Always hire your replacement. The truism of hiring people with the skills to grow begins with the initial senior people you hire and extends to every level of the organization. An organizational schema is only as good as the people who inhabit the roles. In a growing business, people not only wear a lot of hats, they also must be able to quickly wear bigger and bigger hats. Expanding beyond a handful of stores is possible only if your original team can step up and run the existing stores for you. Becoming a major regional or national chain is possible only if your senior staff can each manage a number of stores each. At every level, people must have the capability to step up to the duties of the next level above. The same capacity for growth is required for every other aspect of the business, from real estate to finance to human resources. This means you need to be as careful in hiring a cashier as you are in hiring the head of operations.

Entrepreneurs have difficulty making the shift to a professionally managed company, or making the shift without becoming bogged down in bureaucracy. Sometimes the difficulty comes when the founder/owner is unwilling or unable to “let go” when the organization becomes too large for the entrepreneur to run directly. Sometimes the entrepreneur brings in people who have experience managing a larger company but not one in the throes of transition. Even if the owner/founder and the original management team understand their organizational problem and can take step back from the fires of daily business, they seldom have the expertise to plan the development of their organization. They plunge ahead, working harder and harder, until organizational friction and personal burnout bring the organization to a grinding halt. Be ready to shift from “doer” to “delegater,” and be sure to plan ahead for the structure that you will need to manage a far-flung organization. Psychologically, by establishing the idea early that “everybody moves up, everybody grows,” you are less likely to cling to old responsibilities when you should be taking on new ones.

Have the confidence as well to hire people who bring skills you do not have and who are good enough to challenge you, your initial management team, and your assumptions as the business and organization evolves. Insecure leaders cover up their own sense of inadequacy by requiring sovereignty over the people they hire. They do not want anyone to show them up. Executives who are defending or hiding their vulnerabilities frequently fire employees. The initial result is constant turnover, which brings its own set of problems. Eventually, these executives succeed in surrounding themselves with people whose skills and temperament make them comfortable, the proverbial but still extant “yes men.” Having the skills to placate the boss is not the same thing as the skills to grow the company, which is what ought to actually please the boss. Hire people who are smarter than you. They will make you look good by exceeding expectations as a team.

Of course, identifying and then being able to hire high-quality people for your company is a challenge. Most executives focus on the wrong things. It is like your best friend asking you to find him a date. Your friend gives you a long list of preferred qualifications, but it really comes down to the men wanting a gorgeous babe and the women wanting a good-looking hunk. The same holds true with companies seeking job candidates. The company always has a long list of abilities that the candidate should embody, but in the end they want … Cindy Crawford or Richard Gere. (Who, as I recall, did not do well as a team.) In other words, companies tend to want the best presentation, the candidate who is the most impressive, rather than the one who is most capable of filling the position. Without intending to, they treat the external or “cosmetic” features of candidates as the primary criteria. Hey, this guy went to an Ivy League school. Hey, that gal worked for a Fortune 500 company. Employees with these kinds of credentials earn the hiring manager and the senior management team bragging rights. The hire feels safe. The subconscious belief is, “If they don't work out, don't blame me.” Yet “resumés,” as I call highly credentialed people, often do not work out. They may look good on paper, but paper does not tell you what is in the heart.

An education from a fine school and work experience in a major corporation are assuredly good things, but ask hard questions: Why is the person from a Fortune 500 company available? Is a senior person from a major company the right profile anyway? What if the individual expects the kind of resources and support available to a Fortune 500 company when you are struggling to make your first million dollars? Different companies have different needs depending on who they are and where they are in their stages of growth. Your candidate might be perfect if he or she has a small company background as well as a large company or is free of the rigor mortis that sometimes comes from corporate work. Some individuals become so entrenched in their old ways of doing business that they continue to do whatever they have done up to this point to move up the corporate ladder. They just do not comprehend the change in work context or speed that comes with the environment of a smaller firm. They may want to accept your company's working circumstances and its values, but they just cannot. I know of a great “strategy” guy who joined a company that also needed him to execute tactics. He never engaged. He actually said, “Tactics are beneath me.” To me, this was his insecurity speaking, not his superior abilities. He did not last long.

