11th July, 2021

Week 28/52

➗ Divide

A lot of times
We’re angry at other people
For not doing what
We should have done for ourselves
— Rupi Kaur, The Sun & Her Flowers

When talking about the things that need to be done, you can pretty neatly divide the world into people who mostly say we and people who mostly say they.

See also: We are still divided


👩‍💻 Recruit

Every founder who has ever asked me for advice about their start-up will be familiar with my favourite question:

What is the constraint?

Normally I'm asking this in the context of a single company. I've found it's a great way to identify the most useful things to talk about, to dig into the specific areas of the business and to understand what could unlock growth.

More often than not the answer is people - i.e. how to manage the existing team so they perform to their potential, and how to grow the team without wrecking the culture.

Knowing the point at which headcount tips from being a vanity metric to being vital is one of the keys to successfully scaling a venture beyond the start-up stage.

I think this also applies at the ecosystem level.

Previously I wrote:

We need to make sure that we identify and remove any systemic constraints that make it difficult for ventures to start and scale.

What are these systemic constraints?

For many years the consensus in New Zealand has been that capital is the major constraint that has been holding us back. It's been an unhelpful myth.

The noise from those complaining about how hard it is to find investors has drowned out the much smaller but ultimately much more interesting group of founders who have raised investment and are bumping into a whole different set of constraints.

The tweet I included above is from 2014, but is frustratingly evergreen.

When we ask founders who have raised capital what's holding them back they nearly all point to the challenges of finding and keeping great people in their team.1

Just this week NZTech estimated there could be as many as 10,000 open positions in the market at the moment.

Start-up investors sometimes like to imagine they are funding “innovation” (with a hand wave 🙌). But, we need to peel the onion and think about how capital is spent. When we cut through the aspirational language, in practice, funding innovation nearly always means funding payroll. Even hardware companies, with significant capital costs, still spend a large portion of the money they raise on people.

Raising capital allows founders to create roles, but filling them and keeping them filled is still hard work, and cash is only one part of the solution. As Jason Lemkin pointed out, it's tempting to think that start-ups are about having a great idea, but in the end they are about being great at recruiting. I would add to that: being even better at retention.2

More and more, the best companies in our ecosystem are either forced to poach staff from each other or hire remotely.3

Those are not signs of a healthy ecosystem!

An economy is truly healthy only when its people know how to make and do things that others will pay them a decent amount for. Jobs, in other words, are not the cause of a healthy economy; they’re the byproduct.4

How do we remove that constraint? Where else could we find these people?

Train

The need for more qualified people to work on these businesses has been well sign-posted for many years.

But you might not guess that by looking at the statistics.

In the last decade the number of people completing Information Technology or Engineering degrees has roughly doubled. The number completing Science degrees has increased by ~20%. But both of those increases are from a very small base. The raw numbers are depressingly low when we compare to the number of currently unfilled roles and future requirements:

Science: 2,740 graduates
Information Technology: 1,390 graduates
Engineering: 655 graduates

If you looks at the trends over time for these three different areas of study combined, the total number of students enrolled peaked in 2015, when there were ~54,000 students. By 2020 that number had fallen to just over 50,000, 4% fewer than there were way back in 2011. By comparison in 2020 there were ~14,400 students studying law and ~11,700 studying accountancy.5

It's even worse further down the pipeline, where the number of secondary school students completing NCEA technology standards dropped from 52,504 students in 2015 to 48,024 in 2019.6

And it's not just engineers and technology people that are scarce - we are also drastically short of sales and marketing people with experience selling the sort of products that start-ups here are building.

We often repeat Paul Callaghan's formula:

Just 100 inspired entrepreneurs could turn this country around.

But we overlook that each of those founders, if they are actually going to build a great business, will each need to hire hundreds of qualified people.

As I said previously:

We don't only need 100 crazy founders. We need 10,000 people contributing their expertise to these businesses. Then 100,000. What are the constraints to that?

I don't have an easy solution. I doubt there is an easy solution (remember, if there is one thing we need to do, it's to stop believing in silver bullets!)

But I can state the problem clearly: we need to train many more people than we currently do.

I'd love to see more analysis on this, and I think it would teach us a lot. Is anybody tracking how this increase in graduates has flowed into employment, and specifically into which companies (i.e. are these folks going to high-growth businesses or more mature businesses)?

Import

Another potential solution is to convince qualified people from overseas to relocate.

Again, there is a relevant Paul Callaghan catch phrase. He said we should aim to “be the place where talent wants to live”.7

But what does that actually mean?

He was talking about the lifestyle that those of us who choose to live in New Zealand enjoy. If anything the COVID response has accentuated that, and our global reputation as a place where qualified people might want to live and work has probably never been better.

But the key to unlocking this at scale is our immigration settings, and this is not simple.

Obviously most of these options are currently unavailable. But, if we look at some examples of the specific initiatives we've used previously, there is not great evidence that they have addressed the constraint we're talking about at all:

Investor Visas

In the past we've tended to fall into the trap of being a comfortable place to retire for folks at the end of a successful career, rather than a place that attracts those who are still hungry to build new businesses.8

Pre-COVID an investment of just NZ$3 million was enough to effectively buy a visa. If you could invest NZ$10 million that made the criteria for time-spent-in-country even lower. There was no requirement that these investments were in growth businesses - low-risk bonds, public companies and property investments were all counted.

