Silicon Valley Frontlines

Top Ten Start-Up Mistakes. Not What You May Think! Part Two ...

Ok, here's my belated follow up and conclusion from Part 1 of Top Ten Start-Up Mistakes from the Orrick event last month!

Mistake #5: Not Recognizing When to Supplement or Shrink the Team

Founders who fear bringing in the right people at the right time are a problem. "When I find someone as smart as me then I'll bring them in" - wrong! Engineer founders generally don't know how to build sales and marketing. The culture you want determines the kind of people you hire. You should always be hiring or shrinking - but make sure the people are the right fit (don't hire guys with machetes if you are already on the highway). Personal characteristics and motivation are always the most important, not the specific skills - you can learn the latter but not the former.

Mistakes #6 and #7: Not Having a Real Plan - and Not Knowing Where You Are On Your Roadmap

A key emphasis here was to insure you figure out what type of business you are building - a big or small company, a home run or a single. This is really important because it determines much of what you do - and who you hire and whose money you take. The reality is the vast majority of startups that succeed turn out to be single. Very few ever IPO (fewer than ever). Most will get acquired if successful. And for you as a founder you may be a lot better off taking smaller money from angels or smaller vc's, controlling your destiny more and getting a larger share of a smaller business (and more total dollars) than someone who swings for the fences and even if successful gets a very small piece of that bigger business. Regardless, you need to build your business to be independent, not just to be bought. 

Always have a clear plan - but be nimble enough to change it if you need to. If revenues are less than you planned then you need to find new growth or cut expenses. This is partly why investors bet on people - things rarely go according to plan and how the people handle it is key. Knowing where you are on your roadmap then becomes key - is your hypothesis (for that's what it is) working or not? By the way - as I've written about before - tying funding to milestones is wrong, not just because its a cheat on valuation by the investor but because you may need to change the plan and the milestone becomes a millstone.

However metrics are important. Here's what we said we'd do. Here's what we did. Here's what we're going to do next. It's your feedback mechanism. Why is something drifting? Be ready to reset if needed, or take other action. Be super transparent, regular, communicative and avoid surprises.

Mistake #8: Being Penny-WIse and Pound Foolish

As a financial advisor and CFO to startups of course I have to echo the starting point on this one - the panel's statement that you need to have a good CFO or Controller. It's still a surprise to me that so many startups don't have either one - and in fact frequently don't even have a good bookkeeper or basic financial information available. The panel view was that you need someone on board who doesn't want to spend money BUT the real key is someone (CEO's are often not the right ones) who can help make the right trade-offs. After all, saving $5k a month in online marketing is a false economy your total burn is $150k/month and not spending the $5k means you take X months longer to make your target. Not having a top sales person is a bigger mistake than having a colour copier. I'll repeat a personal view here: the right financial person on board (emphasis on RIGHT) will pay for themselves many times over in better business decisions and return on investment. 

When you have raised money (see below) then have self-control and don't defocus. If your plan said you would spend $Y on marketing and you raise the money you needed then don't go spend that $Y on swanky new space instead.

Mistakes #9 and #10: Never Be In The Position Where You Have No Money; Don't Raise Too Much or Too Little

Sounds obvious. Amazing how many don't figure it out. Cash is the rocket fuel so you need to raise it. Be sure you know you much you need to get to the next key funding milestone - then raise more because it will take longer than you think to achieve that milestone. But also, raise money when you can, not when you need it. Timing is a key factor - not just in your business but when the market is more ready to supply funds is critical. 

Be forced to make tradeoffs and prioritize. Be very lean during product development and market discovery, then accelerate to ramp up the customer acquisition and returns.

Raising lots of money at a high valuation means you need to have a big exit. This will NOT happen for most companies. Solid singles (an exit in the $50 - $100m range) are a great result for most people. When raising money don't obsess on valuation. Take a reasonable valuation and focus on increasing it solidly between rounds. Down-rounds are viewed very negatively (in fact they can be the kiss of death).

Finally, raise money strategically. This means raising based not just on cash needs. You need to have in mind what business you're building over the longer haul, who the investors are and what they bring to the table that can truly help move the business froward. Yes, terms are important but get a win-win-win out of it.

The Right Skills from the Right People at the Right Time ...

