grey beard meets the whiz kid,” says Gordon Rogers, president of Atlanta Technology Angels. “It can work to both of their advantages.”
Rogers was one of several panelists who joined moderator Benn Konsynski, chaired professor of information systems & operations management at Emory University’s Goizueta Business School, to address “C-Level Skill Sourcing: New Alternatives.” While startups and companies growing at a rapid rate need the expertise of C-level professionals, executive talent is often priced out of the reach of cash-strapped, nascent businesses. But the current economy presents opportunities for small- and medium-sized businesses to take advantage of outsourced C-level executive skills without coughing up C-level salaries.
In this environment, C-level executives and company founders can form a more symbiotic relationship. The C-level executive can work with the startup on a temporary basis (e.g., six months to a year) and in that time introduce the company founders to potential clients and markets, or even help them get funding. “The Rolodex of these senior execs is far deeper than anything these founders can hope for,” says Rogers. “Where else can you get that kind of talent? This kind of economy is precisely that opportunity.”
What kind of talent is available? Financial expertise, marketing acumen, human resources, legal—just name it, notes Konsynski. “But the first thing they need is a controller,” he adds.
Without structure, a company built around a great concept or idea may never get out of the gate. “Just mention the word ‘budget’ to a founder,” says Frank Pazera, founder and managing partner of CFO2Business. “It’s almost a four-letter word.” Pazera has held CFO, COO and CEO roles in a variety of industries. At CFO2Biz, he and his team provide on-demand financial function support for fast growing enterprises. “I’m an arms merchant,” he says, adding “why should any business waste resources on the total cost—hiring, training, turnover, retraining, and related overhead—of owning a full-time resource when they have the option to invest in a more experienced, powerful and tailored skill set at a fraction of the fully loaded cost?”
Hired guns like Pazera are flexible when it comes to compensation. In general, payment for services involves some cash in exchange for defined deliverables, but an additional equity exchange may also be included. “We prefer to have equity in all the companies in our portfolio,” he explains. The beauty of this arrangement? Startups conserve cash and C-level execs get a stake in the company they’re working with.
This equity position can make a significant difference in overall company performance, argues Pazera. “Rather than operating as transactional consultants, outsourced C-level execs with equity incentive move in concert with the other equity holders,” he explains, “and that alignment provides great assurance that the overall business mission and value creation efforts succeed.”
When it comes to early stage companies and marketing, many are, as Konsynski notes, “loathe to spend money.” With more than two decades of experience as a senior marketing executive, Debra Mercaldo, founder & president of Mercaldo Marketing Group, hopes to help growing companies avoid costly missteps. “I see a lot of beautiful business plans, but their tactics are a laundry list of things that have no relevance,” says Mercaldo. Her role is to help fledgling firms “look at their strategic plans,” she says, “and put tooth to what they’re trying to do.”
Creating and aligning a message is critical, notes Konsynski. “It’s when entrepreneurs pay serious attention to marketing that they build a message both inside and outside [their company],” he says. An expert like Mercaldo comes in, explains Konsynski, “and says what the baby is rather than what [the company founders] think it is.”
Entrepreneurs who believe they are on to the next great thing tend to be optimistic and protective about their ideas. Advice to be more realistic about expectations doesn’t always go over well. “In my experience,” says entrepreneur and startup advisor Greg Foster, “entrepreneurs think everyone is out to get them.” Foster, who serves on several boards (including that of The Onion, the nation’s largest satirical news source), has noticed changes in liquidity events—including what he sees as a new benchmark: “What I’m seeing in the market and what’s changing is small in, small out. You can exit without a press release in the $10, 15, 20 million dollar range,” he says. “A lot of companies will do well and be permanently small.”
The days of entrepreneurs becoming millionaires overnight may have gone the way of the subprime mortgage. “Smart entrepreneurs in this environment know they’re not going public or selling to a large public company,” explains Foster. “They’re thinking about who they can bring on their team to help run the business and sell the business in a fairly condensed period of time. The savvy entrepreneur says, ‘I need someone who knows something about this thing.’”
