Beyond the Investment: The Role of VCs in Recruitment

Everyone can agree that hiring the right people is critical for post-investment success. This is why it's often the first order of business for many founders after scoring a funding round.

The relationship between talent and capital is cyclical, and typically, it looks something like this:

A company hits a major milestone that scores them a round of funding. They are then responsible for taking this surge of cash to find the right people with the right skills to help them reach their next milestone.

And so the cycle continues.

But the intricacies around what talent you need, when you need them, how you find them, and how you make them stay isn't so clear. So how are first-time founders supposed to handle hiring? Maybe they don't even have product-market fit or have ever sat in an interview. After all, just because they have a funded-worth idea doesn't mean they are talent acquisition experts. So knowing how to set a hiring plan, bring candidates into the process at scale, or establish an employer brand might not be in their tool belt.

At this point, founders typically turn to their VCs for help. Where do they start? Who do they need to hire? And when? And how? More often than not, investors can help them sort out these questions or even link them up with the network or providers who can help. For example, by recommending recruitment software, a recruitment agency they trust, or even connecting them with someone in their network who could fill the role.

But is this enough?

Maybe more seasoned founders can take this advice and run with it. But others might need more hands-on guidance as they turn their investment dollars into a winning team - because without it, hiring volume, velocity, and priorities might snowball into their downfall.

And the transition from capital to talent might be treated too lightly by some investors (and founders, for that matter). Because although some consider talent to be a transactional afterthought or support activity, the reality is that this couldn't be further from the truth.

Because without the right team in place, the initial investment might have been for nothing.

So, let's dig into the intersection of talent and capital and why Venture Capitals are starting to invest in the quality of the team first and idea second.

From Transactional Afterthought to Strategic Advantage?

For decades, people teams have been seen as a back office, reactive function. So rather than driving strategic initiatives or dealing with key stakeholders, people teams have taken hiring requests from the organization and put our fires when needed.

We'll call this afterthought treatment of people teams the back office syndrome.

But over the last few years, we saw people teams step out of the back office and up to the strategic table. Suddenly, human capital is the new frontier of value creation. And people teams everywhere were at the center of growth and expansion. Everything from product launches to funding depended on their ability to hire the right people at the right time.

These years felt like a pivotal point for people teams around the world. Finally, companies were ramping up their internal hiring teams, product and dev teams were scaling like never before, compensation and benefit were getting the attention they deserved, and more and more teams were investing in scalable talent infrastructure.

Finally, the people function was getting the attention it deserved, and talented leaders everywhere were pulling their seats up the table.

So, are the days of the back office syndrome behind us? Some might say yes, but we say not so fast.

Even though it might have seemed like people teams were entering the golden age of talent, the reality was that the massive hiring push from 2020-22 was the back office syndrome all over again - just manifested differently.

Because people teams were still in a hamster wheel of filling roles and putting out fires, just this time, it was at scale. And if you fast forward again to 2023, layoffs came en masse, hiring froze, contracts were canceled, and investments slowed (particularly those in the Series A-D stage).

Source: Carta, 2023

The worst part is that people teams were hit the hardest during the market slowdown. The same function that was considered the critical driver of growth, value creation, funding, and product launches was now tossed to the side.

Which begs the question: if the people team is a critical, strategic function, why are they the first to go? Maybe it's because, often, their roles were overly dependent on hiring volume. And when hiring stopped, so did the need for talented professionals.

You might be thinking, "This reality is true for any function. When your product stalls or your sales slow, you might have to lay off your product or sales team members, right?"

You're right. However, the difference is that these functions have a more stable role in a company's strategy. Nobody questions that sales or products are critical to growth. In contrast, the people function has a relatively new seat at the table when it comes to growth and expansion. So when funding was abundant, and talent was scarce, companies used hiring as a growth catalyst and ignored any costs that over-hiring might rack up along the way.

And while using talent as a path to growth created positive momentum for people teams, it ultimately put the people function back where it all started - scrambling to keep up with organizational requests and meeting short-term needs.

But it's time for the world to catch up. Because talent teams should be considered a strategic function in almost any company - no matter the size or funding.

And they should be scaled systematically and invested in intentionally - not just because you have an influx of hiring needs or a surge in funding. Because it's a proactive, systematic approach to talent that truly brings the people team out of the back office and into the front of strategic decision-making. Not hiring.

