Rising Need and Costs of Capital, Talent, and Growth





Transcript below, for those of you who prefer reading over listening!


I think this conversation is going to be helpful to a lot of the leaders out there who feel like something is different right now, who feel like they’re operating in tighter constraints, but who may not be able to describe what’s going on from a macroeconomic perspective and why this feels different. You’ve been speaking to a lot of our clients and helping them make sense of their context and what has shifted. Why don’t you share what those conversations have been like? What are your observations and how are you helping founders, CEOs, and investors make sense of what is different from the last decade and decades before?


The first thing I tell people is: You’re not crazy. It is different. This is a very different point in time. There are different factors going on and you as a CEO, founder, executive are under unique pressures with a unique set of constraints. There are going to be some people who are going to get lucky, and they’re going to navigate that well; and there are going to be some people who are purposeful and skilled and navigate that well; and most people are going to get really damaged by it. 

Because whenever any human being is confronted with something that’s completely novel, regardless of whether that causes fear or excitement, we don’t really have a playbook for navigating it. And right now, there is no playbook. Take it from me. I was an entrepreneur in 1987 when the stock market completely decimated itself. I was a CEO during the tech wreck. I was in big companies during the great recession. I was a CEO during the pandemic. I’ve been through a large number of these things, and it’s very easy for someone who’s been through many of these to say, oh this is pretty similar, it’s an economic downturn. But the more I’ve talked to my clients and investors, the more I’ve talked in public, the more I’ve come to realize that there’s a unique confluence of things that make this a uniquely challenging moment.

So the first thing I say is, you’re not crazy, this is really bad. This is really tough, and it’s unlikely to get easier anytime soon. In addition to my client conversations, I’m listening to our partners and coaches who work with hundreds of leaders and companies. And I’m starting to figure out the template for understanding this moment – how we can make sense of what’s unique about this moment and what we can do about it. 

So I’m incredibly excited about this topic because I hope it can give some productive sensemaking to the people we care about – the people out there trying to create great companies – and help them understand that there’s a path forward even though there’s no real playbook. There’s a method of navigating super confusing, incredibly constrained times, and winning. There’s a method for doing that, which of course is something that we believe we’re expert in, and I’m just very excited about this topic.


I’m glad to hear it. You compared the moment we’re in now to prior upheavals and downturns. You described this as different. Can you give us a sense of what you’re seeing as different.


Talentism is framework and first principles driven in our thinking. So I want to start with defining some terms because I think this could be more helpful to navigate. We talk a lot about confusion and why confusion is a big deal at any point, but especially if you’re in a high-growth or fast-change environment. Confusion is endemic. It’s inevitable, and you either can deal with that effectively and turn it into clarity, or you can be consumed by it. We’ve talked about that in the past, but what’s important to understand about confusion for what we’re about to talk about is that confusion starts with expectation. Almost all of the leaders that we work with have built a set of unconscious expectations over the last 15 years. That’s by and large the period of time in which most of the companies we are working with were started, or where a change of ownership of control occurred, such as in a private equity context, that really reset the clock on the business and brought a new strategic focus and leadership. 

It’s important to understand that post-2008, the government’s efforts to deal with the pain of the Great Recession have led to an extremely cheap capital environment. Howard Marks at Oaktree Capital did an incredibly good job of sort of piecing this apart in his essay. People far smarter than me have done a good job of this. But it’s important to understand that everyday we experience things, and those experiences unconsciously go to form mental models, and then we start believing that the future will be like the past. This is the form of expectation. And when the future isn’t the same as the past, we become confused, and confusion and uncertainty are a big part of cost, which we’ll talk about next. This confusion is a call for leaders to step back and say, wow I really have been in a cheap capital, relatively stable environment over most of the length of my business – pandemic aside – and that formed expectations which are no longer productive, they just don’t help me deal with my reality. 

