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What an investor looks at while evaluating a team? How would the teams be evaluated in such unicorns as Facebook, Google and Amazon? How a startup should search for the right staff and with what team to start off?
Sergey Lavrinenko,an author of the team evaluation methodology on the Rocket DAO platform, answered Andrew Miroshnichenko’s questions about different approaches of evaluating a team, intellectual capital and about the ways how to receive the right expertise to successfully develop a project.
Startup Jedi
We talk to startups and investors, you get the value.
My main experience in IT is working as a project manager. Managing the project is equal to managing a team because we are working with people and their competencies. In such a way, working in this sphere I have accumulated some competence and understanding of how the team should be built from the inside in order to achieve success.
If we consider the classical roles according to the Scrum methodology, it has three roles:
Product-owner. He is responsible for shaping the path along which the product should move: draws up a technical task, details and formulates business requirements, supervises everything related to the product.
Team. Technical specialists, who have expertise in the implementation of the necessary tasks. Usually, a team is cross-functional, and the more competencies there are for cross-functionality, the more mature and effective the work of such a team will be.
Scrum-master. A person who is between the product owner and the team, he helps product-owner to realize his idea from the point of view of the effective team management “in a moment”.
Of course, project management in IT does not end up on the Scrum methodology: for the large and difficult projects there are PRINCE2, RUP, Waterfall, everything that is described in PMBOK — there are a lot of them. There are also flexible ones — Kanban and Scrum-ban and others.
However, precisely Scrum is the most suitable for the IT projects, which are created in the dynamically changing environment: Scrum is a work without a clearly defined long list of tasks, aimed at creating a process that could change a product as quickly as possible in a rapidly changing environment to the needs of a changing market. It perfectly suits to a startup in the early stages of finding their business model. You can transfer the philosophy of Scrum — a dynamic search for a solution at the right time — to the concept of a just created startup. So, if we transfer these three listed classic roles for Scrum to a startup, it is obvious that all of them will be necessary for a startup.
When I started to study the experience of other accelerators (also those that exist on the Belarusian market), I understood, that my approach is quite common in the industry. The novelty of my approach is in the digital competency level determination. Requirements to this determination are off the Rocket DAO frames, as the Rocket DAO project strives to escape from the evaluative expert judgement by the means of implementing the methodology and minimising the human factor.
Based on these requirements, the team is evaluated in three areas (product, business, technical), which are ranked according to the formal criteria of the team members’ achievements. Of course, we cannot be 100% sure that the person with these or that achievements will be definitely successful in his startup’s development; and vice-versa, a person without those achievements will fail in developing and realization of the idea. However, the presence of this competence is easy to check by the means of nominal signs in person’s work: his work experience, scientific work, already launched projects, and not launched (failed) projects. This person can be a student and have a favourable social environment if he studies at top universities that are innovatively open and produce promising personnel. Or this person may be a scientist who has worked on a problem for a long time: as part of a startup, he will be fully competent in this problem and close this need. There is only one general rule: the more achievements a person has that he can document, the more experience he brings to the team, and the team gets a higher rating. Accordingly, the more people fantasize about things in which they have no practical experience, the more likely it is that the project will not “take off”: the technical implementation of the project will fail, a business model will not work in practice or a product solution will not solve important pressing problems in the required area.
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I am not rejecting such methodologies. However, try to walk in investor’s shoes: what should he look at in the early stages of development, when there is no product yet? The investor will look at the profile of people, their achievements and competence as it is easy to check. The psychological stability of the team is difficult to evaluate even through testing. In order to hire psychologically suitable people, large companies use the assessment-centre mechanism — a complex multi-stage psychological interview where special groups, using the developed methodology, create stressful situations for them and watch their reactions. So, before getting to this stage of the interview, candidates undergo a rigorous selection by the qualification criteria. Yes, such a complex system brings results. However, in order to organize such large-scale testing, a lot of work needs to be done. And this is used in cases where the cost of managing a huge company is extremely high. If we talk about startups, we have to understand that: at an early stage, the investor already acknowledges the probability of certain errors, and the price of such complex testing will be too high, taking into account the number of projects that the investor needs to view. Nevertheless, I do not deny the possible effectiveness of such assessments.
