Think & Grow Partner, Hugo Bieber, speaks to Dan Krasnostein, Partner at Square Peg, about the shifts start-ups and their founders are having to make in today's market. Dan also shares advice about founder remuneration.
Let’s start with founder remuneration, how do you look at remuneration for founders when you’re investing in portfolio companies?
The short answer is that we don’t have set rules in place because every founder is going to come up with their own model for what they feel is best for their business. The reality is, no founder is expecting to start a business and take a large salary.
Ultimately it’s a decision for the board but we take a collaborative approach with our founders. 10 years in, and I can’t think of a time when founder remuneration has been contentious.
And how often is founder pay reviewed?
Again, every company is different and by a certain stage some will start putting in remuneration committees. Typically, we see a subset of the board managing that. That could be reviewed annually or more frequently.
In terms of the employee side, we always advise founders to have appropriate structures in place, defining the salary bands, ESOP, bonuses etc. for each level. When you have that matrix structured well, then as people move through the org or when you bring new people in you’ll know where they slot in.
What’s your approach towards founders and long-term incentives? For example, do you typically ask them to re-vest their shares for another four years?
Typically when we’re investing, we like to see a re-vesting period over some portion of their equity which is an alignment around long-term incentives. Again, there are no set rules and this is a balance considering where the business is up to, and the effort and contribution they’ve already made.
We’re big supporters of founders that want to take a small amount of secondary. That could be as early as a B round or an A plus round in some cases. This is not for them to buy a boat or holiday house, but we’ve just discussed that they take a lower salary, they work 26 hours a day, eight days a week, investing enormous amounts of family and personal time trying to build value for the business and their stakeholders.
Being able to take an appropriate amount of money off the table to - whether that’s to pay down a mortgage, relieve some financial stress, just some reward for effort, whatever it may be - we think makes a lot of sense given what proportion of their wealth, or potential wealth, is tied up in the business. We want our founders to make big, bold bets and have a really long-term mindset, and we find freeing up some financial pressure can help them do that.
What challenges are you seeing in the current market regarding hiring and retaining talent?
A very different one to 12 months ago! This is the first time we’re seeing layoffs and hiring freezes happen across the board in Australia. Whilst it’s far from every company, it’s also true that even with high quality, well-funded companies are making these decisions. First and foremost, it’s an enormous challenge and emotionally draining for founders, it’s a major challenge and incredibly hard for the people being let go, and it’s demanding for the remaining staff taking on the extra workload and not feel secure in their job. Everyone needs to be aware of that and take an empathetic approach here.
The silver lining is that there is now a large amount of incredibly talented people in the market. We are big believers that the single most important thing for the future success of the Australian tech market is attracting and retaining top tech talent to it. So anything we can do to re-hire these people into other companies is a big win - that’s why we love the Between Work initiative that Earlywork recently launched. You can check that out at: https://www.earlywork.co/between-work
In the last year, you started to build out your own talent function within Square Peg. What do you see the VCs role as being in terms of talent?
One of the most important challenges most startups face is around hiring and retaining top talent. We’ve always tried to work really hard for our companies when it comes to people and building out our talent function is a natural extension of that. For us it is more than just hiring people, it is thinking about L&D, org design, advisor/mentors/experts companies can tap into, etc. Every VC approaches this differently, but hopefully it’s an area we can have a meaningful impact for our companies.
How can companies look to extend their runway during this time? Are there aggressive or less aggressive ways to do it?
It’s interesting because this is the first time that many founders have had to deal with this. Before it’s just been grow, grow, grow and then raising additional capital was much easier. Now we are in a different world and clearly access to capital is harder than it has been in the past.
I think the first thing to note is that generic advice on things like this are fairly unhelpful. Each business is going to have its own best plan of attack at this specific time.
If you are asking specifically about extending runway, well that’s just math - you either bring more money in the door from customers, raising equity, taking on debt, or you spend less money. And clearly, there is a tradeoff here, because often the spend you may cut - variable marketing for example, or reduction in sales force - is the type of spend that can help bring in more revenue. And this is precisely why unilateral advice of ‘cut spend by x%’, or ‘reduce your workforce by y%’ isn’t helpful.
The answer for every business is going to be different, but a question we find ourselves asking is along the lines of “do we have enough cash to last the next 18-24 months assuming we can’t raise another round, whilst also assuming we don’t meet our revenue forecast”. Essentially, in the worst case, can we ride out this storm. If you can devise a plan where the answer is yes, we can ride out the storm, then destiny is in your own hands. If the answer is no, it’s probably time to work on a new plan.
What about profitability vs growth and the shift in trajectory?
For a long time, the market has been in the mindset of growth at all costs. If you’re growing rapidly, the market will reward you, and raising additional capital to keep growing will be relatively straightforward. Clearly, that’s not the mindset today.
But we also haven’t shifted 180’ to “we must be profitable in the next six months”.
There is an efficiency lens that’s been added, to force founders to think about how they can be more efficient with growth and what the next 12 months look like as the business scales. You need to make sure the core metrics, as opposed to just top line, are very strong and in a good place.
Do you think we’ll be seeing more M&A amongst larger start-ups buying smaller ones, consolidation within the sector?
I genuinely am not sure. I think we are still at a heightened level of uncertainty and that tends to lead to a more cautious approach.
And lastly, you’re an investor in Earlywork. How would you advise young people entering the start-up ecosystem and paving a career that they’re passionate about?
So, the pathway into tech now is very different to what it was ten years ago. But, in terms of advice, I’d say two things;
The first is find and follow things you are passionate about. The second is build a strong network. The ecosystem is growing fast but is still relatively small. Most people in the industry care deeply about building a larger market and are willing to share their time and insights. There are no better communities than Earlywork for young people trying to find a way into tech. This industry needs great people to thrive and for the first time in many years we are seeing the best and brightest turn their minds to tech which is incredibly exciting.
Thank you to Dan Krasnostein, Partner at Square Peg and Hugo Bieber, Partner at Think & Grow.
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