26 November 2009

Setting And Shaping A Strong Startup Culture

Of all the determinants of a startup's success, company culture reigns supreme.

Over the past several years, I've had meaningful interactions-- meetings, calls, etc.-- with perhaps 700-800 early stage startups. From that broad pool, I have worked closely with about 100 firms, on a variety of business plan, business development, and fund-raising projects.

In short, I have been exposed to a 'statistically significant' number of companies, over a long-enough time-frame, to be able to discern certain patterns-- among them, which traits lead to failure, and which lead to success.

The short answer to what I've found?

A handful of factors-- all internal to the startup-- are the best predictors of whether a company will make it big, or crash and burn.

Not the amount of funding raised, and not the vertical in which the company operates. It almost always comes down to how the startup operates, day in and day out.  In other words, it all comes down to startup culture. In more detail: 

Culture of Speed
The first indicator of a company's success is the speed at which the founding team operates. The reason is simple: startups have the benefit of being fast and nimble; remove these traits and you remove a huge competitive advantage. Large firms have greater resources-e.g., more access to talent and capital-but are weighed down by sluggish decision-making and bureaucracy. Startups, by nature of their lean structure, can adjust rapidly and can often "win" by innovating and responding to customer needs faster.

Slow startups on the fail-track operate at a pace resembling their big-company peers (sometimes due to too much big-company DNA on the resumes of management). They take a long time to make decisions, are slow to respond to inquiries, and hold too many non-essential meetings. In short, slow startups lack a culture of urgency. A key fail-track warning sign: frequent excuses of why something hasn't been done yet or can't be done (and a cultural acceptance of such excuses).

In contrast, fast startups seize opportunities immediately as they arise-even if it means responding to an email at 10 PM or working through a long weekend to deliver on a customer request. They have a
cadence of work that emphasizes frequent product releases, short meetings, shared accountability for hitting milestones, and rapid decision-making (even without all available information).

Further, they create their own opportunities by paddling out in anticipation of where the next wave will be, and by trying new things. They realize it's ok when experiments fail, because being nimble means they can bounce back and try again. Simply put, fast startups value time differently, and have a culture marked by rapid plan-test-refine cycles; this is at the core of any startup's advantage.

Culture of "Launch Early, Launch Often"
One of the most dispiriting experiences is when a company never actually gets to market; or, by the time the company finally does launch, the market has passed them by and their product is irrelevant. In such cases, a huge amount of money and talent is often wasted, unnecessarily.

Sometimes this is due to poor planning-e.g., underestimating the time required for product development. But in many cases, startup founders get obsessed with building the "perfect mousetrap," fearing the market or press will skewer them if the product is not up to their impossibly high standards. This becomes exacerbated in a competitive space, when other firms are making noise, and product release paralysis sets in.

In my experience, this is largely a psychological issue; wise founders "let go" and realize that Version 1.0 is just the beginning, not the finish line. Success-track founders get to market early with the minimum set of viable features, and then iterate like mad based on user feedback. If needed, they slap a "Beta" stamp on the product, which brings a greater level of acceptance of bugs or rough edges. In short, they are guided by the knowledge that the benefits of reaching perfection far outweigh the costs of missing a market window.

Culture of Promoters
Second only to the dismay felt when a startup idea becomes stillborn is when the company actually
does get into the market, but after initial launch, the product languishes, collects dust, and is soon forgotten. Opportunity lost.

This is most common with startup founding teams that are heavy on the technical prowess but short on marketing skills. Technical teams sometimes underestimate the true level of effort required to not only get attention and mindshare, but also to convert such attention into actual, paying customers. It is the classic "build it and they will come" fallacy.

The good news is that even highly technical engineers can become skilled at marketing fairly quickly. Technical founders- the builders- have a pride and passion for the product that cannot be taught. Further they have more credibility with other techies, who are often the earliest adopters or beta users. The key is to first gain a basic grasp of marketing strategy- where do your customers spend their time? How do they make buying decisions?- and then to develop a simple, flexible marketing plan with discrete action steps, timelines, and milestones, as well as a way to measure effectiveness. 

