Tuesday, December 4, 2012

Part 18/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)

By Laurence K. Hayward

This is part eighteen of a twenty part series on this topic.

18. How do you plan to expand your labor force?

While the precise conditions of labor markets change, it is always a challenge to find the best people. VCs will not only be interested in the composition of your existing workforce, but also in how you plan to fill key positions now and in the future. Have you used an executive search firm? Do you have qualified candidates currently under review? Most companies include in their “use of proceeds” a line item for the expansion of human capital. Have you identified in advance people who will fill those roles? If not, how long will it take you to find them?

If these questions seem premature, consider that for early-stage companies labor costs are typically the largest operating expense. Have a basic understanding of what your staffing needs will be as the company expands. What human resources are necessary to achieve and to service the projected revenues? VCs will be interested in knowing how much of their invested capital will go to labor, that you’ve thought through this carefully, that you’re getting the most from your people, and that you’re expanding the labor base judiciously.

How will you compensate people, so as to attract, motivate and retain employees while keeping labor costs under control? VCs like to see incentive-based pay where appropriate, particularly as it aligns the motives of key personnel with the objectives of the company. They like to see management’s skin in the game, often in the form of direct investments and performance-based compensation. They will question salaries that seem excessive. While good people often cost more, there is the belief that if management does an effective job of communicating the vision for the company, people will gladly take part of their compensation in the overall performance of the company (distributed through bonuses, profit sharing, stock options, etc.)

This is one of the areas where operational experience is critical. As previously mentioned, entrepreneurs are often befuddled when others (including their own employees) don’t share their enthusiasm for the business model, concept or vision. All the creativity and brilliance that went into the business model ultimately depends on people. Those with operational experience understand the challenges (and the ugly realities) associated with building enthusiasm and ability to execute amongst the entire workforce.

Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here

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