Making the right hire is not about resumés or pedigree. It is about the personal values and abilities of the person. It is about finding a person whose values, abilities, and goals are aligned to the right job and to the brand, values, culture, actual job requirements, and growth plans of the company. You need individuals who are sufficiently in touch with themselves that they are open to accepting the culture and the values and beliefs of your company. If you find a person who has the combination of terrific experience and humanity (an ability to listen, to be open to learning, to participating in your culture), then you have picked the right person to complement your management team. You should look hard for evidence that this person is a team player, someone who can work within a structure and is happy to use conventional approaches when they work. Tradition is a good thing when it represents the distillation of hard-earned experience about how to get things done. At the same time, your hire needs to be irreverent enough to challenge the status quo—a dish breaker but not an anarchist. It does not hurt to have at least one of your core team with experience in high-growth enterprises, either. When you hire good people, you will find that they are harder on themselves than you are on them.

Two instances from the major expansion of Starbucks in the Southeast illustrate the importance of hiring heart over resumé. One hire was a senior real estate person who had extensive corporate background with a major retail chain. He knew real estate strategy, he understood the problems related to opening stores promptly, he had a good grasp of financials, and he presented well in the interview. We soon learned that he was very good at quantitative analysis: Put numbers in front of him and he could pick the right site in an instant. However, he could not do a qualitative evaluation. He had trouble developing a feeling for the romance of the Starbucks brand positioning and how it related to selecting new store locations. Faced with evaluating the aesthetic attributes of competing locations, he looped into analysis paralysis. He could not make a decision. In contrast, another individual who came aboard at the same time had little corporate experience. However, he had worked on the brokerage side for several retail rollouts throughout the Southeast. Brokers have to get deals done in order for them to get paid, and I wanted to build our real estate group with such aggressive personalities. This person's natural sensitivity to Starbucks brand positioning led him to rapidly find prime locations that properly presented the company to the public. This person, a perfect example of hiring attitude over experience, remains one of the best hiring decisions I ever made.

Also, the most effective people are not hot dogs. Jim Collins's latest book, Good to Great, identifies 11 companies in a variety of industries that have gone from average to great by objective financial measures. Collins discovered a number of common traits among these highly successful firms. One of the traits is that not a single company of the 11 had “rock star” leaders, larger-than-life characters who enjoyed the limelight. The finding should not be surprising. If company attention is focused on boosting the CEO or other senior managers, it takes attention off the customer. The same rule applies to every team at every level in the company. Ask yourself, “Did this person become a star at the expense of others or to the detriment of his or her team, or did this person become a star because of the great team he or she created?” The most effective people at every level focus on the results at hand, and they make those around them look better.

Personal interviews represent the best opportunity to find out what really matters about someone, but most experienced businesspeople are well prepared for interviews. They offer crisp, compelling, credible answers to all the toughest questions. To really learn about the person, you need to talk about less formal matters. My friend Mark Jaffe likes to say that a candidate interview is like the first session with a psychotherapist, with one difference: You get important personal information from them, but do not have the responsibility to make them feel better! As I do with potential clients, I ask prospective employees about their family, their parents, who they were in high school, what books matter to them. None of this data is particularly important in isolation. What matters is your listening to the voice when people talk about unrehearsed things. Their response to questions that have “feeling content”—about family, for instance—often reveal the most. Note that “reveal” means the person's values and psychological state, not marital or parental status or other personal matters that are inappropriate, as well as illegal, to ask applicants.

Looking for the heart of a person is not the same thing as hiring only with the heart. My biggest hiring error came when a classmate from grade school connected with me again in a job application. I was so enthralled to be hooked up with a childhood friend that I hired him quickly. He was qualified for the job, but I did not do enough due diligence as to whether he was the right fit with my team. His ultimate termination was painful for both of us. The learning from that experience is that I should have first determined objectively whether by training and experience my friend was the right candidate before allowing myself to respond on an emotional level, or I should have let others in the company do more of the initial evaluation and screening about his fit with our team and the company before I became involved.