My experience shows that the person, who occupies a serious managing position, has serious achievements and a potentially high evaluation scores according to my scale, he can be imperfect from the point of view of the psychological work in the team, but has a good level of psychological adaptation to work effectively in a project (otherwise, he would not be able to adapt in his previous projects). That’s why we can say, that the experience and position of a person can indirectly pinpoint on his or her communicative skills and adaptation in the team. Besides, remember that nobody urges you to create startups: it is a team of likeminded people who follow the common goal. If these people have outrageous psychological discordances, this team will just fall apart or will not gather together.
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I will answer form the end. The question of the startup’s valuation on the early stages is debatable and contradictory. Large funds come to the conclusion that this assessment does not need to be carried out at all, and startups should be given approximately the same money for approximately the same conditions. That is why it is a so called pre-seed investments. The practice of angel investing supposes that there should always be a “leader” — a lead investor who can understand the project and be interested in it. If we are talking about the factors that a project may be of interest to a lead investor, then we are not talking about large amounts. Intellectual capital relevant to it will be one of the first factors in making a decision. Investors in their broad masses represent a set of very different competencies, ideas about business models, problems and areas. At the same time, the presence of high-quality intellectual capital allows you to find among already successful people those with whom you are most likely to find a common language.
For example, if you worked in the industry of investments, and you have an idea for a startup, that will help to change this industry so it can work more effectively — it means that you already have some kind of social capital of people, who work in this industry. Even if you have no investors in your social environment, you know that in any company of business angels there will be people, whom you can show your project and find common ground. In all the countries people earn money quite in the same way, and the higher your level as a professional, the easier it will be to find the common language with funds and angels, and the less you will find a common language.
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High. There exist marketing myths like: “Google is created out of one simple page that was a browser”, “Facebook was created in the university dormitory by one single student” and others. If we exclude myths and look at real people, who started this projects, we will see that Zuckerberg from the point of view of the social capital was studying in the most prestigious place in the world, and there were quite a lot millionaires among his course-mates, who could help him with the scaling. Up to the moment, when Steve Jobs created well-known Apple, he already had an extensive business experience (nevertheless, he didn’t get a specialized degree). Even Bill Gates before Microsoft had experience in project realization. If we search for a real unicorn created by the students of provincial Russian, Indonesian or Brazilian universities or people with non-relevant expertise (for instance, when large manufacturers start to launch IT-startups, and they have a lot of money, but they do not have competence in this industry); in all of these cases, we will not see the story of success. Those boys from sunny California and good families with not completed (or completed) higher education in one of the elite universities somewhere abroad will get a higher evaluation according to my methodology. Taking also into account programmers who surrounded those boys — it is another level. [Even in terms of accessibility, buying an Apple personal computer in the mid-80s was like buying Tesla now.]
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This is an interesting question. The majority of technicians do not have such competencies, and that’s why the majority of startups (somewhere in California or here in Belarus) are created for technicians by technicians: productivity tools, coding tools and many others. The competition in this area is high: people “brew” in this industry and have extensive experience in it, understand its problems as these problems are close to them. However, this is not the only way. An alternative way is to solve problems that other people have. Here I can advise you to take in the team those people who worked closely in a different industry that is not related to startups: for example, representatives of the construction industry are very “greedy” for automation, but they are absolutely far from startups — if you combine a startup team and such a specialist, it can turn out to become a useful and potentially successful project. It should be noted that in my methodology, I did not take into account advisers, because they are not team members.
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If the team feels that according to the methodology criteria it is “inferior”, there are several variants of the solution:
Temporarily put the project on pause and go on to complete the necessary competencies. It is not necessary to spend years on this: it is possible to significantly improve your level by deeply plunging into the topic. Long story short: for example, I want to make games, but I don’t know how — it means that I go to work in this area for a year and pump it, and at the same time I confirm the acquired expertise — I write articles, conduct research, etc.