But for this to happen at VC-backed companies, investors need to provide more hands-on, function-specific support, which brings us to our next point.

The Rise of Function-Specific Support

Traditionally Venture Capital funds are made up of seasoned experts, and you can bet that nearly every investor has touched almost every part of an organization at one point or another. Be it finance or hiring, they definitely can point you in the right direction - but since they are spread so thin, they lean towards generalist.

These generalist roles can play to the founders' advantage. It guides them in unfamiliar areas while allowing them to exercise their strengths. So when it comes to people and talent, VCs often recommend 3rd party search firms, interview guidance, or even pull on their network to fill a key role.

But with each hire being critical to post-investment success, is giving such high-level guidance and offering up your network enough?

Organizations will need varying support and expertise to get the most out of their talent. For example, hiring at an early-stage company can be an incredibly personal decision for the founder and might be better handled in-house than by an agency - so recommending a CV shop to help fill roles the first few roles won't bring much value. However, taking such a persona, ad-hoc approach to each hire won't work when rigging a Series-A company up for scale since scalability requires a different skill set than network recruiting or shortlisting tactics.

Either way, you slice or dice it, the traditional Venture Capital firms often falls short when it comes to helping its portfolio companies rig their people function up for success.

This is why in recent years, some of the most forward-thinking funds, like Sequoia Capital, Eight Roads, and Point9, have brought on dedicated Talent Director(s) in-house to help with their portfolio companies.

But what value does a Talent Director bring to portfolio companies? First, it forces investors and founders to be more sensible when making hiring decisions and more strategic about building talent infrastructure. Rather than handing over capital and saying, "start hiring," having an in-house talent muscle forces teams to rethink who to hire, when, and at what pace. And most importantly, who should make these decisions for maximum value creation within your portfolio?

So, what does a Talent Director do? As with anything, this will depend on factors such as funding stage, company size, industry, founder experience, etc. But with that said, they typically won't be involved in the day-to-day hiring for their portfolio since this is often best done in-house or through an embedded recruitment partner. Working operationally also isn't very scalable if they work with dozens or hundreds of portfolio companies.

That's why more often than not, Talent Directors take on a strategic advisory role, which means they spend a lot of time helping founders build talent infrastructure. This could include anything from compensation and benefits models, building leveling frameworks, establishing hiring processes, and solidifying the hiring plan and velocity. While these talent infrastructure tasks might seem too high-level to add value to such an early-stage company, nailing these things early on is critical to post-investment success. Because falling short on the basics means you aren't able to scale when you need it most.

If we learned anything from the hiring bubble of 2020-22, it's time to slow down and regroup on how we approach talent at venture-backed companies.

The Future Role of Venture Capitals in Recruitment

If it isn't clear by now, we predict that more VCs will hire an in-house Talent Director to guide their founders on getting the most out of their talent strategies. This shift means more founders will have a go-to advisor to help them maximize their talent strategy. For investors, it means they have an in-house expert who can scrutinize hiring plans, re-evaluate growth at all costs, and advise their portfolios on what type of talent team they need to succeed.

At its core, this shift has two main implications…

1. It demonstrates investors' commitment to developing their portfolios into sustainable, people-driven organizations.
2. It emphasizes that a proactive, systematic approach to talent is what pulls people teams out of the back office and into the world of strategic decision-making.

While we don't expect every VC to take on an in-house Talent Director tomorrow, we believe that VCs are starting to realize the impact a well-executed and sensible talent strategy can have on value creation.

And we think that the most forward-thinking VCs will act on this sooner rather than later by investing in an in-house resource. This resource can guide portfolio companies as they make key hires, build an internal talent team, and advise them on when to partner up embedded recruitment provider to help them manage talent from A-Z. 

Only time will tell how VCs will approach talent moving forward. But with powerhouses like Sequoia taking a proactive, hands-on approach, we think it's only a matter of time before others follow suit.

This is an excellent sign for people teams everywhere since it shows a willingness to invest strategically in how you build and manage teams throughout different stages of funding and maturity. It also counters the notion that the importance of a people team is directly correlated with hiring volume.

We hope that founders and investors everywhere will continue to shift their mindset around the people teams' role in shaping an organization.

Because talent is not an afterthought function focused on short-sighted goals like launching that new feature or scoring your next funding. It's a driving force behind sustainable growth and long-term success.