As a strategic plan defines success for market penetration or sales growth and a personnel review defines success in terms of the person's necessary achievements, the job description for new positions should describe not just the responsibilities but the results you require. Defining success will help crystallize the type of person you really need. Who has done this thing before and what does this “thing” mean? What kinds of skills do people in this role really need to be successful? A company that is struggling may not need someone with experience in the same industry. The company may need an expert in turnarounds. When IBM went outside the company—and outside the technical field—to hire Lou Gerstner in the 1990s, a lot of people wondered about the move. Yet Gerstner knew how to work the organization from the inside and how to instill confidence in customers on the outside. He led the technology company to a major rebound within just a few years of taking the helm. Before joining Musicland, Eric Weisman was CEO of Alliance Entertainment Corporation (AEC), a provider of business-to-business infrastructure services for home entertainment products. Paul Pressler, who led the resurgence of Gap Inc.'s brands (the Gap, Banana Republic, and Old Navy), had a 15-year career at Disney, where his major responsibility was running the company's theme parks (although he did have charge of Disney stores at the end).

Certain skills and qualities transcend particular industries, and it is often these traits that establish the right fit. Judging talent requires you develop with an eye toward promise and potential as much as to past performance. Personally, I have not always been the most qualified person for a job—at least on paper—so perhaps that is why I look for other attributes when I am in a position to hire. But I have always had related work experiences that other applicants have not had, and I try to bring a lot of energy and leadership to the game. For these reasons, I tend to look for focused energy and for what I call “utility players”—a sports term meaning athletes who can play a number of positions. Given the choice between a person with a good but single set of skills and a person with a variety of skills and the right kind of attitude, I will almost always go for the person with the widest range of talent. Such people have already demonstrated the greater potential for learning new skills. Looking to hire the person with the best skill set rather than the person who best matches the job description is another way of getting beyond the resumé and evaluating the person's fundamental temperament and abilities.

Consider an example involving store operators, the heart and soul of a retail company. Suppose that you have found a person who by all appearances has the skills to manage your newest store. Through personal interviews and reference checks, you learn that the person has shown consistently good results, has been diligent in merchandising, and has shown a solid tactical understanding of financial matters. At the same time, you come to realize that the person has not shown any kind of creative flair for merchandising, does not have a great grasp of the strategic implications of finance, and has a reputation for being so hands-on that subordinates demonstrate little growth of their own. Another applicant for the job is an assistant manager who has worked in several related fields, shows a gift for marketing, and has great personal financial and personal skills, a definite “up-and-comer.”

If the opening is for a store that has suffered from inconsistent leader ship, then the first candidate, someone who is great at blocking and tackling and will likely be around for a long time, may be the correct hire. This choice of hiring the best “position player” becomes clearer if there will be few opportunities for other management positions and candidate Number Two might ultimately feel stifled in that position. If, on the other hand, you see this hire as being a linchpin in your future growth, as someone who will rapidly rise from managing a store to managing other store operators, or who will be able to jump into any number of other roles—then candidate Number Two is the better hire, unquestionably.

Part of the evaluation process, then, is to match a person's talents and achievements with his or her ability to work effectively in a new context. This is more than switching from chocolate to strawberry. This is about tapping into what your new hires will be able to do next in their careers.

Of course, evaluating people is a very tricky thing. Some executives acquire a talent for it and some do not. Finding the right candidate has less to do with identifying ideal criteria than with the hiring executive developing a high degree of self-awareness, an ability to take careful stock and inventory of what you as an executive and the organization as a whole have to offer. The best way to recruit high-caliber people is to have a compelling story to tell about your company. Try to understand why the perfect person wants to do this particular job for you. Granted, telling the story is not easy. Hiring top executives by yourself is like doing psychology on yourself. Most people do not have the right discipline or honest self-image to realistically articulate what they have to offer. They cannot provide an honest and compelling argument for why a high-caliber player would want to work for them. If you are finding it difficult to locate the right person or have had a string of poor hires, consider hiring a third party, an executive recruiter, to assist. A good headhunter will help you identify your assets, help you find real as opposed to ideal candidates, and ensure that you articulate your story credibly.