Incredibly, those who did want to invest in growth businesses were encouraged to consider the Angel Association. Who decides that we didn’t have enough angel investors and so needed to import them? Once again, the myth about our shortage of capital distorted decision making over many years.

MBIE claims that wealthy individuals using this scheme provide “hundreds of millions in direct investment, job creation and skills”.

I'd love to know how this is assessed in advance, and what feedback loops are in place to determine if those given these visas ever actually deliver what they promise. How many jobs are created? How are their skills actually applied? In other words: Does it work? What's the actual impact?

Either way, news that this scheme is opening up again will be a welcome relief to real estate agents in Queenstown.

Global Impact Visas

This separate scheme was established in 2016, enabled by government but outsourced to a private group called Edmund Hilary Fellowship to implement.

The cabinet paper making the case back in 2015 admitted that the pre-existing Entrepreneur Visa, while “working well”, wasn't “designed to bring in the more innovative, global entrepreneurs needed to support the growth of the New Zealand's innovation system”.9

The proposal was smart: target younger founders with a greater appetite for risk, who don't qualify for other visas (mostly because of the financial criteria).

Is it working?

The results seem mixed. As always, when success depends on picking winners the outcome depends on who we allow to do the picking.

There are anecdotal examples of individuals in the scheme making a significant contribution. The year three evaluation report published by MBIE notes:

The direction of travel is positive and the potential for future outcomes is strong

But also:

Ecosystem stakeholders have mixed views about whether the scale and type of outcomes they have observed from the pilot to date are in line with their expectations. Some fellows are also underwhelmed by the aggregate outcomes that the pilot has delivered to date.

(The report also makes it clear that the pilot was significantly impacted by COVID-19. In fact, international fellows have been unable to enter NZ since borders were shut.)

Perhaps most importantly:

To date there has been limited alignment of the pilot to other government initiatives that seek to address innovation.

And:

While the pilot does have some accountability mechanisms, the lack of interim targets for output and outcome measures has made it difficult to track progress.

Many of the fellows seem to have been selected for their current celebrity rather than their deep commitment to living in New Zealand and contributing directly to local ventures.

That seems like a big missed opportunity. If we are not clear about who we intend to help, what constraint they have and how we hope to reduce or remove that constraint, then we will struggle to demonstrate any impact.10

Unfortunately this seems like another policy initiative that was captured by derivatives in the ecosystem, rather than directly targeting start-up companies and the constraints they have:

The resulting policy reflects what the market is seeking, including potential applicants and potential host communities (business and innovation hubs, regional authorities, economic development agencies, etc)

If that's our definition of “the market” then of course the solutions we implemented were distorted. We've got to stop falling into this ecosystem trap!

Of course, the challenge that is implicit when we talk about importing talent is that talent can also be exported.

In the past we have worried about a “brain drain” - i.e. when qualified people leave to take up bigger and better opportunities working overseas. We should expect that will happen again in equivalent numbers once international travel options open up.

However, just as we can export software without having to physically ship anything around the world, we can also export software development without having to physically relocate ourselves. So, smart developers based in New Zealand can now tap into a global market for their skills, and if we prefer, easily work remotely as part of international teams. This is the best of both worlds - we can stay living here and enjoy the benefits New Zealand has to offer, but earn an international salary.

The impact of this change on local teams will be huge and is only just starting to be noticed.

Free

A third option, that doesn't get anywhere near as much airtime as those previous two:

We can rescue people from corporate servitude.

I joke, but only a little.

I’ve noticed that once they've experienced working in a high-growth company there are very few people who choose to go back into a corporate or government job. And those that do often don't last long before they jump again into an environment where the outcome is far less certain and so their ability to influence the outcome and benefit from that is so much greater. It's addictive!

So, why do so few people do this?

I wonder if the dominant narrative about start-ups is again partly to blame. If you're working in a secure corporate job and everything you see about start-ups looks like a reality television show - incubators and accelerators and demo days and start-up weekends etc - then it's easy to assume it's all a bit of a game, and not a serious career option. As a consequence, it's not until high-growth companies get much bigger (i.e. when they start to become small corporates themselves) that they start to attract these people as team members. By then the opportunities to learn all of the lessons from a high-growth stage are missed.

If we're going to convince more of these people to take the risk on a role in a start-up we have to do a better job of demonstrating the opportunities that exist in actual high-growth and early-stage start-ups, rather than just banging the ecosystem drum louder and louder.

If you're one of these people: be more curious. There are so many interesting and different jobs available at companies that you've probably never heard of. The biggest problem they have is attracting people with useful experience to join their team. Because they are growing quickly the range of things you'll be exposed to will blow your mind wide open, and with that comes amazing career opportunities in the future. What have you got to lose really? Even if the first team you choose doesn't work out, my experience is you won't look back.

Look!