With prompting from Fred Wilson's recent blog post regarding accounting for startups, my own recent experience makes me revisit the topic of finding a good bookkeeper or accountant early in your startup's life. (At this point many entrepreneurs will switch off - don't do that! You need to read this!)

Fred did his post as part of a new series of posts educating entrepreneurs on financial fundamentals. Bear in mind Fred is a V.C. - he's invested in Twitter, Etsy, Zynga (Farmville, Mafia Wars), FourSquare and so on. The man knows what he's doing - and saying. The main points in his post:

"If you have a company, you must have financial records for it. And they must be accurate and up to date. I do not recommend doing this yourself. I recommend hiring a part-time bookkeeper to maintain your financial records at the start. A good one will save you all sorts of headaches."

and

"There is always a temptation to skimp on this part of the business. It's not a core part of most businesses and is often not valued by tech entrepreneurs. But please don't skimp on this. Do it right and well. And hire good people to do the accounting work for your company. It will pay huge dividends in the long run."

I'll give you some examples in a minute that support his views - from when it hasn't been done right. But I would say that Fred also misses a key point - which is that even the best bookkeepers often need guidance, just as the best engineers, customer support or sales people need guidance and direction. In accounting this comes from having an experienced part-time CFO or financial expert on your advisory team (very part-time, maybe for equity only or a little cash). That person will help the bookkeeper and entrepreneur determine key policies like revenue recognition that invariably trip up the unwary and can really help the entrepreneur think about how to structure his sales deals, etc.

If you don't follow Fred's advice - or mine - what happens? Well, you get these real-life examples:

• A company which has misstated it's revenues for more than 5 years and which has allowed sloppy business practices to become institutionalized. And which is costing a lot of money to fix before they can get more funding. In this particular case its also clear that the lack of proper accounting raises big question marks about the overall management of the business.

• A company which has for 3 years used an under-qualified bookkeeper to "save money" and declined to get outside financial or auditor guidance. The result? Receivables on the books that sit there for years and are not collectible, revenues that don't align with underlying sales contracts, debt and equity accounting that doesn't match the company's historical financing events, inventory on the books that doesn't physically exist, non-existent accounting for a joint-venture, etc ....

• At the extreme, another Canopy Financial ....! OK, Canopy looks like a fraud perpetrated at a senior executive level. And yet paying attention with the right skills from the right people at the right time could have nipped this in the bud instead of taking the company down along with well over $70 million of investor money.

I don't really blame the bookkeepers. I blame management. And the Board of Directors as overseers of management. As a founder or CEO your job includes insuring you get this right. It may cost a little bit of money - but nothing like as much as it will cost you later if you screw it up!

Why Do Otherwise Sensible Companies Not Have CFO's?

The Canopy Financial fiasco (see my posts from late last year) highlights a very basic question (in that case, among many basic questions): "Why do so many fast growing startups not have a CFO?"

Here's an interesting table (I think it's from Ernst and Young, one of the Big 4 CPA firms, via the J. Robert Scott CompStudy):

As According to this only 17% of startups have a CFO when they have done one or fewer rounds of funding. In most cases this is probably appropriate - these companies tend to still be at the pre-revenue, product development stage and the business is pretty simple.

By the second and third rounds of funding, however, most of these companies are now generating some level of revenues and starting to grow and scale the business. Yet only 56% have a CFO. And only three-quarters of them have a CFO after 4 or more funding rounds.

To me this is bizarre. There are so many requirements piled on a business that need a dedicated CFO to help handle - revenue recognition, external audits (often a mandatory investor requirement as a condition of later-stage funding, though not always enforced), business planning and strategy, pricing, international structuring and tax planning, compensation structures, internal controls, economic models, budgeting, HR compliance etc...

So why do people not have them? I think its a combination of the following:

1. Lack of experience at the founder/CEO level. Not knowing what's important in managing the broader growth challanges of an early-stage business and the need for checks and balances, particularly in rapidly growing, multi-location companies. By the way, lack of experience doesn't just mean few years of experience. The challenge is also often true with an experienced sales or marketing executive turned into first-time CEO, for example.
2. Pressure to keep costs low and spending focused on product development and customer acquisition (sales and marketing). Unfortunately this is often encouraged by a company's Board - people who should know better about the need for checks and balances but often tend to be way too focused on minimizing unsightly or "unproductive" G&A overhead.