With recruitment, take as much time as humanly possible. Do more than check references. Your potential hire has worked for somebody. Somebody has worked for him or her. Find someone who actually knows the person. (What clinched the decision for the great hire in the Southeast were the glowing recommendations from colleagues who knew him.) No matter how desperate, do not hire just to fill a slot. No manager has ever ended up happy after “settling” for someone to hire. A poor employee will cost you far more energy and pain than you will ever spend covering an open position.

Once hired, new employees need to be inculcated into the core values and beliefs of the company. This is an important principle I learned from Howard at Starbucks. He called it “imprinting people with our DNA.” Every hire, at every level, went through extensive training about the company's mindset as well as about its processes. Every hire, at every level, served as a barista working in a store to experience the nature of the company's customer service. Toyota has a similar indoctrination process—engineers and managers are expected to get their hands dirty learning about cars—and also talks about imprinting people with corporate DNA. I am shocked at how little attention some retailers pay to the importance of instilling their culture into new employees. More than once I have talked with a company that is about to open a new store and have inquired about training for the new manager. “Oh, we hired a great person from the Gap,” the owner will say. “She has a lot of experience. We believe in her. She'll start at the new store.”

“You're going to bring in someone to manage your new store who has never been in either of your first two stores? Someone who has not been with the company long enough to know its history?”

“I'll spend half my time over there the first couple of weeks,” the owner will invariably respond. “It will be fine.”

If the manager is good, it may be fine from an efficiency standpoint, at least in the short term. But what about values, beliefs, mission, attitude toward customers, attitude toward employees? How will the manager, out there by herself, ever feel a personal connection to or loyalty with the rest of the company? If she has no feel for the people in senior management and how they make decisions, how will she have any sense of what decisions to make on her own and what decisions to refer to headquarters?

Although some people mortgage their houses or drain their life savings to start a business, this is rarely the best approach. You will invest a lot of your money regardless and contribute a great deal more in “sweat equity,” but putting all of the risk on yourself and your family is too stressful a way to begin. A good concept should find support from some kind of investor, even if it takes time to identify the right one. Therefore the right investor group is very nearly as important as the right management team.

Individual investors may include friends and family. The primary investor in Blue C Sushi is a longtime friend and former colleague of James and Steve. Friends and family are often the most patient investors but can also be the least likely to understand the word “risk” if the investment fails completely. “Angel investors” are individuals who invest either individually or collectively in a company in its very earliest stages. Another source of funds is known affectionately among fund raisers as “DDM,” or “dumb doctor money.” It comes from private wealthy individuals—doctors, lawyers, software moguls, and other professionals—who invest to diversify their portfolios. DDM investors are likely to be interested in your idea but bring no real expertise, whereas angel investors will usually offer business expertise and expect to have a seat on the board. Individual investors were the source for investment money when Howard Schultz was first trying to create a retail coffee business. He found them by going to his friends and to every financially successful person he could find in greater Seattle. Of the 242 people he asked to invest, 217 said no. But the 25 who said yes were enough to launch him on his way. (I was one of the 25, a very modest investor.)

Best known among institutional investors are venture capitalists (VCs), who usually come in once a company has proven its concept and needs money to rapidly expand. VCs normally want one or more board seats and expect to see a return on their investment in three to five years. As opposed to DDMs, VCs take an active role in guiding and growing the company. VCs see their return when the company goes public or when the company sells for a profit to another company or investment group. VCs can be aggressive to the point of ruthlessness, or they can be the best partners a company could ever want. Other institutional investors prefer to be silent partners, relying on the expertise of the founders for the business to succeed. Other institutional investors are more comfortable with mid-term investments, when the company is well on the way and relatively low risk; for example, when you fund your second round of expansion rather than your first. Institutional investors include a number of merger and acquisition (M&A) funds active in the United States at any moment. Some specialize in certain categories such as food service; others are involved in a variety of retail businesses. Investment bankers are another source of capital; they may not invest directly but their business is putting together deals among interested parties. The original Potbelly Sandwich stores were so successful that Bryant Keil had institutional investors knocking on his door. One of the companies was Maveron, a venture capital firm whose principals are Dan Levitan, a former investment banker, and Howard Schultz. This was 20 years after Howard's first foray into the investment world, and now he was dispensing funds rather than soliciting them. Bryant funded his first outside round primarily through Maveron and a second round through Maveron, Oak Investments, and Benchmark Capital, all nationally recognized venture firms.