And then, just do it. Get out there and pitch, honing your message as you go, and doubling down on the marketing activities that demonstrate a positive ROI. If you are able to simultaneously pitch and listen attentively, it's remarkable how short the learning curve can be. 

We're going to pick up the pace here and cover a few more in short order:

Culture of Focus
Fail-track startups try to "boil the ocean" and compete on the depth and breadth of their product feature set. This is a losing proposition from the start; startups are, by definition, resource-constrained. Most startups that go down this path run out of money. By comparison, success-track startups strip out all non-essential bells and whistles. They focus with a laser-like intensity on the most pressing needs of the most attainable customer base, while retaining the vision for broader markets and verticals as resources allows. They do just one or two things, but they do them exceedingly well.

Culture of Confidence
Fail-track startups are unnaturally cautious-- often bordering on paranoid. They are convinced that around every corner, someone is plotting to steal their idea. As a result, their ‘story' is kept close to the vest. An early fail-track indicator is when the CEO requires an NDA before he can give even a high level overview of what the company does. In every single instance in which I've seen this behavior, the companies never go anywhere.

While you should never give away true IP or trade secrets, a primary job duty of the CEO is to pitch and sell the vision of the company-all day, all the time, to (almost) anyone who will listen. Success-track startups realize that execution- not the idea- will win the game. They are judiciously open with their vision, and they have an evangelizing ability to get stakeholders such as customers, partners, investors, and potential hires to rally around that vision.

Culture of Action
Similar to the "culture of slow" is the "culture of theoretical." Fail-track startups tend to devote too much time to theorizing and hypothesizing, and not enough time doing. They defer decisions to wait for more information, and they spend a lot of time in meetings and at off-sites. Granted, brainstorming and forming a cohesive strategy is necessary, valuable, and important, but unless it leads to action and output, it is wasted time- something no startup has the luxury of. Success-track startups follow the "iceberg model": for every bit of ice visible above water (strategy), there is a huge amount of supporting ice floating underneath (action). Post Script: Fred Wilson of Union Square Ventures wrote a great blog post on this topic called "Action Oriented."

Connecting The Dots (aka, You Want to Be "Playing for the Yankees")
The factors described above have proven to be the most common determinants of success and failure at the several hundred companies I've interacted with over the years. To reiterate, they are all internal traits of an organization-- traits that can be embedded, infused, or hired into a firm.

Granted, external factors will always play a role in determining a company's outcome; markets shift and funding environments change. But teams with strong cultures are flexible and can adapt. As a result, strong teams will view tough markets as opportunities to pull ahead of the competition.  After all, the startup ecosystem-- especially in an emerging, crowded, and rapidly growing market-- is the purest business example of Darwin's 'survival of the fittest' theory in a business context. In short, strong startups operate with the confidence that they will come out ahead when the dust settles. 

Bringing It Home: Hiring Smart
Having identified that success is tied to stong cultures, the question then becomes, "how do you ingrain a winning culture into your startup?"
The answer is disciplined hiring.

A generally accepted maxim is that a company's culture or DNA is set by the time it hires its fifth or sixth employee. Fail-track startups hire based on who's cheap or available. As a result, they hire B-players. Success-track startups maintain a greater level of hiring discipline, and "hire smart," holding out for A-players. The effects are magnified as the business scales, since A-players attract other A-players, while B-players (who are less capable or confident in their roles) tend to attract other B- or C-players. (For more on what constitutes an A-player, click here.)

Hiring smart has many other elements to it, such as the aforementioned culture of speed-i.e.., can each new hire keep up? If not, they should be weeded out before they slow down the overall average pace of the tribe. Success-track founders also know to hire people more intelligent than themselves and to give them free rein to run with the ball. Ultimately, this helps the founding CEO retain his or her job; shifting responsibility to an A-team means the CEO can spend more time on strategic issues and less time on micromanagement.

How strong is your startup's culture? What can you do to improve it?

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