You have no idea how many companies I've seen over the years where some combination of these two factors has resulted in substantial problems later - restatements of financials (sometimes material enough to change an investor's view of the company's results), businesses with poor balance of resources, out-of-control compensation structures, untenable long-term economics, screwed-up equity structures, bad borrowing decisions, etc.

In the case of Canopy Financial they had, at some level, thought about the need and done some initial looking - as I know from my personal experience. But it clearly was not as high enough a priority as it should have been, and it took the appointment of new in-house legal counsel to blow the whistle on the problem. I guarantee you that a strong CFO hired a lot earlier would have discovered the problem before it escalated so significantly - and perhaps prevented it altogether.

So I know its self-serving to some extent but - please! - bring in the right CFO-level help at the right time. If its too early for a full-time person there are many well-qualified part-time people available. The cost of not doing so may be substantial - and not just the cost of fixing things. In the case of Canopy, it was disastrous.

Two Tales of "Working For Equity" ...

Working for equity only is, realistically, the way most startups have to get going. True founders - the gritty, enthusiastic, determined, change-the-world, passionate types - will do this for a long time, including well after they start paying others on staff some real cash. While there have been times in the last dozen or so years, usually during times of venture capital excess, that cash to founders, early-stage executives and other key employees has matched regular market compensation (still with the upside of the equity), this is not true in the vast majority in the start-up game.

In my line of work, consulting to a range of startups as CFO, mentor, COO, counselor and therapist, I come across many "opportunities" to work for equity only and I have a couple of current clients where I do just that. In both cases these are pre-funding companies I believe I can help and where I believe in what they do and how they do it. In both cases the founders pay themselves nothing in cash, and what little money they do have goes to other resources they need to get to a funding milestone.

These are fair arrangements I enter with my eyes open and - particularly in my role - its clear very quickly whether this is equitable or not. Compensation-wise the biggest challenge is insuring people are respectful of my time and skills (when they don't write real checks for hourly or project work they don't tend to be quite as diligent on this as one would like!).

Then you find the people who just don't get it. Recently I was offered the opportunity to help a company and the opening gambit from the CEO was "well, we can only pay equity and in your own blog you say that's OK". Er, yes, but when it turns out that you have a staff of 15, all on salaries, a $3.5m a year burn rate and your equity is worthless due to numerous recapitalizations and bridge loans from investors then either you don't get it or I'm stupid to do it.

The second example came along just this morning. Someone in my network forwarded an email to me from a recruiting firm that is quite active in the Valley. They are looking for a "a stellar CFO to be their financial lead as they build their foundation and move into fast growth" and it goes on to describe all the usual stuff about how you need to know how to scale tall buildings in a single leap and conjure up millions for the business while providing the adult supervision.

Then come the red flags: "you can be an integral person as they raise a C-round of financing" and "we're also looking for someone with the ability to work for equity in lieu of a paycheck at first". Translation: "we've blown through two rounds of funding already and we need to try and convince some sucker to work for nothing and pull our asses out of the fire".

Worse yet, the same recruiter, on their website, is posting a position for "a strong, confident and very savvy executive assistant to support the CEO" and for which they will pay $80,000 a year. The company description makes it crystal clear that this is for the VERY SAME STARTUP looking to pay nothing to the sucker CFO. What kind of client is this that has blown through the money, wants a top-notch CFO for equity only and actually thinks its OK to waste $80k a year on an executive assistant to the CEO? Hello startup, exec assistants to CEO's are out of the question, let alone for $80k! Looks like you should have hired a CFO a long time ago!

Don't get me wrong. Working for equity only is a perfectly valid way to go. But get it right:

• Make sure the arrangements are fair and equitable to all. Don't be paying yourself or others a decent salary and then expect someone else just to work for stock
• Don't mislead someone about the value of the equity. If you have $30m of preference in some manner stuck in front of the Common, then convince yourself of the value of the equity before you try and convince someone else.
• Be respectful of people's time and skills and make adjustments to the arrangement if it's no longer in balance (either way)

Good luck on that Series C raise, by the way!

More On The Canopy Financial Fiasco ...

