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Where Is Your VC Funding Going?

Friday, August 22, 2008 10:28 pm - by ccountouris
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The people you hire is the single greatest investment you make.

Accolo raised a Series B round in June of 2007 from Altos Ventures with three goals in mind:

  1. Finally get ahead of the hiring curve on the Client Services side of our business (the folks that do all of the recruiting and consulting work)
  2. Ramp our sales team and build a formal marketing department
  3. Accelerate the development of our core technology

As I look at where the money is going, at least 60% of it is for hiring full time employees and 30% towards technology development contractors/resources. The other 10% went toward a kegger and new coffee machine (just kidding, Ho – just curious if you ever read this stuff). Anthony Lee of Altos Ventures estimates that 70% to 90% of a company’s expenses in the early days go towards headcount.

Given that level of investment, why do most small, venture-backed companies not have any formal way of spending those dollars? We talk to companies every day that recently closed funding, have a lot of money to spend (and the associated growth expectations) and a short time line, but have NOTHING in the way of a formal process to hire or dedicated resources to get it done. Most either spend a truckload on contingency recruiting fees or assign whoever isn’t in the meeting to run recruiting. It’s a common cliché that the people you hire is the single greatest investment you make.

You know where this is all going, but I’ll proceed anyway. Let’s say you have $5 million to invest and expect a good return. You decide to let me invest it for you. You are aware that I have no formal training in investing, no tools or research to leverage, and stock picking is one of a hundred things I have to do everyday. How confident are you in the returns? If you’re lucky, I’ll pick by throwing a dart at the newspaper stock quotes. Come to think of it, I’m not even sure if they print those any longer.

When Accolo has its multi-bazillion dollar IPO in a few years and I become a rich uncle to startups, the first question I’m going to ask is what plan is in place to spend the 90% of my money wisely? A company that recruits by asking an overworked office manager to post on Craig’s List and then forward resumes to a CTO that is working 80 hours a week is at best the equivalent of throwing darts at the newspaper. What is the cost to the company of a bad hire? What is the opportunity cost to the company of a hire not made? It’s somewhat surprising how many startups make their most important investment without a formal process or the resources to do it well.



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