Knowing “something about this thing” means knowing how to put together a pro forma and having one’s financials in order. “The entrepreneur needs to be dealing with someone who can get him ready for the big show, even if the show isn’t that big,” adds Foster.
An area of business where many entrepreneurs fall flat is human resources. As companies grow, it behooves a company’s executive team to have a clear understanding of what type of culture they’d like to establish, how they’d like the company to be organized, how to define jobs, what kind of people to hire, how to hire them and/or fire them, drug testing, safety issues—the list goes on.
“Large companies have the luxury of compensation departments, recruiting departments, heads of HR that work with the executive team,” says Peter Rosen, founder & president of HR Strategies & Solutions. There’s no reason, notes Rosen, why small companies should do without that expertise—“even if it’s a couple of hours a week,” he says.
Likewise with legal services, says Konsynski. “We’re seeing outsourced, in-house counsel available to startups,” he says. Rather than hire a full-time chief legal officer (CLO) at significant cost, companies like Palladium Chief Legal Officers—one of very few in the field, representing a new model in the legal industry—provide part-time, flat-rate CLOs to companies in search of on-going, internal management team legal expertise. A CLO helps advance and leverage a company’s business model, identify channel partners, and put in place business practices and contractual terms that can create asset value by protecting the company’s ideas, their R&D.
“Entrepreneurs don’t know what they don’t know about where the risks are in their businesses,” says Dawn Ely, founder & president of Palladium, adding that IP law is not intuitive. For example, if an outside vendor provides services and deliverables for a company but is not an employee, “you don’t own anything they’re doing unless you have very specific language in a written contract,” she says. It’s not just about protecting the startup, explains Ely, it’s about “being proactive, advancing your business and creating asset value.”
What a CLO brings to the table in this environment, says Ely, is “knowing your industry, knowing the players in your industry, their businesses and how the legal issues run through your industry, and therefore your business. That’s the greatest value of a CLO—minimizing the pitfalls that result from business managers not knowing what they don’t know.”
What it all comes down to, says Konsynski, is “wise use of available capital.” Not something gung-ho entrepreneurs are often good at. While they may bristle at the idea of parceling out equity in their companies, it’s sometimes the best way to go. “Equity gives [the outsourced executives] a vested interest in your success,” adds Konsynski.
It’s important that outsourced executives believe in where the entrepreneur wants to take his or her company. “You need people around you with expertise in your industry and [who believe] in the direction you want to head,” says Ely. It’s not unlike dating: if there’s a gut feeling it’ll be a match, give the executive a shot. If it doesn’t work out, fire him or her—and do so quickly, the panel contends. Capital is too sparse to waste.
Even with revenue coming in, it matters to investors whether or not the entrepreneur has a track record and whether or not he or she has “assembled the right pieces without spending a lot of money,” according to Foster. “This is the stuff you’ve got to get right. You’ve got to separate building the business from building a company. People are all about building a business and they forget about building a company.”
Foster says he witnesses the fallout from this confusion all the time. “The founder has a great idea, maybe even great execution on a product, but when they approach the venture capital community, their corporate records and information are a disaster. It doesn’t take much time or effort to make sure things like options agreements, the cap table, financials, etc. are all in order.”
While the current economy may make C-level executives easier to employ—even on a temporary or flat-rate basis—entrepreneurs need to be realistic about their businesses. “There should not be a VP of sales until you have sales,” says Rogers. “Until you have a shipment of your product, everyone is a VP of customers. I don’t care if you have a cure for cancer. If you have no paying customers, we’ll never value your company over a million.”
Foster notes that he often sees founders raise their first money at an unrealistic valuation, “which means that when the first round of institutional capital comes in, those original investors’ shares go down in value dramatically. This kind of ‘cram down’ makes for an uncomfortable conversation with those early investors,” he says.
To succeed, and to bring your business to the next level, says Konsynski, don’t be afraid to look for people with different skill sets and expertise to elevate your company’s game. “All too often the people who bring you to one point,” he explains, “are not the ones who bring you to the next.”