At the local or national level, you will find that the investment community is relatively close knit. Many of the players have done deals together in the past, and they talk all the time. Sometimes the conversation is on the order of, “I found this. Are you interested and do you want to take a portion of the round?” Other times, the conversation is more along the lines of, “If you're interested, I might jump in, too.” An “angel network” is expressly designed to engage a variety of individual investors. Potential investors are easy to find. Ask your banker or investment advisor or friends in the financial community. Read the local and national business journals. Find out who is investing in what kinds of enterprises. An Internet search on the names of any of the VC firms listed here will lead you to dozens of Web sites related to venture capital and investments, including Hoover's Online and InsiderVC.com, both of which offer information about venture companies. (Hoover and InsiderVC offer some analysis free and some for a fee.) Eventually, you will find a connection that will enable you to work through the proper investor network, local or national, individual or institutional.

Entering into a relationship with an investor has the same potential for happiness or disappointment that any other marriage has. However much you need an infusion of cash, do not fall for the first sweet- talking suitor. Investors have their own goals and objectives—not to mention personal agendas—that may or may not align with yours. Howard's sweep of the Seattle financial community almost cost him Starbucks before he had even bought it when one of his own investors tried to maneuver the deal out from under him. (The ploy failed.) Stealing a deal from someone else at the eleventh hour is called “gazumping” in England. I like the word because “gazumped” expresses the feeling of having the wind knocked out of you. Getting “gazumped” happens more often in business than you might imagine. Recently I sought to invest in a company, which brought in a consultant to review my offer in light of the company's somewhat tangled financial situation. The consultant ended up lending the company money, a bit at a time, until he had effectively cornered the remaining security available to a new investor.

While a potential investor is doing due diligence on your company, you should be doing due diligence on the investor. Generally, a retail start-up needs a long-term investor. Do not sign up with a VC who specializes in “quick flips” and then be outraged when he wants to take his money and run in 2 to 3 years.

Just as you would with potential employees, determine whether your values and mission resonate with investors, or whether their eyes glaze over when you talk about anything except the bottom line. Evaluate what they bring beyond their money. They should have contacts in the vendor community or be able to bring in other investors or recommend potential senior management members. Do not overlook the human element. Can you enjoy time spent with the investors over coffee or a beer? Do they laugh at your jokes? If you were in town and did not have business with them, would you call them just to say hello? Business is hard enough without a clash of personal styles. Find people you like to work with. Most important, try to assess whether the investor is the kind of person that you can make money with—the kind of person who will be happy for you and your success. There are many people with lots of money who, deep down, do not want to see other people be successful. Unless you can find the right person, you are better off scratching along by yourself.

Due diligence into potential investors includes an evaluation of their previous deals. Deals that failed are more important to understand than deals that succeeded. Did a deal fail because of bad luck, unfortunate timing, or a disparity of goals? Did recipients of previous investments find the experience to be a good one? It is fun to be an investor when times are good. You put money in, more money comes back. The test is when times are bad. In doing his research, Bryant's good feeling about one institutional investor was confirmed when he learned that during a particularly bad time for another company, one of the investors had dug into his own personal pockets to save the business, which ultimately became very successful. That action speaks to a human commitment as well as to an alignment of business objectives.

