The common traps entrepreneurs fall into when forming new firms
Why do so many start-ups fail even when they seemingly have it all – great products, customers and a good outlook?
It probably has a lot to do with the transition from initial point of starting-up to becoming a professional organisation. Many just do not get there. Or when they do, they are unable to sustain themselves.
The question is: Does being intellectual property (IP) smart automatically translate to leadership or business smart? In many cases, the answer is simply, “no”.
There are several factors for this. Ranjay Gulati and Alicia DeSantola say in an article titled Start-ups that last, how to scale your business published in the Harvard Business Review that extensive studies on fast growing companies have identified four critical activities for successfully scaling (professionalising) the organisation:
- Hire functional experts to take the enterprise to the next level;
- Add management structures;
- Build planning and forecasting capabilities and;
- Spell out and reinforce the cultural values that will enhance and sustain the business
Such was the case of CloudFlare, a San Francisco based start-up founded in 2009. The company quickly became an important player in content delivery and security for small and medium-sized websites.
By 2012 it served nearly 500,000 websites with two billion daily page views. At the beginning, the founders proudly and vocally proclaimed that they would build a totally flat organisation with no hierarchical structures or human resources (HR) function.
They wanted to promote flexibility and individual achievement, and believed structure and hierarchy would cause unnecessary bureaucracy.
However, along with their growth, problems soon arose. By the end of 2012, five of the firm’s 35 employees left, citing lack of structure and HR practices.
Without official policies, they found it difficult to navigate aspects such as vacation, sick leave and balancing work and family expectations.
As many start-ups grow, they go through a life cycle; from small initial start-up to a larger enterprise. Some may even end up being acquired in its totality by another large corporation.
Inherent in this growth, the founders and team members experience typical situations and behaviours akin to the growth of teams in organisations.
Perhaps the best way to illustrate this is to use the classic work done by psychologist Bruce Tuckman on the life cycles of a team. The same life cycle, or stages of development, could show how a start-up typically evolves into a mature and high performing organisation:
Bruce Tuckman’s Four Stages of Team Development
Stage 1: The founders or chief executives of start-ups are usually visionaries bringing something extraordinary to the market, often in a disruptive way. However, they often mismanage finance, hiring (too many, too few or not the right people) or marketing, simply because these are not inherent skill sets they possess.
Stage 2: Start-ups go through a similar life cycle as teams and it is often in the storming phase that things go awry. This is where proper role clarification takes place, conflict emerges and trust becomes an issue if not managed.
Stage 3: Successful start-ups understand the importance of scaling at the right time and working on maintaining the culture that made it attractive for them to initiate their company in the first place.
Stage 4: Successfully navigating the storming phase allows start-ups, like teams, to grow and perform.
Maintaining that which you stand for
As the start-up grows and becomes more professional it is important to mould and maintain the culture and values that brought the start-up together in the first place. Few however, take the necessary steps to reinforce culture and values.
Patty McCord, founder of Patty McCord Consultancy and former chief talent officer at Netflix says in his interview with the Harvard Business Review on how Netflix reinvented HR that when he advises leaders of start-ups about moulding a corporate culture, the following issues need attention:
1. Often in start-ups there could be a premium on casualness that runs counter to a high-performance ethos that the leaders want to create. In this regard, it is the leaders that would need to walk the talk. It is a waste of time to articulate values and culture if it is not modelled by the leaders.
2. Making employees aware of the levers that drive the business. It is important that leaders clearly communicate how the company makes money and what behaviours will drive success.
In summary, there are three critical and intersected focus areas for start-ups to be aware of as they grow to scale or professionalise.
Area No. 1: It is critical to keep focus on the initial IP – that great idea or that innovative product. This is what gave rise to the start-up in the first place, and why customers keep coming back.
Area No. 2: In keeping focus, do what works in larger enterprises without losing the original culture and values. Professionalise the business through effective structures, governance, metrics, planning and forecasting. In doing so, hire the right functional experts.
Area No. 3: Create the right structure and discipline. This is how healthy habits are formed. Not only will this make the organisation more efficient, it will most certainly open the door for new opportunities.