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Stuart Garfield
Friday, June 19, 2009
Where the jobs are
Limited funds drive startups to contract hiring
By Galen Moore
MHT's Galen Moore: New 'hyperlocal' web trend
Breaking down the MIT $100K
How is the economic crisis affecting tech companies?
If flat is the new up, lean may be the new overweight — and some companies and investors are proving that innovative hiring practices can keep the burn rate down for the next generation of venture-backed companies.
Venture investors and entrepreneurs are adjusting to the idea that exits under $100 million are going to be the norm. When it comes to hiring, they’re finding ways around the typical front-loading that takes place when early startups start looking for top talent. Even in capital-intensive startup areas like consumer products, they’re finding ways to slide through a much-narrowed financial gap to a successful exit.
Newton Peripherals LLC is among a handful of companies to spin off using patents developed at Natick-based Manifold Products LLC. Newton developed the initial intellectual property into a family of products including a Bluetooth headset and mouse that are almost as slim as the company is.
Not only does Newton Peripherals have no office, the company has no full-time employees. Manufacturing, sales, customer service — even the corner office is outsourced. “I think it’s the most capital-efficient model we’ve executed,” said Matt Westover, a management consultant who is the company’s contract CEO.
Newton Peripherals has raised $7 million and has 300,000 to 400,000 customers, Westover said. For comparison’s sake, San Francisco-based headset maker Jawbone Inc. has dipped into VC coffers to the tune of $44 million.
Executive recruiter Jeff Leopold, a managing director at the Burlington office of Chicago-based Cook Associates Inc., said the so-called virtual company is fine for the startup, but questioned whether the model is scalable.
“It becomes difficult to create corporate culture,” he said. Customers choose based not only on a product itself, but on the company identity that surrounds that offering. That identity, which shows through in customer service, is hard to inculcate in contractors, he said.
“When a company hits a certain inflection point, it will become very clear that virtualization’s costs outweigh the benefits,” Leopold said.
Venture consultant Simeon Simeonov also has a plan for part-time executive leadership early on — but his startup leadership structure would dissolve after just 18 months.
Simeonov, who left his venture partner position at Polaris Venture Partners in March to form the consultancy FastIgnite Inc., has been pushing the idea of an executive board chairman for FastIgnite’s startup clients. The executive chairman solves a “chicken-and-egg scenario,” in which young startups can’t attract experienced business talent, because they don’t have funding — and can’t get funding because they don’t have experienced business executives.
“It’s an interim role, a very senior role,” Simeonov said. “It’s sort of like saying this person could be CEO if they want to, they just don’t want to.”
A part-time executive chairman would work two to three days a week and receive $100,000 a year and 5 percent equity to vest after the company gets Series A funding, Simeonov said. The technical founder of the startup would report to the executive chairman.
“It could be a very, very lucrative and also very valuable service,” Simeonov said. “There is a fundamental scarcity of founding CEO talent.”
Westover said with an additional investment of less than $8 million, he believes he can scale Newton Peripherals to the point where the company will be an attractive acquisition.
Beyond that, he hopes his consulting company, APlayerNetworks LLC, can apply the model elsewhere. Westover is shopping his success at Newton Peripherals to VC firms that are triaging portfolio companies — betting that even companies in high-burn venture sectors like manufacturing and biotech can be run more efficiently. “Give me the bottom 50 percent of your deals,” he said. “How many diving catches have been made of companies that then rose?”
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