Product vs People: The investment tipping point

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The investment tipping point

Product vs People: The investment tipping point

Ashling O’Connor, Partner – Media, Content & Digital
Glenn Horine, Partner – Sport

It’s a classic conundrum for budget-conscious start-ups: when to divert spending on product to investment in people.

For many entrepreneurs, especially in the tech sector, the product is the company, and depriving the core asset of resource is counterintuitive. Many are not even paying themselves a salary so why would they hire expensive executives?

But there is a tipping point at which the focus on human capital can make or break a business. Most entrepreneurs instinctively know it: demand is sky high, everyone is operating at maximum capacity and there is no time to think let alone devise a talent acquisition strategy.

This question of ‘people vs product’ was prevalent at a recent sports tech accelerator event at which SRI was present as part of the judging network.

The setting for Stadia Ventures’ Fall 2019 Finalist Pitch was Frisco, Texas where profits from the Dallas Cowboys – the world’s most valuable sports franchise – is evident everywhere. They call it ‘Blue Star Land’ (in reference to Cowboys owner Jerry Jones’ 500-acre development) or the ‘$2bn-mile’ and it is as close to Dubai or Abu Dhabi-style urban planning as you will find in the US. A little over five years ago, it was farmland and cattle ranches. Today, in one of America’s fastest growing metropolises, the local high school football team plays in a $70m stadium.

Inspired by the backdrop of uber-investment in sport, the 10 finalists – whittled down from 300 applicants from more than 50 countries – pitched to be among the three companies awarded a coveted place in Stadia’s 9th cohort. Think ‘Dragon’s Den’ or ‘Shark Tank’, the latter featuring local celebrity investor Mark Cuban, owner of the Dallas Mavericks.

Over two days, the expert audience tested their business models with astute questioning of commercial strategy and deft probing of budget assumptions. In the final analysis, however, it was the people on stage we were judging. Were they credible? Did we really believe they were capable of delivering their business plan? Did we like them?

“We invest in both the bench and product, but the bench is most important,” said Alysse Soll, President of New Model Advisory and a fellow judge. Every investor conducting due diligence on potential deals is looking squarely at the leadership.

“It starts and ends at talent for us,” David Mosse, Partner & General Counsel at TPG Growth, said. “No matter how great the product or value, it is equally important that there is a backable team.” It is not just the C-suite in sharp focus either.

“Many companies will have a good CEO and CTO in place, but the team, the next layer deep, is where there may be a need or concern,” Geoff Rhizor, Director, Canaccord Genuity, said.

Once a start-up has passed due diligence and raised the money to scale, at what point do they invest in talent acquisition? Most investors will encourage a company to exhaust their networks before turning to a search firm. Rhizor argues, however, that these are not mutually exclusive options. “Spend time considering your talent acquisition strategy – budget, time, outreach – do it as inexpensively as possible, but make sure you get the right person. The wrong hire can be much more expensive than taking longer or spending more to find the right fit,” he said. “For first time entrepreneurs, external recruitment can be much more important while veteran entrepreneurs should be able to rely on their network.”

It is difficult to be prescriptive. “There is no cookie cutter approach to finding the right talent, for the right opportunity and at the right time,” said Ms Soll. “Talent infusion and management depends on where you are in the product life cycle.”

Faced with a multitude of challenges all coming at pace, though, surely companies can apply some rule of thumb to talent acquisition?  “It makes sense once you have the cash available to professionalise the business,” Adam Kulick, Chairman of Reactoo, a Stadia finalist, said. “This feels like post-Series A to me – when there are recurring revenues – and should be included in the budget for that funding round.”

It’s more instinct than science, however. Fred Schonenberg, founder at VentureFuel, which partners corporates and start-ups, said founders need a sixth sense about capital allocation. “They do everything at the start, but there comes an inflection point when to scale, they need to focus on the aspect of the business only they can do,” he said. “At that moment, the founder needs to be nimble and resourceful to put a management team in place to free up their own time to maximize their ‘secret sauce’.”

There is general agreement that companies – even pre-revenue – should develop a robust talent acquisition strategy, presenting their organisational structure and compensation needs to potential investors as part of a holistic growth plan.

“Founders are focused on the daily grind and surviving, but they must have longer-term thinking. It’s never too early to plan for each stage of growth,” Tim Hayden, co-founder and Managing Director of Stadia Ventures, said. “The real question on the back of every investor’s mind is how the company is going to grow, get to a positive cash flow and change the world. A big factor is whether they have the right people to do that.”

Building an entire team from scratch while developing a product and refining a go-to-market strategy is hard to do all at once. Start-ups need to think ahead by building in budget for people as well as product development. It’s called human capital for a reason.

As Megan Baker, an entrepreneur and another fellow Stadia judge, said: “The product is obviously important but, in the end, people buy from people, so you need to get that part right.”

About the Authors

Ashling O’Connor
Partner – Media, Content & Digital
T: +44(0) 207 092 6961

Glenn Horine
Partner – Sport
T: +1 212 203 814 7307