Episode 2, Season 3
You're building a remarkable company that will change an industry - so stop hiring like an HR manager, with Chris Tottman, Notion Partner.
The most interesting, important and challenging aspect of the founder experience is surely the journey they go on from founder to leader, to a big company CEO. The ability to build and lead world-class teams along the way is paramount and there are few people in the European tech scene better to discuss this with than Chris Tottman.
Chris is one of the founders of Notion Capital, but also one of the founding members of MessageLabs, a tech company that went from an idea in 2000 to more than 600 people and $150m in recurring revenue in 8 years before its acquisition by Symantec. Amongst many other responsibilities at MessageLabs, Chris oversaw nearly every single senior hire, shaping the leadership team and organisational structure.
Since then, over the last ten years with Notion Capital, he’s been investing in SaaS founders to help shape their vision, nurture their ambition and, critically, help them hire ever more extraordinary people.
You can listen to a recording of our interview with Chris Tottman here on soundcloud, apple, spotify, etc.
If there is one thing I’ve learned, says Chris, it is the overarching importance of building incredible teams.
When you start with founding, growing, building and selling companies, and then move to investing, you need to learn a whole new craft and become comfortable with a whole different way of working. One of the most striking aspects of tech investing is how unlikely you are to succeed!
Statistically you might see 2,500 companies, invest in 25 and make the majority of your returns from 2-3. And that is a decade’s worth of work. You learn that great ideas don’t necessarily translate into great companies. It's a combination of great founders, with the great people they bring into the business, who can flex and adapt from a single office company with a small group of people, to an international company dominating a category, which has different offices and cultures around the world and having to synthesise all that. And you learn that luck plays a big part. But the lesson that’s re-enforced, is that the biggest difference is the alchemy that can happen when you bring incredible people together.
I get a tingly feeling when I meet a founder that I think can “carry an entire industry”
Alongside being a ‘people geek’, I have to confess to also being something of a business model geek, so I start my investment discussions being really quite obsessed with the market pain and the business model.
When it comes to what I look for in founders, it is something about them that stops me in my tracks, which is quite arresting, and that can be hard to quantify. And I think that’s largely because of the context you are operating in: to complete the journey and build a category leading business, that possibly will change the way an industry operates, then that individual is going to go through something of an inhumane process, period and experience in their life. For example:
These questions are constantly running in the back of my mind as I’m considering an investment - as well of course the statistical improbability of success!
Of course you need to invest in people who are super-smart, that goes without saying, but they also need to be incredibly self-aware and be able to grow at an alarming rate. They need to be able to sell a proposition and “carry an entire industry” if everyone is going to have a great outcome.
But I always look for that tingly feeling - and we had this at MessageLabs - when you can see the possibility of building a team that no-one wants to compete with. So that means investing in rare founders, and more importantly a rare group of people, with something arresting about the experience when you are in the room with them.
The greatest founders believe the world should work differently, while understanding everything is an experiment
People talk a lot about conviction-led founders, who believe the world should work differently and are crazy enough to enter the fray and take that idea to market, building a proposition, and never giving up.
But the greatest founders are also self-aware enough to realise their original idea is limited - it’s an alpha, an hypothesis. It’s under-informed, it’s not been market tested. They centre themselves around an industry pain that won’t go away - it’s constant, it’s making companies suffer - and so they pivot around the pain, because the pain will inevitably drive an adoption curve as the industry moves from an old way of doing business to a new way. That’s the genius of the very greatest founders.
Whether that is direct bookings for hotels via Triptease or finding an unskilled job through HeyJobs or delivering translation as a service with Unbabel, they are all fundamentally different solutions to whatever has come before. They have changed the economics of those markets and, although that was definitely not the starting idea, it is what they rapidly iterated to. So, great founders have a level of comfort with an abstract world and their ability to discard firmly held beliefs - theirs or the markets - and reimagine that market in a completely different way, discarding the market norms, and they do this quicker than anyone else. There is a clock ticking down and, as soon as you take venture investment, someone is literally standing there with a whistle and stop watch and it’s relentless - quarter in, quarter out - so they learn and move incredibly fast. They build organisations quicker than anyone else and are comfortable with a totally non-linear experience. They are A star people, but with a C minus ‘could do better’ attitude. They are very free in the way they process information and spin it into new ideas and if they can convert that into a new way to solve a pain that has to be solved, then they can build a big business, fast.
