March 9, 2020
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Unicorn Startups Seek Cognitive Diversity Early In Hiring

Unicorns captured our imaginations as children, and they continue to do so in the venture capital world.

Startups with a $1B+ valuation are almost as elusive as their mythological counterparts, but what if we could predict, or at least demystify, the path to this lucrative club?

Notion, a London-based venture capital fund that invests in SaaS and enterprise tech, is on the search for the Holy Grail of venture capital: a predictable and replicable model to take portfolio companies to the unicorn realm.

We spoke with Itxaso del Palacio, Investment Director, and Maddy Cross, Talent Director, about an incredibly insightful research report they put together that uncovered certain actions that put B2B SaaS Unicorns on the fast-track to $1B+ valuations.

We highly recommend combing through the report alongside this article. [You can see the report here].

The Unicorn Trajectory: Who Unicorns Hire and When They Hire Them

Notions report mainly focuses on people hired into the leadership teams of B2B software companies, what key ingredients helped propel some companies into the valuation stratosphere, and how Unicorns differed from a Control Group.

The report is based on 50 B2B software Unicorns in North America and Europe that raised between $3m and $15m in one round of venture funding between 2008 and 2018, and 50 B2B software businesses in the same regions with similar funding between 2008 and 2013 that did not break past a $100m valuation.

“Even if we discovered everything unicorns are doing in terms of how they hire, it wouldn’t necessarily be actionable,” comments Maddy. “We needed to find what separated them from the pack of other companies.”

The Notion report posits that specific hiring decisions were made by Unicorns within their first five years of their first significant venture capital raise that took them from $20m valuations to $1bn+.

In the first five years after a significant raise, Unicorns added seven times as many leaders (defined in the report as having VP, SVP, EVP and C-level titles) as the control group.

It’s worth noting that the Unicorn group is slow to hire in the first year. At this point, these are not “famous” businesses and are missing the clout that helps nudge key recruits in the future.

“It’s massively time-consuming to do one of these searches,” according to the report. “Let alone three at the same time (whilst running a business that’s in the high growth phase), with limited employer branding.”

Unicorn teams are also significantly more diverse in terms of leadership experience than companies in the Control Group.

“It would seem that hiring inexperienced but exceptionally high potential leaders while complementing them with proven and experienced leaders, is a strategy that works well.“

What’s your takeaway for VCs and investors?

“You have to look at the team as a whole,” comments Maddy. “The overriding theme in the research is cognitive diversity. Unicorns have a much greater variance in both experience and educational background than the Control Group. You can only see those things by looking at the team as a whole.”

Many venture funds look at each individual hire as needing to check items off a list,” Maddy explains. “X years of experience, schooling, prior company experience, and so on. If you hire everyone with similar experience and education profiles, you’re going to miss that key diversity that set Unicorns apart.”

How would you recommend handling any misalignment between founding teams and funds in regards to hiring experienced talent early on?

In order to attract key players, many companies have to offer equity. If they offer equity, they dilute the pie for everyone.

This creates a natural dissonance between startup founders and funds. Everybody wants growth, but early hiring decisions that can change the fabric of the company (as well as the cap table) can introduce some turbulence into a startup’s relationship with its investors.

“I think this is one of the most interesting questions,” comments Itxaso. From the moment investors put money in the company, we expect these companies to grow exponentially. This study shows that the fastest-growing companies hire very experienced people early on; it helps investors and founders to be laser-focused on recruiting the most experienced talent globally.

“You should be totally clear and make sure your investors are aligned,” comments Maddy. “If you spend $300k on someone and they’re worth it, spectacular. But, you hear not such great stories often about wrong hires. Be really clear on what the money is being spent on, in terms of potential ROI of each candidate. Look at a lot of candidates as well. You need to look at a lot of people to get a real view of whether a certain hire is worth it or not.”

“Hiring intelligently is knowing who to hire at what times,” says Itxaso. “Some companies hire a lot of salespeople before they find product-market fit. That is probably not going to work if the product is not ready. This study is not about the type of roles that need to be hired first. Companies need to prioritize which roles to focus on first, based on their needs”

How can startups build a world-class hiring process?

“I tell my companies they need to hire the best people and the best person that can help them reach the next milestone,” says Itxaso. “Rather than hiring whoever they know, they need to look for that person, who is probably working for a competitor or for a given company, and who can take them to the next level.”

“Get an executive search firm on board,” says Maddy. “[Executive search] is getting better in Europe, but volume isn’t as good as in the US. It’s incredibly powerful to have someone that can find the perfect candidate for you and save you, a founder doing a million other things, the focus to run your company as you should. Asking your inhouse Talent acquisition Managers to do C-suite hires, can often be a mistake. Incredible C-suite people will usually take your company more seriously if one of the founders sees the value in speaking to them directly.

How would you predict the results from a similar study would be different five years from now?

“Companies are becoming better and better at hiring more experienced people,” says Itxaso. “After looking at this study, we’re looking at diversity (cultural, experience, background, education) as a major defining factor for high-growth teams.”

“We can see formal education being less of a priority in the future,” says Maddy. “So many awesome technical hires are found through GitHub.”

“I also think technologies are going to play a huge role on suggesting who you need to hire,
Comments Itxaso. “What would otherwise take months could take a matter of days, potentially significantly accelerating the rapid early hiring process that set the Unicorns apart.”

“Anecdotally, I’m also starting to see that people are more willing to move for the right job. People are more willing to move from hubs like SF to other smaller hub cities, even working remotely,” comments Maddy.

“Talent can gather around a good quality of life,” comments Itxaso. “So much of the world’s best talent is able to lean into the advances in remote work and the massive growth in smaller-scale hub cities that offer phenomenal qualities of life.”

Final Thoughts

Ultimately, the more data collected around the spectacular growth of certain startups, the clearer of a picture we’ll have at what it takes to grow a company as a founder, investor, or advisor.

“By far, the bulk of the money we invest in our startups goes to hiring talent,” comments Itxaso. “Funds should be looking at team makeup. We’re doing so actively.”

The Unicorn Trajectory results point to talent from diverse educational and professional backgrounds, and an aggressive tendency to hire the best early on, as the premier quality of B2B SaaS unicorns.

As always, the better the information funds have at their disposal, the higher the quality of decisions they can make.