The second thing I want to talk about is cost. Things like cost of capital and cost of growth and cost of talent. When I say cost, I don’t mean price. This is a common cognitive bias and heuristic problem in the human mind. To illustrate the difference between cost and price, let’s say I have two vendors I’m working with. One vendor charges $20 an hour and the other vendor charges $100 an hour. So we’ll call them 20 and 100. I’ve given them both the same goal. It takes me a couple hours to get in sync with 20, getting them adjusted, and then they take 10 hours to do the work, and another 10 hours to iterate on that work because it really wasn’t that good, then it takes another 10 hours for them to redo the work. Eventually, you’re in the 50-hour range of total work to achieve that goal – $1000 to get that work done. 100 is highly expert in what they do, they take a couple of minutes to get in sync with you, and after 2 hours they produce something that’s really good. You just have to tweak it a little bit more, they put in another hour and then you’re done. $300 versus $1000 is the cost.

It’s not only the total capital required to achieve that goal, it’s also all the time you have to put in to make that work. Lower price items often have higher costs than higher cost items. This is important to understand because the human mind loves shiny objects – and price is a shiny object – and so we constantly in the midst of efficiency, in the midst of all these things that we’re trying to deal with (capital constraints etc.), we tend to look at price not cost. That kills businesses. You have cost constraints, not price constraints. So I want to talk about confusion and cost. 

In businesses we work with, there are three big pillars that we find that CEOs are dealing with: Capital, Talent, and Growth. I want to talk about the cost of each – and why confusion and uncertainty are at the core of those costs. And why the combination of those three things – the higher cost of Capital, higher cost of Talent, and higher cost of Growth  – combines into a really unique period of time for leaders to be working out of.

Cost of Capital. Anybody trying to raise an equity round, trying to get leverage for their PE business, or trying to access debt, knows that the capital markets are mostly frozen. Especially for riskier ventures like venture capital or highly-leveraged private equity. Everybody’s experiencing that. This is a problem because a lot of the companies that we work with have gotten used to solving Talent and Growth problems with cheap capital. That has been the template they’ve used to grow and to attract talent. When cheap capital goes away, they don’t have great tools at their disposal to deal with growth and talent. In most economic downturns, one or the other of those becomes something you don’t have to deal with. For instance, if talent is demanding higher salaries and then there is an economic downturn, typically those calls for higher salaries go away. So the cost of talent tends to go down. But we’re not seeing that. So far the layoffs and those kinds of economic activities have led to a loosening of the talent markets. In fact, what you’re still seeing is a great deal of compression at the top of the talent markets for people who have the right pedigrees or the right experience or brand. Those people continue to demand not only higher wages, but are able to dictate the terms of their employment, which is a first. So we’ll talk about that in cost of Talent. 

In cost of capital, when capital becomes more expensive, you lose it as a lever to solve talent and growth problems. And capital is more expensive. Not only because it literally is more expensive – to buy a dollar now costs more than it did two years ago – but also because of the degree of uncertainty in the expectations around that capital. The people we work with got used to using cheap capital to solve difficult talent and growth problems. The way this looked internally to Talentism – we gather a lot of data and work with a lot of companies – is there was endemic confusion inside fast-growth, big-change organizations. And that confusion – rather than being dealt with through effective management – was dealt with through over-hiring and overspending, which we call waste. Any allocation of capital should either produce a beneficial result to a key stakeholder above the cost of that capital, or learning that enables a better result in the future. Waste is where you get neither good results nor learning. You’re just throwing money at a problem and it isn’t getting any better.

We saw cheap capital funding a lot of waste, and that was acceptable because that thing would keep rolling forward until the key stakeholders could exit and hand off that problem to somebody else. And so the founder could get out of the company doing very well for themselves before the stock market crashed or whatever. There wasn’t a great deal of incentive at any point in the system to operate looking at waste, or staring at how do we increase productivity or efficiency, But with inflation and then the inevitable rise of the cost of capital as well as the uncertainty in the capital markets, the cost of capital has gone up, the uncertainty around access to that capital has gone up. 

With our private equity clients, we’re hearing, I used to be 2x, 3x levered and that was a way that we would think about how to run our business. You’d never want to be 6x levered because just the cost of servicing that debt would destroy your company. But all of a sudden, being 2x to 3x levered is the same exact cost as being 6x levered two years ago. So we’re now completely constrained by our capital servicing. 