The very best teams are built on chemistry
Like my children, every one of my founders is different. So it’s too limiting to think that each situation is the same. I do, however, talk to all my founders about the game-changing hires they are going to make. Before we have even completed the investment, we will be talking about the leadership debt (existing leaders who need to grow into their roles) and leadership gaps that need to be filled. After the investment, founders are going to spend a lot of money on two or three people that are going to help them transform an industry.
The conversation is focused on a pyramid with three layers. The foundation of the pyramid is 100% built on chemistry. You are going to dedicate a group of relationships to doing things that are absolutely extraordinary and that will test those relationships to the limit, without that chemistry, the alchemy will not happen.
The 2nd layer is repeat pedigree. What evidence is there that a potential hire has gone through the level of scale required for the next couple of years? For example, take that concept of reaching $1m in bookings a month, then $2m a month, then $3m a month, while keeping customers happy and creating unusual economics for markets - have they done that before? The repeat pedigree of having done the scaling before - in whichever function - is incredibly important.
Then little bit at the top of the pyramid is the job description - which the bit most people obsess about but that I obsess about the least.
So, going back to the initial investment, I really do think about the chemistry I have with the founder: is this someone I want to build a massive company with and do we have the foundations of a relationship that will allow us to do that? Because the shit will keep hitting the fan, this stuff isn’t simple, we will have survival events in every business. These are the realities of getting through the start up, grow up and scale up journey. So I ask myself, how is my relationship with the founder going to stand up when tested, do we have deep pools of resilience we can draw on?
And the same goes for the leadership teams, can they stand up when tested? Are these built on shared chemistry and repeat pedigree? Because these are the things that great success are built upon.
Quite often I am talking about upgrading the team, before we have even signed the term sheet, and that really tests the relationship as I don’t have the answers, just lots of questions.
My best founders surround themselves with people who know how to take them on the next stage of their journey
Most people cannot grow as fast as a fast growing company, and certainly not without a huge amount of damage to themselves and their personal relationships. So you need to accept that and focus on the founders deep pools of resilience and their ability to learn.However, what’s more important, is how founders surround themselves with extraordinary people, who are suitable for the phase they are about to go through.
A lot of people talk about ambition and I believe ambition is demonstrated by the things you do. The founder’s ability to upgrade all of their people and all their strategy, all of the time, tips the odds in their favour. So any individual has got through the A, B, C raise is already articulating how their industry should be working, so they are probably the right person to articulate how their industry will work in 5 or more years. They just need the right people around them to go on that journey, that’s how I think about it.
The most successful tech companies are talent-driven economies
I genuinely believe you can see the impact of Game Changers in the P&L of a company. When I look back at MessageLabs, I was betting on the chance they could transform the business, but didn’t know that they could or that we could together. But when you look back you can see it - maybe in the product or the way you are addressing the market or in the P&L.
So we have built a proprietary data set on how unicorns built their leadership teams after the A round and this confirmed a number of beliefs we held as a group of people who have been building and investing in SaaS businesses for 20 years.
The most important thing is that massive tech companies are talent driven economies.
When we were building MessageLabs we used to think “what is our market share of remarkable people”. If you are in a competitive market and you are consuming all the remarkable people, your competitors aren’t getting them. It’s that simple. So what did we find?
Maddy, who runs our Talent Practice, has established this rapidly evolving data set that has re-enforced some things we intuitively knew but couldn’t prove. So we have gone from a belief to an absolute realisation that there is firm evidence for that belief, so it fuels our commitment to betting on the right people and then surrounding them with the right people.
This is incredibly liberating and is why the whole concept of Game Changers is so important to us.