A mismatch between the mindsets of the founders and the investors, on the other hand, can lead to catastrophe. I once sat on the board of a fast-casual restaurant. Two VCs were eager to get on the bandwagon for one of the hottest new food concepts of the year. Needing more funds for expansion, the founders went several times to the VCs, who eventually took control of the board. One by one the founders were asked to leave. To placate the VCs on various issues, the management team had to divert more and more time and energy away from the business. Based on a pledge by one VC to invest more money in the next round of financing, management made commitments on leases and construction to continue expanding. When it came time for the VC to deposit his funds, he backed out. The dot-com industry was in a steep dive, and losses in that industry forced him to reassess all his investments. In short, he lost confidence. His need to reduce his own risk led to the company being dumped at fire-sale prices—despite having a good chance to achieve profitability in the near term.

This example demonstrates that the structure of any deal should leave the retailer in control of the company. Unless it is a last resort, be in position to control your own destiny. Moreover, be sure to raise enough money in the first round of financing to sustain the company for a reasonable time. Think in terms of enough money to operate one store for several years or to open several stores within a reasonable period of time. The last thing anyone needs when starting up a company is to worry whether the money will last long enough to get off the ground! Investors should support this goal. Do not let anyone talk you into starting out with less money than you need. (Most beginning retailers underestimate their cash needs, sometimes by as much as half.) The only reason for investors to offer less than the minimum is to ensure that you will come back later when your needs are more critical and your leverage is diminished and they can foist terms upon you that are more advantageous to them. To state the obvious, this is a poor way to start a new relationship.

Many times potential investors will have experience investing in a variety of retail businesses. Their background here is one of the values they bring. However, beware of someone with an investment in a direct competitor. As above, the investor may make choices in favor of their other investment. Although most investors are professional enough to “compartmentalize” competitive information, in the worst case they might glean the sweet spot from your new concept and attempt to knock it off.

Finally, the investment documents should adequately describe the next steps financially if the business does not meet its financial goals. The contract should describe under what circumstances and under what terms one party can buy out the other. The document should describe the disposition of assets in case of dissolution. There are myriad control mechanisms that you could put in an agreement. Seek legal advice.

Investors come in many shapes and sizes. You need to find one that is a perfect fit for you. The best way is to ensure that their motivations are totally aligned with yours; that is, that both of you are building for the long term or both of you agree on a goal of selling in an agreed upon number of years. Make sure the human connection is there. In Asian cultures, it takes a long time to reach agreement on a contract. The reason is that both parties want to get to know one another. In America, we tend to rush into contractual relationships, assuming that the written word will protect us and we will develop the relationship as we go. Take the time to develop a personal bond with your partners. A contract should ratify the relationship. It should not be the relationship.

Last but by no means least, if you ever get a funny feeling about a potential investor, run for the hills. If your gut instinct tells you that something does not feel right, listen to it!

Making the right decision about the senior management team and investors is an example of what software designers call “early binding decisions”—decisions that determine many of the characteristics of the system, such as its fundamental organization and logic flow. The quality of the initial management team directly relates to a company's ability to race ahead in the market. Sometimes retail start-ups err by spending the wrong kind of money ahead of the curve—ahead of the actual need. Retailers do this when they obtain more office space than needed or fill too many staff positions before the revenue can justify the positions. To go long, however, you must always hire ahead of the curve when it comes to the people who will make the decisions that will drive growth. They will have the background to make the right decisions about when and where to invest money and when and where not to. Unless they are “silent” by contractual agreement, investors should also bring business experience and business contacts that flesh out your organization. Good early hires and good investment partners can help a fledgling retailer eliminate costly mistakes of all kinds. Eradicating even a single error of omission or commission in the first phase of a company's life can save many months of time and millions of dollars later on. More than eliminating mistakes, having the right management team and critical partners in place from the start propels the company positively into the market and provides the best way in which to establish the retail brand. Having a comprehensive set of the proper skills provides the company with the best opportunity to succeed in its retail category. In addition, creating a leadership team that shares the same personal and corporate values and is strongly committed to the corporate mission ensures that the right corporate DNA will take hold in the organization as it grows and evolves. The combination of skills and values will lead to a culture that perpetuates and extends the company values as the business grows. Establishing the human framework, as described in this chapter, will enable your company to score big by giving it the personnel and mindset to “go long.”