Last but not least (actually probably most!) we could all do a much better job of hiring a more diverse range of people into start-ups. It’s difficult to claim that our biggest constraint is recruitment when our teams are filled with predominantly young white bearded men.

This is a pattern that is repeated too often: The first few people to join a start-up team all look quite similar to each other. The reasons for this are usually innocent: they normally know the founder and might be the only people prepared to take the massive risk involved in being the first followers. Then, when the team expands, those people hire their friends. When you are operating at pace this can seem like the easiest option, and it's a common mistake. However, once that pattern has been repeated a few times we end up with a monochrome team and a culture that is unlikely to appeal to anybody who doesn't fit that mould in the future.

When we consider the companies that are most successful they tend to have much more diverse teams. That’s not an accident or a coincidence.

We need to be much more conscious about those first few hires, looking specifically for different specialties and perspectives when adding each new person to the team and choosing those who will expand the lived experience of the group. A good place to start is asking what it would take for our teams to reflect the customers or other stakeholders we hope to serve.

To win we need to build teams that work together like rugby teams not rowing squads.

(See: Monochrome)

This is a hopeful time! I can tell you lots of stories of astonishingly competent people who have started or worked on amazing ventures. I've been incredibly fortunate to have some of them as colleagues over the years.

But there are just not enough. We need more. We need many more! Until then, this is going to hold us back from growing more of these types of businesses.

What different decisions would we make if we were more honest about our actual constraints?


🦠 Learn

I feel like those people who say we now need to learn to live with COVID-19 should be more specific about the curriculum they have in mind.

I would prefer we continue to learn about how to live without the virus. That work is incomplete and feels difficult enough to occupy us for the moment.

Choosing between two bad options is hard. Especially when the change involved might be permanent. Our brains do anything to avoid it.

Here are some thoughts I shared in March 2020, around the time that the number of active cases of COVID-19 in New Zealand was rapidly increasing:

Many leaders are having to make decisions under pressure at the moment. Everybody from the prime minister, to CEOs, to primary care givers. People respond to pressure in different ways: some get angry and lash out, some get depressed and withdraw, some will refuse to admit their new reality. But, thankfully, some thrive. Sharing our reckons and anecdotes doesn’t help in any of these cases. All it does is increase the pressure. Instead, we should all try to share our own expertise. Think about what you know really well that might be useful to others in this moment. What can you teach us? What are the practical ideas you have? Just increasing anxiety isn’t useful. So if that’s all you have, better to say nothing yet. And, if you’re angry or frightened about decisions others have made, before you publish your hot take, just as a fun mental exercise: make a list of the best reasons you can think of for why those who have to make that decision might have chosen the option they did. At the moment lots of people are having to choose between two or more bad options. You can help them by calmly and quietly sharing your expertise when it’s relevant and trusting them to make the difficult decisions otherwise.

This still feels relevant today. Maybe more so?

I wish we would stop talking about when we can get back to normal. That feels as useful to me as wondering when I can get back to being 37 years old.

Time only goes forward. What matters is what's ahead, not what's behind.

So, we need to bury our old plans. The future we imagined was never real. The faster we can mourn that loss and get on with creating an alternative that isn't bleak the better.

But that's not what we're doing.

Instead we seem determined to put in place artificial deadlines and estimates for when this will all be over, based mostly on wishful thinking rather than evidence. For example, consider the current scramble to estimate when we will be sufficiently vaccinated and borders can re-open, even though we don’t have anywhere near enough information to know. It’s optimism, I understand that. But if we keep behaving like this we will eventually run out of sand to accommodate all of our heads. What happens when those dates come and go? What’s the impact on how we feel?

I think the lessons of the Stockdale Paradox could be helpful. This suggests there are two contradictory things we need to do:

  • Don't belittle the severity of our current situation, but confront the brutal facts as they are; and

  • Believe that this will be the thing we look back on and consider our defining moment.

In other words: we need to be grounded but hopeful.

2019 was possibly the last year of unconstrained international travel (and many other things). What is 2022 going to be the first year of?

What expertise do you have that could help with this?


BONUS: Jim Collins explains the Stockdale Paradox


Top Three is a weekly collection of things I notice in 2021. I’m writing it for myself, and will include a lot of half-formed work-in-progress, but please feel free to follow along and share it if it’s interesting to you.

1

It's worth noting that, due to the impact of COVID-19, supply chains are a new and sometimes even more pressing constraint for those ventures that also need to ship physical goods.

2

I recently read the story of a graduate who spent two years working at Xero and is now leaving to become a real estate broker. 😳

3

Consider this anecdote from a recent media story about HeartLab:

“Since the October raise, HeartLab has been in hiring mode, boosting numbers from three to 13 - including two staff poached from Fisher & Paykel Healthcare”

7

As was pointed out to me recently, rather than referring to "talent" we would be better to just say "people" - keeping in mind that people aren't talent (or "heads" or "resources"), people have talents!

9

Which does beg the question: What was the Entrepreneur Visa designed to do, and on what basis was it working well?

10

Recall the four simple questions I've mentioned previously:

  1. Who does this help?

  2. What constraint do they have?

  3. How do you hope to reduce or remove that constraint for them?

  4. How will you show it's working?