As expected the SEC has filed suit against Canopy Financial as a company and against one of the founders, Jeremy Blackburn, who was also Chief Operating Officer. The lawsuit filing makes interesting - and rather sad - reading. In it, and I quote the lawsuit verbatim in passages in italics below, the SEC alleges:

"During the period from at least October 2008, through at least August 2009, defendants Canopy Financial, Inc. (“Canopy”) and Jeremy J. Blackburn (“Blackburn”) engaged in a fraudulent scheme to raise $75 million from investors in a private placement offering for the Canopy preferred securities (the “2009 Canopy Offering”). To induce investors to invest in the offering, Canopy, through Blackburn and others, provided unsuspecting investors with documents misrepresenting the Canopy’s financial condition. Before the 2009 Canopy Offering, Canopy and Blackburn provided falsified financial statements, a falsified audit report, at least one falsified bank statement, and inaccurate monthly operating reports to investors."

And ...

"As part of the 2009 Canopy Offering, Canopy received approximately $75 million and Blackburn received approximately $1.625 million after redeeming 250,000 shares of Canopy common stock. As part of the scheme, Blackburn also misappropriated at least $1.17 million in investor funds into his personal bank accounts. After the payouts in the 2009 Canopy Offering, on information and belief, Canopy retains approximately $8 million."

The suit then goes on to detail numerous alleged misrepresentations by the defendants when raising $75m in their Series D funding from Spectrum (a major VC) and others. These include:

• Faking the existence of an independent financial audit by KPMG and forging a related KPMG audit report and audited financials.

"Blackburn knew that KPMG had never audited Canopy’s financial statements and that the KPMG Audit Report was forged and Canopy’s audited financial statements were false" and

"Blackburn sent Kashyap an email dated June 30, 2009, attaching the KPMG Audit Report and the audited Canopy financial statements, with an email subject heading of “Audit Finally Complete,” and email text stating “I never wanna [sic] go through this again!!”" and

"Blackburn reminded Banas to lie about the existence of the KPMG audit in two emails from Blackburn to Banas dated April 13, 2009"

• Provided false information to prospective investors in Canopy Monthly Operating Reports

"The Canopy Operating Reports provided to investors show an increase in the number of client accounts, increasing from 214,735 in February 2009, to 1,012,002 in May 2009." and

"Blackburn knew or should have known that the Canopy Operating Report entries showing the number of client accounts were false. As of June 2009, Canopy’s internal records show that it only had 81,618 client accounts"

• Forged a material bank statement

"Canopy, through Blackburn, provided to Spectrum a Northern Trust Company (“Northern Trust”) account statement purporting to show Canopy’s cash balance for the period June 2009 was approximately $8.9 million." and

"Blackburn forged, or caused to be forged, the June 2009 Northern Trust bank statement he provided to Spectrum before the 2009 Canopy Offering. The forged statement misstated the ownership of the account, the real bank account number and the real account balance. The forged statement showed the account as a Canopy account ending in -9601 with a balance of $8.9 million. The real account was a custodial account for the benefit of a Canopy client, Coventry Health, with an account number ending in -9602, and a balance of approximately $86,000 in June 2009."

So what exposed the alleged fraud? Apparently the hiring of it's new General Counsel (chief in-house legal officer).

"In or about November 2009, Canopy, through its newly-employed General Counsel, began a search for a Chief Financial Officer and contacted an acquaintance at KPMG for possible candidates. Canopy’s General Counsel sent what he understood were the KPMG Audit Report and “Canopy’s audited financial statements” to his KPMG acquaintance." and

"KPMG quickly responded to Canopy and advised Canopy in a “Cease-and-Desist Demand” letter dated November 3, 2009, that Canopy used KPMG’s name without KPMG’s authorization and consent. Further, KPMG told Canopy that it: (1) had never been retained nor agreed to audit any of Canopy’s financial statements; and (2) did not issue the audit opinion dated June 29, 2009."

You can download a copy of the full suit below, but you get the picture. This alleged fraud should have been exposed a lot earlier - or, better, never have happened - if the company had hired a CFO early in the year as apparently it started to do in some informal manner (despite the statement above - beginning a search in November 2009 - it was certainly under consideration much earlier).

