Why 80% of your investment cash needs to go on people

As the chief executive of a start-up, when investors ask you how you intend to spend their money, your answer is most likely going to be people.

Start-ups are not capital intensive businesses which is why investors love them. A very small but talented team (think Instagram) can go a long way due to the scalability of the internet and web applications.

Give or take some money for rent, marketing, and hosting, 80% or more of your investment are going to be in people.

When you raise funds you need to make sure that your money is going to get you the traction you need to either become cashflow positive or to build the business to a level where you have enough traction to justify a higher valuation.

In order to do this you need people who are going to help make this happen. This means identifying your weaknesses and hiring staff who make up for what your founding team lacks.

You can broadly break down your company into these skill sets:

• Sales/Marketing

• Technology/Engineering/Design

• Strategy/Administration/Finance

Start-ups often begin with a heavy focus on engineering and strategy. After all, before you can sell something you need a product to sell, and that requires engineers and product people.

Only once you have a product can you start marketing and selling it.

After your product is built, the next hires should be people that can help you generate cashflow and/or traction. That means sales people, community managers or online marketers.

They should be relentlessly focused on communicating with your target market in every way shape and form, driving traffic and getting your company heard across the web and real world.

Often in the early stages you don’t need much more than a designer, a couple of engineers, some marketing/sales people and a couple of admin/support staff. As the company scales, these skills are amplified by growing each respective skill set to support the initial team.

Hiring is probably the hardest thing you’ll do as an entrepreneur. If you interview two engineers they might both want the same wage, but ask them to code and one might be good, but the other one might be off the charts good. How do you know this up front?

Well, that’s the hard part. Until you put people to the test, you never really know how good they are. My advice here is to be brutally honest with every hire you make.

When they sit down for the interview, you need to explain that you are building a team of world class players and that their first three months of your employment is a probationary period. If they are A-players, this shouldn’t worry them. If you set these expectations upfront there will be no surprises down the track.

The last thing you want to do is turn around staff often. It takes time and costs money to hire and educate then on your product. Once your cash is burnt, that’s it.

If you don’t use your funding on the best talent you can find, your chances of getting to the next stage of growth are much lower.

In addition to this, it is important to incentivise the right staff with stock options. This aligns your team with the company. Just like hiring, you need to ensure your equity is protected against bad decisions. To protect yourself against bad hires, its common practice to make stock options vest over three or four years with a one year cliff.

This cliff provides you with 12 months of time to get to know the hire and ensure they are the right fit. If a staff member is terminated during this time, none of their options vest.

Good luck building your team. It’s a challenging task but very rewarding when you get it right. The difference between a good and great team is almost always the difference between a good and great company!