Startups should expect more scrutiny from VCs on their hiring plans

Startups went on a hiring spree in 2021 as VC cash flowed and the job market was hot. But many overindulged in the talent pool and then had to make large cuts and layoffs in 2022. The worst for startups is likely still to come.

This isn’t a pattern that companies are going to want to fall into again when the market recovers and subsequently ramps up. And maybe they won’t this time around, because VCs are likely going to start paying a lot more attention to how companies are spending their money on hiring.

While many of the huge layoff numbers of the past year come from public names like Amazon and Microsoft, startups have also made notable cuts. Some, including Better.com, Bolt and Vimeo, have conducted multiple rounds of layoffs in the past year. Many expect layoffs among startups won’t slow down this year.

But there’s hope we won’t see this again. Angela Lee, a professor at Columbia Business School, angel investor and venture partner, said founders generally state their hiring plans on a slide at the back of their pitch deck that breaks down how they plan to spend the money they raise. Traditionally, she said, that was a throwaway slide that didn’t get much thought from VCs. But it won’t be anymore.

“It is not to say, ‘do not hire’ — it is just that we need to see the double-click now on why,” Lee said. “You need X number of million of dollars for what? Why do you need a chief data scientist and architect?”

She said that startups should also expect to get more into the details of these potential hires and be prepared to answer questions about how much they are going to be paid and what their overall compensation packages will look like. Plus, companies should be able to talk about how each hire will directly impact the business and why they should hire a full-time employee as opposed to outsourcing the position or utilizing a fractional role.

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“Walk me through how many cold calls can they do a month; we want to see an actual tie to team and growth in a much more clear way,” Lee said. “Founders should be able to say, ‘I know this salesperson can do 200 calls and grow three deals a month.”

Dave Zilberman, a general partner at Norwest Venture Partners, agreed that founders should expect more questions on hiring.

He said that as a multistage investor, he will be paying more attention to what internal teams companies are hiring for and whether it makes sense based on the startup’s stage. He said that hiring should be directly tied to milestones companies are trying to hit, so they should be focusing on hiring that will help them get there.

“For Series A stage companies, or companies that are just in early stages, we always advise against a sales team before they have the marketing team in place,” he offered as an example. “If they are hiring a CRO or head of sales in advance of marketing, or having a dozen paying customers, that’s a red flag.”

VCs will also be looking to see that companies are approaching hiring in a sustainable way, M13 partner and head of talent Matt Hoffman said. It should be clear that these new hires will help the company get to that next stage of growth while still allowing the startup to be lean and efficient.

Hoffman added that he’s always advised companies — but especially now — to approach hiring slowly and thoughtfully because it ends up being more time-consuming to hire the wrong person quickly than to hire the right person slowly. In this market, he hopes it will be easier for companies to stick to that.

“You actually have the luxury in this market and to be really thoughtful in what you are hiring for because there is not as much external pressure to go fast,” he said. “There are a lot of good reasons why people want to grow as fast as possible. Speed really matters; I get that, but hiring directly and more thoughtfully in the long run will be faster to get the hire right.”

But while all three agreed that in terms of layoffs, the worst is probably yet to come, Zilberman hopes that entrepreneurs, having watched the layoffs unfold, will make smart hiring decisions moving forward.

“The headlines in the market about the layoffs at the Salesforces, the Amazons and Meta are certainly not lost on the entrepreneurs,” he said.