And then in startups what you saw was, as long as we get to MVP, or some level of market acceptance or some growth, it really doesn’t matter that we’re burning a ton of cash. We’ll go in and say we need enough money to get through 2 years of burn to get to the next level. But if we only had that cash last a year – which was pretty inevitable, like say one thing to the venture community and underdeliver on that – if it only lasts a year, that’s okay because the capital markets are cheap and they’re easy and I can go back and get it. There’s certainty in how to access capital, there’s certainty around the cost of that capital, and that enables me to mostly be blind to other costs.

The cost of capital has changed. That’s a fundamental driver of business decision making. I understand that personally as CEO of a fast-growth business. Cost of Capital lives with me every day and it’s a critical component of how I think about running the business. And for the hundreds of clients we work with, it’s a critical component of how they think about it. 


I just want to make sure that those who are following along are building the model in their head that you’re laying out for us. You’re giving us a model to understand what we’re experiencing. The 3 levers in the model I’ve heard you articulate are: (1) Cost of Capital, which has felt relatively cheap to most people who are currently running earlier, growth stage businesses that have been started in the last 15 years or so. (2) Cost of Growth and what it takes to drive growth for a business. (3) Cost of Talent, which is changing not only because salaries are going up, but the way that the talent can dictate the terms on which they operate with the organization is changing as well. So the mindset around these three things is something that is new and requires adaptation. So I just want to make sure folks are kind of building along with you as you go.


Perfect. That was beautiful. That’s why you’re the best. Yes, that’s exactly what I’m saying.

Let’s go to the cost of talent, because I think this area has been fundamentally disrupted. I think Elon Musk has become the patron saint of the past. People are surprised when I say that, but what Elon is demonstrating with his Twitter adventures is that a dictatorial control mechanism that treats talent like trash can succeed. Everybody’s watching that. I’ve talked to so many CEOs that are watching that because they’re like, I hope he succeeds because I’ve got that playbook – I know how to treat talent like trash. I know how to do these things, not because I think it’s right or wrong, but because every day is really tough and I’ve got that playbook. This situation I’m experiencing instead where I can’t afford to lose my best people, and my best people are way out of sync with me about what they want from work… It would be so nice and so comfortable to get back to the old days where I didn’t have to give a shit about what they cared about, and now I have to. So this has been a fundamental disruption and everybody’s hoping that Elon and Mark and all these people can demonstrate that there’s just been this weird pandemic blip. And it’s just a weird gen z intersection with the pandemic and lots of cheap capital that makes people all silly and crazy, and they think they actually have a voice and know what they’re talking about, but they don’t. And now the control is going to come back to me. 

It’s undeniable that if we head into an economic downturn that people will be more concerned about their pocketbook and they’ll probably be willing to go backwards somewhat to deal with endemic, terrible management and endemic, terrible leadership. They’ll probably be willing to do that, no matter how awful it is for the company and no matter how ineffective it is as a business proposition in today’s world. 

But there’s a great deal of the population that I think is fundamentally reset and they won’t be willing to. You see this in the labor statistics. Where you’re seeing labor economists really struggle to understand where the hell did the workers go. There isn’t an easy diagnosis for why people in a tight labor market aren’t returning to work. 

My opinion is it’s because a lot of people are not up for that grand bargain anymore. The grand bargain between managers and employees is that managers will provide an opportunity for labor, and that opportunity for paid work will be consistent and secure, and labor is going to show up. And they’re not really going to worry about what they’re good at, what they care about, their values, or any of that stuff. They’re going to say, hey look I’m willing to give up my autonomy, my sense of purpose, and my sense of mastery in order to participate in this grand bargain. Because you’re going to give me a really stable, lifelong job, and that’s going to be great. Even though that lifelong bargain got busted in the 80s and hasn’t really been around since then, it’s still a key part of how we think about labor economics and labor relations in the United States – that the employer is offering up something big, meaningful, and stable, and therefore the employee or labor is willing to give up stuff of great meaning to them in order to have that.