More key questions:

• Where was the existing Canopy Board of Directors in all this They should have had an Audit Committee who appointed and met independently with auditors. Where was this oversight?
• Where was the due diligence by Spectrum and the other investors beyond relying on a few reports?
• Why did the young CEO, Vik Kashyap, not do a better job of really understanding what was going on, particularly in Chicago where Blackburn and most others were based while he was in San Francisco?
• What on earth makes someone think they can actually get away with this stuff? If indeed bank statements, audit reports etc were forged it is surely only a matter of time before such things are found. It is just not possible without widespread collusion (Madoff?) to keep up such a sham by forging more and more documents.

Oh dear ....

Download 23541745-Canopy-113009

Shocking Stuff At Canopy Financial - And Why You Should Always Have A Strong CFO On Board ...

I don't know if you've seen the shocking stuff that has jumped into the headlines about Canopy Financial, until recently one of the hottest startups in the Bay Area and potential IPO candidate for next year. Long story short, this company just filed for bankruptcy protection after raising $75 million in venture capital funding in July (of THIS year) and a total of $105m in its relatively short (4 year) existence. The bankruptcy filing says it owes creditors between $50m and $100m. Read this WSJ article for more background.

So, how could this possibly happen? Let's get to that in a minute. First, why am I focused on this? Well, I got introduced to the Canopy story at an investment banker conference in San Francisco early this year. At that event Vik Kashyap, the young founder and CEO, presented the company in a 20-minute session, alongside many other companies. I was blown away by the pitch - specifically the numbers. Here are some extracts from my notes from his presentation:

• The company provides services for the management of health savings accounts (HSA's), flexible spending accounts (FSA's) and health reimbursement accounts (HRA's)
• Working with 12 of the top 25 health plans in the country including 85% of covered Americans
• He claimed they had 400,000 accounts under management handling 8 million claims a year
• His revenue (he claimed) went from $9m in 2007 to $20m in 2008 (and a $3m profit) and projected $47m in 2009 (with a $17m profit) and forecasted $126m in revenues and a $72m profit in 2010. He actually said all this (which, frankly, is a big red flag - more on this in a moment)
• 50% of revenues are payments-based (fees for transactions processed)
• 4th fastest growing company in the Valley

Now, if you see numbers like that presented by a private company you have two conflicting reactions. One is "Holy crap, this is a HOT company". And the other is "Someone needs to advise this kid that you don't go around putting this kind of thing in black and white - not in this kind of climate - unless this is all rock solid. And certainly no public forecasts". Oh yeah, and the "this is too good to be true" reaction as well.

Anyway, so my investment banker friends have already told me that Vik is looking for a CFO to fill out his team. And based on his pitch and the way he presented it - yes, he needs one, for lots of reasons. So I approach Vik after the pitch and suggest we talk about the position. He's in a hurry but says "send me the resume".

After a few months we get to talk on the phone for 15 minutes and the net is that he wants a CFO, yes, but someone with payments systems experience. OK, that's not me. No problem. But its still a hot company and I keep it in the back of my mind. Fast forward to a month ago. Another investment banker friend tells me they has still not found a CFO - maybe I should get back in touch with Vik. As I'm about to do so, everything blows up.

So what's going on? Obviously I don't know for sure but I'll tell you what I suspect. I think this is a young, inexperienced CEO with a rapidly growing business that got way out of his control and he got way out of his depth. And the key missing link was (not having) an experienced, strong CFO. Fraud? Don't know, though I hear the SEC is planning to file fraud charges. Can fraud happen without a CEO's knowledge? Yes, absolutely, though not altogether likely - unless you really don't know what your job is as a CEO.

On top of all this you have to wonder something else. What were the VC's thinking when they invested in this thing? Did they do the detailed due diligence they should have? Surely you don't give $75 million (with an "m"!) to someone without really taking an in-depth look. Apparently not, judging how quickly this thing went belly-up.

Lessons from the story - so far:

• Very few young founders are right to continue as CEO's of rapidly-growing, complex businesses. Some can, but the vast majority cannot. Experience matters.
• Always have a strong, experienced CFO no matter how good you think you are, the rest of your team is and how much it costs
• Always do your due diligence ... on an investment, on a job opportunity ... etc!

Startup Staffing - How to get it Right!