I might spend three or four years hunting down someone I have isolated as a Game Changer. And when I send out a message saying I’ve landed one of those people, the feeling for me is as good as just having landed an extraordinary investment. That’s how much it means to me.
Everyone will notice, because these people are fundamental to the business and the pressure cooker that surrounds the founding team and are fundamental to the ability to re-imagine entire industries.
The best founders don’t become founders to manage people, but to imagine a different future
We’ve talked about ‘levelling up teams’, but it’s as important to think about “levelling up” strategy and to do that I’ve hacked a start up version of the “McKinsey Three Horizon’s Model”.
Horizon 1: is the proposition, the ideal customer profile, business model and the market you are in today and that we are investing at the start.
Horizon 3: this could be several years out and we may never get there, and this is how they have transformed the industry with a dominant market share. Does the industry work in a new norm in a way curated by them, and are the industry participants adopting their platform to get more access to volume and better economics because you have created better liquidity in the market. You have carried the whole industry and are the rails the industry is and will run on, that’s Horizon 3.
Horizon 2: is somewhere in between and slightly more near term and is where you are sequeing from horizon 1 to horizon 3. It is typically the graveyard because there is insufficient strategic rigour applied. Mostly it’s because founders haven’t invested time and effort to Horizon 2, because this is critical to the long term success. So what I look for is the founder and a small “crack team” for horizons 2 and 3, while backfilling horizon 1 with brilliant execution people.
You can learn more about this topic on Dennis Fois’s recent Notion Podcast.
I don’t believe there is mutual exclusivity between short term focus on execution and long term thinking, that would be a mistake as it primes you to think about short and long term as linear, so you have to do things in series. I believe that is wrong; you need to do both at the same time. Dennis Fois. Read more here.
Let’s say we have a first time founder who’s found a big hole in the market they are starting to fill. They have momentum and investment and have grown from 20 to 40 people and are considering expanding internationally. The execution complexity has now already increased dramatically, so you have to ask yourself, “do I want my founder focused on managing this first horizon”?
Typically founders are founders not because they want to manage things, but because they want to imagine things. And so I tend to encourage founders to think about how much time and money is being invested in the creation of horizons 2 & 3. And who - with great pedigree - is being brought in to manage horizon 1. This is a dramatic simplification, but thinking like this really frees founders up to think about what they really want, what they need to do and what innate skills they have and how much more value would be spent on horizons 2 & 3, rather than doing other things.
You end up with a business to operate on multiple time horizons simultaneously.
So I will then be asking:
That, for me at least, is a way to think about future horizons, rather than month ends and quarters. Dennis Fois, now CEO of Copper, is a big fan of this thinking and many of our founders are now using this approach.
Who stands out for you as a Game Changer?
When I think back to MessageLabs, the person who stands out is Jonathan Gale, who joined when we needed to pivot away from our perfect indirect strategy, which didn’t work, to a direct model. We had recently taken a large investment and were 80% off plan, so it was a high stakes game. We hired Jonathan and over the next few years we went on an incredible journey of month over month growth.
Jonathan Gale went on to become CEO of NewVoiceMedia, growing the business from $1-$70m in revenue and recently recorded a podcast with us - Why great product is the foundation of SaaS success.
Another example that comes to mind is many years later with Unbabel.
As an investor, we had discovered Unbabel and their amazing technology proposition, but only a very small amount of revenue associated with that proposition. I felt the company could succeed but didn’t have the commercial nous to take the proposition to market and so a few months later we ran a search which surfaced some amazing candidates.
One was an amazing person on the way up, the person most people would hire because they can afford him.
The other two were more expensive. My preferred candidate came 2nd, but the founder chose the most expensive, because of the chemistry and the pedigree, but mostly the chemistry. What we actually did was hire the number 1 and the number 3. We ignored the budgets and spent 80% of the entire gross margin of the business on one person!
When you make these big bets, what you have to think is “we are going to run out of money three months earlier, but imagine the clip we will be growing at.” In the next 12 months the business grew 12X.
My big takeaway? Hiring game changers requires a completely different mindset, not just thinking like an HR person.