That all got blown up in the 80s. And it is more so true now than ever – I don’t know of any employer who feels they can afford (this isn’t a bad people thing) to make a lifelong guarantee to an employee. They don’t feel they can afford that because they are competing in a world where their competitors aren’t offering that, and are able to move – they feel – faster as a result. Every employer Talentism works with no longer even entertains the lifelong security thing. That’s a relic like dinosaurs, because if I was to do that, I would be screwed, I wouldn’t be competitive. I think if you talk to them even more, they’d say, the people who are really hot in this job market would never want that anyway. Even if I could say, give up your purpose, autonomy, and mastery, and I’ll give you lifelong work as an employee, they’d say no. There’s no amount of money you can give me that is making me willing to trade that. I have come to understand my sense of meaning and commitment to what the organization does, the products we produce, and the work value of my work, the ability for me to not live under a dictatorial regime of a completely incompetent manage, and the opportunity for me to improve at my work in my craft. I don’t think I have to go bankrupt in order to find a place that’ll give me that. 

By and large, they’re right. If they really care about that and they’ve got something to offer in this job market, employers are going to dance to that tune. So employers are really stuck because they keep wishing that they can revert back to the power dynamics of the past, and amongst the employees they’re most dependent on, they never will be able to get there. They’re never going to make that return. 

I talked to these employees and some of these really big employers that are depending on this – the Metas and Googles and Facebooks and Teslas – and that they’re not buying it. They believe that the labor market will continue to be liquid even in a recession, and that they can basically set their own terms, not just in comp, but in the jobs they want to do, where they want to work from, the amount of time they want to put into that, the other priorities they want in their life, and the expectation of what that employer is going to stand up for in the marketplace, etc. 

So the cost of talent – not just comp but also the amount of attention you have to put as a leader into the talent equation – is very very high, and it’s never been this high before. Cost is the total loaded comp for the people I need to to achieve my growth and strategic objectives, times the amount of attention I have to put in as a leader to make sure that we’re building a place that these people want to come to, figuring out where they’re confused and helping them get better, structuring management so that people say, yeah I have the appropriate amount of autonomy, purpose alignment, and improvement. 

The amount of attention that goes into that is huge, and so I don’t think the cost of talent has ever been higher, and I don’t think that’s going away. It may go away in the aggregate or decrease a little bit in the aggregate at some levels. But in the people who are going to drive the technologies of the future, in the people who are the creatives, the people who have good synthesis, the excellent managers, the leaders who can envision a new world. They’re going to call the shots even at a downturn, and they aren’t going to choose to work for the old school dictatorial managers who believe that even though they aren’t offering security and all these things, they still get to be complete jerks. I think that world is gone, and so cost of talent is the second thing that I think is fundamentally adjusted.


You’ve walked us through systemic changes in cost of capital. So not only is capital more expensive but the reliability of access to capital is changing, right? So if I expected I would be able to raise on a certain timeline and because of being able to hit certain targets now that’s changing as well. Which means how I lever my business, what I can use capital to compensate for in my business – those things are changing on me.

You also talk about how the talent market is changing. Not only do we see things like wage growth, meaning that talent is more expensive, but the terms on which talent is willing to engage with leaders of organizations, what they’re willing to give up –  that’s changing as well too. 

So these are two critical parts of the model that you’re building for the people who are reading or listening along. There’s a third piece which is the cost of growth, or the way that driving growth is changing, so tell us what you’re seeing there.


Let’s go back to most startups (all the way from seed stage through going public) and private equity backed companies. Not the big I’m buying it for 50 billion kind of thing, but the I’m buying 150 to 200 million dollar asset. And basically in addition to the investor protecting themselves with solid financial engineering and good terms, they’re really depending on growth – either top line or bottom line – in order to try to improve valuation so they can make a good investment and get a good return on their investment. So in both those cases, since 2008 in the era of cheap capital, you’ve seen an approach to growth that has been very much about ‘let many flowers bloom and we’re just going to pick the biggest ones.’ In a large company, classically growth is hey, we’ve got these product lines that we know are way beyond product market fit. They’re product market leaders. And we know we can allocate some incremental innovation, some marketing push, maybe some partnership and things to juice the market. Like, we already know Tide’s good, but we can add Tide with super duper cleaner, and then we can make people understand how not being clean is terrible… There are levers we can move in order to move more product. 