A friend of mine asked me to given him some advice last week about responding to a job offer from a startup which he felt was too low. I was happy to do it and he just wrote to me saying he was able to get the cash side of the offer increased by 13% using my advice. One of my better returns-on-investment after an hour's work! Which got me thinking yet again about startup staffing, some of the challenges and how to get it right. In my friend's case the start-up was getting a good software QA manager but for a while really looked like they might blow it.

I've written many times about how this is a great time to start and staff a new tech business. Here are a few tips about how to get it right, culled from my own experience and talking with many entrepreneurs and investors. In no particular order:

• The right skills at the right time are important. But above all make sure who you hire is a great cultural and personality fit. In a startup there is no question that the whole is greater than the sum of the parts. Someone who is not a good fit can be toxic to the team dynamics and I can't think of anything that makes that worthwhile. The tone of the business and it's culture will be set by the initial team, so make sure that dynamic works well from the get-go.
• Even if you attract a founding team working for equity only to start with, you'll eventually have to start paying cash. These days, yes, you can get people for less cash than before. Whatever you're offering, make it equitable with other team members and pay people what they're worth (to the company - if there's a mismatch there then you're not right for each other anyway). Even if you think they will never find out, in a small company its not worth the risk of losing a good person who is inequitably compensated. Of course, thinking someone will never find out is the wrong philosophy anyway. Some (very few) companies post the compensation of every person in the company for all to see. Even if you're in the majority that don't, think about how people would react if they knew this information. Would they thing so-and-so was worth it or someone else was underpaid?
• A top notch software developer is worth 10 average developers. Unless they're not a good fit. On the other hand the really good developers will cost you - because among their many alternatives is the choice of working for themselves on the Next Big Thing, rather than for you. Of course you don't pay them 10x an average developer - but you do want to recognize your stars and, frankly, get rid of the average or below-average people. No, this is not contrary to my advice above. Done properly, recognizing stars can still be done in an equitable manner with the rest of the team. Don't confuse equitable with equal!
• Make everyone part of the team and incent everyone with equity via stock options. In one of my prior startups I found that the office admin in Prague was the only person in the company without stock options - so I got her some options as soon as I discovered this. Another executive said to me "she's just an admin, so why bother?" Well, I tell you, everyone plays a part in success. They cash compensation reflects the level of value but (in the long run) you would never dream of not paying them cash. Why wouldn't options work the same way? By the way, that executive I mentioned - prime example of the toxic employee ...
• If you have multiple locations, particularly outside your home country, then work hard to make everyone feel like members of the same team. At that same prior startup above I would insure that I made regular visits to Prague and each time I would do a presentation to the entire team (about 40 people) about the company's development, how their work was helping, etc. And we'd usually have a teambuilding event as well. That same toxic executive I mentioned wouldn't even join those meetings when he was there at the same time. What kind of message is that?
• Share information with everyone. The goals of the business. The key metrics and how you're doing. The issues. The more people know, the more they can take the initiative to fix things.
• Sales. If you don't get customer traction eventually you're dead in the water - you won't raise money or attract good people. Marketing is creating awareness and sales opportunities. Selling means closing deals. Getting the transaction over the goal line. In a startup everyone has to be selling and know how to sell. But be sure you have closers on the team. That could be the CEO or anyone else ...
• Outsource the stuff that is not core to your value proposition. Check my prior posts but, again, don't bring things like accounting, HR, etc. in-house unless you've exhausted the the capabilities of good outsourced services.
• Don't think that because you don't have cash you can't hire anyone. You'd be amazed at what a few founders and equity-based employees can achieve over a very short space of time if they truly believe.
• Finally, address problem situations quickly. That could be anything from compensation to work environment to a toxic employee. Yes, if I'd been CEO I'd have fired that executive I mentioned above - even if I was to lose the experience and other contributions I'd be gaining immeasurably in many other ways.

HR Management Resources for Start-Ups and Trends in the HR Space

One of my readers asked me to talk about trends in HR, and about HR companies getting funding and M&A in that space. Very relevant for this blog as one of the great advantages of building a tech business these days is the incredible array of tools and services available to assist with that process - and there are a host of companies now doing this on the HR side.