Find a co-founder, which will close some of the specific business needs. It is not necessary, that he should be super-involved, but he definitely has to be a part of a team and to be interested in a project.
Paradoxical as it may seem — start working with those competencies that are currently available. A low evaluation according to the methodology does not mean that everything is bad, nothing will work, and you need to sit down and cry. Perhaps, in the process of working on the project, a person will spend a lot of time and efforts, and in a year or two he will reach a high level of competencies in those areas where he received low scores before. Therefore, it is correct to look not only at the background but also at motivation, willingness to work with the project, at the ability of people to grow as specialists in the future and level up in this industry (this is personal interaction).
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Hiring is the commitment of people to work together in certain positions. This means that: a) the hired person will be in the project temporarily; b) the financial part “here and now” will greatly prevail over the share in the company. It’s stupid to hire a person for a 30% share of the company — this means that he will already be a co-founder. If a person works for a salary and receives a bonus in percentage, it is already hiring. From this point of view, a competently constructed motivation system is important.
I believe that you can hire a technical specialist, but there are advantages and disadvantages. Pros: work flexibility, freedom of technology choice, interesting engineering tasks. At the same time, there are cons: market salaries are lower, programmers are usually expensive. What is more, in the early stages, this startup problem can scare off funds and angels.
As for the product expertise — you can hire such a person, but then who will be the driver of the idea? If a product person is not a driver of an idea, his role will only be to verify the flow of ideas from the founders and expose them to real and sensible sentences. In this regard, it is not the issue of hiring such an employee that matters (this can be done), but the construction of the hypothesis testing process in a team. If the team can use its own competencies in the creation and testing of hypotheses — this is ok, but if the team is waiting for a person who will do the founder work for them — this is a bad option. The third competency is the competence of the seller. A lot has been written about this in the literature, moreover, the success of the company largely depends on the seller’s motivation. This is the case when the word “hiring” is interpreted flexibly: if the form of cooperation with a person is attractive to him as to a seller (given that the product does not exist here and now), he will have power in the team at the level of the founder. Conversely, you can, of course, hire some girls who will sell something according to the scripts, but this is an examination of the wrong quality. In this case, the most difficult answer is “Yes” to the question “Is it possible to hire such a specialist?”, however, at the same time, I do not exclude this and focus on building a motivation system. You can build a motivation system for the seller that he understands the scope of his competencies and brings maximum benefit. I do not exclude this option. There are even special people who are involved in attracting investments, who are at the same time deeply immersed in the team, but due to their social connections and competencies in business development, they help the project grow.
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I have researched the ways of many different startups, and, in general, I see 2 global directions:
A person works in the industry for a long time, accumulates a lot of experience, competencies and social connections, and then he goes to develop his own startup. For example, do you remember Apple’s designer? The person worked a lot in a corporation, and then he finished creating his own startup. According to the methodology, he will receive a high evaluation;
people, who did a lot and failed a lot, and in the process worked on their projects and gained experience — even Elon Musk. In this case,you will not receive the necessary competencies due to a long period of work, but because you will “beat against the wall” with your projects for a long time, until you understand what point you need to hit in order for this wall to fall.
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The strongest expressed competency in one person is considered. For example, it may be a founder with different competencies, an expert in sales, but he perfectly plays golf. If a person gets a really high evaluation in one of the areas, they will not have such high marks in others, this is normal — it is impossible to be both a top manager and a programmer.
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The methodology is not a universal truth on the stone: it can be changed, specified, it can be flexible. I wish startups to try: not a single human is born with the necessary competencies, and it is never too late to gain the experience or to become friends with a person who has this experience. If you understand, that you are a complete noob in all three spheres, then you need to find three experienced co-founders, and your startup will receive a high evaluation.
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