But when you’re in a smaller company, the approach is hey, we’re going to try about 10 different things and 1 of them is going to work, so we’re going to try to get to MVP with a bunch of stuff. And we’re going to try to move from MVP to broader acceptance in a lot of different areas. Cheap capital fueled an ability to not have to choose or say no. There are 10 opportunities for growth. But I can only allocate attention and capital to one of them. So this is the horse I’m betting on, the other nine are dead. This has not been our experience. Our experience has been I got 10, I’m going to feed 10. I’m not going to feed 10 well, in other words I can probably capitalize 10, I’m not going to feed well 10 well with attention, I’m definitely not going to learn much based on those 10, I’m not going to feed those well with good leadership or management, but capital covers all those problems and makes them secondary and so that’s the way I’m going to do it.

In a capital constrained and now talent constrained environment because you’re starting to see, jeez, I as CEO can’t just take my “best person” and give them the 4 top priorities. They used to have 2 and now they have 4, and they just got to figure out how to be as successful as they were. The talent is saying, nope, you either pay me a ton more. or no thanks, I don’t need it. Given the talent and capital constraints, the cost of growth – by virtue of not having an adequate playbook, not having productive expectations, and also the amount of uncertainty in what is going to work when you can’t push these things through to MVP with just a ton of capital – has gone up substantially. 

The requirement for capital, talent, and growth has gone up as well. So there’s the requirement for those things and there’s the cost of those things which really forms the walls of the prison that most of the leaders we work with feel trapped within.

Because the walls are five feet thick and every time I try to chip through one, it just doesn’t end. I talk to more investors and I still don’t have capital, I try to demand people come back to work three days a week and my best people leave, I try to give the 10 growth projects to two people instead of five and then they say, no way. So they keep trying to chip through these things, and that’s why it feels like a prison. In the old playbook, I can afford to be wasteful in a lot of areas and still get growth. The waste doesn’t pay anymore. You just can’t cover. So you either have to have great learning or great success, and you need productivity to do either one of those. That’s why the cost of growth has gone up. 

These three factors intertwine with each other, and the cost of all three have gone up at the same time. What’s unique is that I don’t think there’s a point in modern commercial history where the demands and requirements of capital, talent, and growth have been as high and the costs have been as high at the same time. There isn’t a playbook here to turn to, you can’t just talk to an entrepreneur who made it through the tech wreck. I can tell you as an entrepreneur who went through the tech wreck that when the cost of capital went through the roof, nobody was expecting growth, and talent was real cheap – so you didn’t you didn’t have all three of these things at the same time.


And I want to take a moment and let the heft and severity of what you just said sink in. So we’re talking about these three interrelated factors: the cost of capital, the cost of talent, and what it takes to drive growth. You’re saying that not only are there systemic reasons where the cost of each of these things is higher, but that the demand for them – the requirement to be able to access capital, hire talent, and equip and enable them to do their best work, and to achieve growth – is at a peak as well. You’re describing this as sort of an unprecedented scenario – unprecedented in the working lifetimes of those that we’re working with at Talentism. 

So give us a bit of the “so what?” Help us with, what does this feel like as an executive? If you have anecdotes to share of how might somebody listening interpret what this means for the decisions that they’re having to make, and the tradeoffs that they’re facing… Just situate us in what it’s actually like to be dealing with these compounded constraints.


I was talking to a client last week – I’m talking to them every couple of weeks, both as a partner for their business as well as their coach. And I think this was a pretty typical conversation for a Series C Series D company. I was asking the CEO to navigate me through his day. 

He said: I’ve taken control, every wreck, every new hire, every expense above $5000 has to be approved by me. So that’s a big part of my day, just trying to scare people to not spend money.

I said: Okay, and what else are you doing? 

He said: I’m trying to force our managers to be very harsh in identifying their underperformers, and get rid of them and then take the work that’s left behind and give it to the top performers. 

I said: Okay, and then what else? 

He said: I’m trying to keep our top performers excited, and so every day some person that’s mission critical to this business messages me or comes by the office and says, I’m just telling you I’m thinking of leaving. And then I have to spend the next hour telling them how bright the future is and all that kind of stuff.

And I said: Is that working? Are they sticking around? 

He said: I don’t know, I don’t feel like they really trust me much anymore, to be honest I feel like they’re just listening patiently and trying to see what’s in it for them, because they’ve really lost faith in the vision and the leadership.

I said: Okay, what else?