For start-ups needing HR help, gone are the days when you needed people early to manage this function. Ten years ago in my first start-up there were very few tools to help, so people had to do it all. We had to use a broker for health benefits and do a lot of analysis ourselves on choices, costs etc.. We had to use an antiquated payroll service like ADP. We had gazillions of forms and reports and compliance things to address. We had to develop our policies and procedures from scratch or We had to use big excel workbooks for commissions, to develop compensation ranges etc. We had to buy salary data to see how competitive we were. In going from 25 to 175 people in a year and getting IPO-ready I had to have an HR Director, a manager, a comp analyst, an HR admin and three full-time, in-house recruiters to handle everything. All of which is not focused directly on developing the core value of the business. Yikes!

Today I simply turn to an outsourced service like Trinet (contact Carolyn Phelps at [email protected]) orJose Montes at Nationwide HR ([email protected]). With their help I don't need to hire any dedicated in-house HR person until I have maybe 100 people - or more. These folks will manage all of the things I mention above on a 100% outsourced basis. I get a far wider range of benefits choices for my employees, I get an HR person in my office to help when I need it, I get all my handbooks and policies, all my compliance issues handled - in the case of Trinet for $40 per employee per month. Employees enroll and sign up by themselves online. All I need to provide is a part-time person to enter payroll data twice a month. How cool is that?! You do need someone (a CFO, or Controller perhaps) to  manage the relationship, check things like Workers' Compensation rates etc. (watch this latter particularly carefully).

An IPO tip: expect Trinet to go public within the next 12 months. They're getting big (recently acquired Gevity) and keep building out their Board (Ray Bingham, Board member at Oracle and Board member at one of my prior startups, joined not too long ago. Ray is the sort of person you bring on as a financial expert to head up an Audit Committee for a public company).

One area that is still a huge problem is recruiting. If someone can find a better solution to match companies and candidates than the existing weak job boards like Monster and Hotjobs, or even DICE, then you will make a fortune. In this economy someone needs to find a better way. Recruiters are not the answer. Yet this is not insoluble with technology, surely. There are a bunch of startups trying to tackle this but nothing compelling that I've seen ... so far.

There are a number of other private or public companies that are very interesting in the HR space. SuccessFactors is a fabulous company that went public a couple of years ago that offers on-demand goal setting, performance management and other tools. Expect new product announcements from them later this month. Taleo is another public company focused on talent management. Xactly is a private, venture-backed company focused on sales compensation planning and management. As one who has had to deal with this area in many prior companies I can tell you that it's a complex management challenge and ususally hard to administer. Xactly has a good set of tools and recently rounded out their management team with the ex-CFO of Salesforce.com who took the latter public. Guess what he's at Xactly to do ...? Another early stage start-up in this space is IncentAlign which just recruited a good friend and former colleague, Bill Hunt, as CTO. All of these companies are SaaS-based - so its easy to get started and the solutions are scalable as you grow. Expect some of the public players to also look at acquisitions of the smaller players and a consolidation in the space.

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How Long is a Piece of String?

One of the questions always asked about start-ups and growth stage companies is around the size a G&A function needs to be to support the business effectively. It is rather like asking "how long is a piece of string?" Well, it depends ...

It depends on the business you're in, its stage of development, its ramp up rate, its geographical coverage and factors such as the strength and depth of the management team. My rules of thumb, which I'll expand on and explain in future blogs:

• Keep it small. Duh! Same for anything that is not a core asset to the business. Core assets are the technology, the brand, the customers etc. Not G&A. But make sure its good enough for where you are now and - eventually - scalable enough for where you're going
• Outsource as much as possible of the basic transaction processing and bookkeeping 
• Outsource human resources - including the benefits function
• Don't spend too much on space
• Develop a relationship with a good audit firm
• Get a good insurance broker. But not for benefits ...
• Have a good law firm - but don't use them too much
• Get good market compensation data (not for G&A, for the whole company) and develop a compensation structure early
• Make sure the systems are in place to match the business you're really running and automate wherever possible
• Make sure that G&A really reflects G&A - not a bucket of spend that belongs to Sales, Marketing, Development etc.
• The key early stage hire - the best Office Manager you can find!
• At the right time, get a good Controller or Finance Manager
• The CFO role is different ...

"Outsource" doesn't mean then hiring a bunch of contractors instead. It means using some of the great services out there that will not only support you now but scale to support you in the future. Some examples:

• Corefino, a Silicon Valley early stage company that supplies on-demand (on-line) bookkeeping services
• Trinet human resources outsourced services

More on all of this soon!