I wrote about the importance of doing fundamental research in an earlier post.
The summary of the post is that, in order to outperform the market, you need to develop your own view about specific investment opportunities. If you rely instead on the thoughts and social signal sent by other investors, you will at best get market returns. To outperform the market, you need to evaluate the source material (team, market, product, …) yourself and come up with informed views based on this source material.
The same reasoning applies for talent. Evaluating a candidate consists of two things. The first is your own evaluation and the second is the external evaluation which results from the candidate’s formal background and reference checks of people who have worked with the candidate. Both should be part of your process. However, you should weight your own evaluation more heavily.
The reason is that the external evaluation in the form of the candidate’s formal background and reference checks is accessible to everyone. As a result, this information will already be baked into the cost of working with the candidate. You’ll be paying the market price for whatever you think you’re getting.
This approach is available to you if you can afford to pay the market price, so it might work if you’re a market leading company with significant resources. But it’s not how great startups are built.
Great startups are built by recruiting candidates who the market undervalues. This requires knowing the market value which results from the candidate’s formal background and references, having an insight as to the candidate’s actual value from your own evaluation, and having the conviction to bet on someone where the latter exceeds the former.