He said: Well I’m trying to figure out how to find a bridge round, I’m out there talking a lot to our current investors about how we’ve reduced burn and all these things that they’re asking for. But it’s not going very well. They’ll take my meeting, which is good, because they’re not taking as many meetings as they used to and they’ll listen to me, but they’re sort of jaundiced about it, they’re not really excited about it.

So the felt experience of this CEO is this thing is falling apart and they’re trying to hold it together, and the way they’re holding it together is they’re taking control and playing cheerleader. Through the course of the conversation, 

I said: Okay well first of all, what does that feel like? 

He said: Feels terrible. Frankly I would love to find a successor.  I hate my job. 

I said: Okay, that makes a lot of sense. 

I heard that a lot in the pandemic. You see that a lot in the data. Lot of founders leaving – founders are both investors and managers and they’re also talent, right? And so they’re on all sides of that equation, and the talent part of them is like, I’m working my ass off for other people i.e. investors, I’ve been completely diluted on the cap table because I was in this cheap capital heyday, so I don’t have very much of this company. I’m working my ass off in an impossible situation, I hate my job. 

This CEO said: That’s consistent with what I hear. 

I said: So what parts of that work make sense to you?

He said: All of it makes sense – in other words, like I think I’m doing what needs to be done, but none of it’s working. In other words, I want to scare people out of spending money.

I said: Alright, I think that’s a terrible way to achieve the goal of increasing productivity, but let’s just go with it for a second. Why is scaring people not working? 

He said: Because they’re figuring out ways to hide the spend from me. 

I said: Okay, that’s what human beings do. 

I often tell the super puppy story. One of my favorite human behavior books is Super Puppy. People are always so insulted when I say this, but Super Puppy is this little manual about how to raise a great puppy. And if you want the simple template for human behavior, read it. One of the things it talks about is, when raising your puppy, the conventional wisdom is if they make a mess on the floor you drag them over to the mess and you scold them. Because you want them to associate pain and fear with that event. You want them to stop that and go outside. But what happens is the puppy gets really good at figuring out how to make a mess where you don’t find it. They’re not getting good at going outside where you want them to go, they’re getting good at hiding from you. Because they’re not thinking at the level of, oh I get it, I made a mistake, and the big picture is everybody will be happier in the household if I go and do my business outside. The puppy is having a fear-based reaction – which the owner is creating – of oh, I get it, I have to figure out how not to have this guy be pissed. So, in human terms, when you start making people afraid of spending money, they figure out other paths to waste. They don’t get more effective or efficient. They just burn extra time or capital that they already have access to or whatever in other ways. Productivity drops dramatically. So I went through that logic with him and he said, yeah makes sense. And we went through each of his approaches and why it felt right and why it was completely counterproductive and actually would lead to more problems later on.


We’re over time and if we want to go to the hour we only have a few minutes left which I doubt is sufficient for you to go into what’s the solution and clarity management and decide. So, Jeff tell me what’s on your mind that we should get out now versus save for our next conversation.


The thought I want to leave everybody with is: all is not lost. This is a huge opportunity. This new environment of increased requirements across capital, talent, and growth at the same time that costs are going up is leaving us with a unique situation in time that we are unfamiliar with and have no best practices playbook for.  It is a huge opportunity. It requires a different way of approaching things. It requires a method of approaching problems as opportunities. And it requires a structured process to turn inevitable confusion into clarity. 

The good news is that this is what Talentism has been working on for the last nine years, and me personally well before that. This is a huge point-in-time opportunity for great businesses to be built, clarity companies to be built, and I’m incredibly passionate about bringing that message to future podcasts and talking through methods. I just want to give it away for free, I just want to say there is a way to do this, there’s a way to turn this prison into the home of your dreams. To realize the door to the prison is open, and that you can walk out any time. There’s a set of principles and methods of working through this – day-to-day. not big change initiatives. Just day-to-day that can significantly unleash enterprise value without having to ignore or wish away the increased cost of capital, talent, and growth.


Much appreciated. We should definitely come back to a Part 2 of this conversation now that we’ve built the model to understand what’s going on, and talk about why you’re describing this as an opportunity, and very practically, what steps leaders who are seeing themselves in this set of compounded constraints can be doing to seize that opportunity. So we’ll be back again soon.

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