Why start-ups fail and how HR can make a difference
HR people are experts in creating the kind of workplaces that encourage a deep sense of engagement, collaboration and commitment. They know how to recognize when this is not present and what to do in order to bring it about
If you look on the web, you will find plenty of reports, blogs and videos that explain why start-ups fail. They usually come in the form of lists, pithy and direct, that summarize the reasons for failure. Many of them are written by academics who have been studying start-ups or by entrepreneurs who share their experiences in self-reflective pieces that show honesty and thoughtfulness about what went wrong, or right.
When you read these lists or watch the videos, what they have in common is that very few of the items discussed have any direct link, or make mention of the positive contribution that Human Resources, Human Resource Development or Organisational Development could bring to the success of a start-up, or that a lack of good, professional and appropriate HR, HRD or OD support may be directly linked to the failure of a business.
There is little or no mention of the positive impact a more strategic use of HR can bring to business success. We are not saying that strategic HR is the silver bullet that will make all startups succeed. However, we do believe that seeking inputs and support from such professionals could help a start-up grow and thrive and make the transitions between different stages of development smoother. Or perhaps even more importantly, fail faster, cleaner and with less damage - financial or psychological - to those involved with great lessons learned so that the entrepreneurs can get up and start again and not keep repeating the same mistakes over and over.
With this in mind, we would like to cover the reasons for start-up failure and the positive impact HR can have and, therefore, avoid the possibility of failure.
Reasons for failure
1. Market, Business Model, Cash and Product Problems
The major reason for failure is insufficient or no market for the start-up product. This may be due to an ill-defined value proposition, poor timing or an inaccurate ‘pain/remedy balance’. That is, a product or service that is not a solution to a problem people recognize or an opportunity people see.
Entrepreneurs also can become too wedded to their business model or plan. They may hold onto the erroneous belief that if it’s written down, in the plan, then it must be true! They may make incorrect assumptions either about the cost of customer acquisition or the (unrealistic) ease of going to market. Because they believe in what the plan says, their reality will take care of business.
Some entrepreneurs have the mind-set of ‘build it and they will come’, especially around websites and e-commerce. This faulty and magical thinking proves more often than not to be untrue!
Cash and running out of financing is highlighted continually as a reason for failure. The usual cause is generally attributed to not achieving a milestone. Researchers talk about poor cash management and accounting processes, though these seem to be less common.
What HR can offer: On the surface it would appear that HR has no role in marketing, cash flow, product development etc. However, key aspects of the discipline of OD include a knowledge and understanding of what is going on, the ability to ‘sense-make’ the situation and ask solid questions that help people think things through and reaffirm the reality of a situation. OD is one of the few professions legitimated to ask uncomfortable ‘questions to power’. Skilful OD practitioners have the ability to ask the difficult questions, to identify where people may have become disconnected from reality and the courage to point out when the ‘emperor has no clothes’! This is not about stomping on someone’s vision, it’s about helping to ensure that what people are envisioning or planning can be connected to both current reality and future expectations. It’s also about helping entrepreneurs understand the direction of the path their thinking is headed and the reality of the challenges they face. This is the core of good OD consultancy.
2. The Team
Every list describes weak or poor management teams as a reason for failure. These are generally attributed to a lack of skill, especially in strategic thinking, or the lack of ability to execute. There is also recognition that weak top teams tend to build weak teams below them.
What HR can offer: Teams and ways of working are issues that are central to the profession of HR. In particular, HRD and OD professionals have extensive toolkits for helping teams diagnose their current reality and identify potential issues that may derail their working together. The HR work in this area includes helping teams to establish themselves, assisting in the review of their working together, surfacing problems and teaching people how to surface, manage and resolve conflict. This is bread and butter work for HR! Good OD and HRD people will have access to a range of tests and instruments, know when and how to use them and to interpret the results, and get buy-in regarding the implications. They also know how to develop realistic plans and processes that will help the team work together in ways that are more likely to lead to success. It is all about getting rid of the ‘static’ in the team that distracts from focusing on the business at hand.
This reason for failure can best be characterized by a desire to try too many things, have too many divergent ideas and to be overly ambitious about what is possible. This is not about limiting vision and action but more to do with having a focus that moves things forward while allowing for strategic opportunism as things move forward. It’s the difference between being a dilettante and being able to see things through to successful completion. The opposite of lack of focus is seen as a stubborn mindedness that leads to a blinkered view of the world. This is an equally disastrous position for a start-up to take.
What HR can offer: A good HR person has the ability to recognize the traits described above in people and knows how to coach and mentor in such a way as to minimize the negative impact. HR people are experts in creating the kinds of workplaces that encourage a deep sense of engagement, collaboration and commitment. They know how to recognize when this is not present and what to do in order to bring it about. We would argue that true engagement creates a sense of focus. It creates a work place where people know what is important and focus on that. At the same time, it gives people the ability to see things in the round and understand and talk about the distractions and dead ends that may interfere. By recognizing obstacles and being able to talk about them, you don’t need to waste time exploring them.
Many people might think that engagement is only relevant in large organizations. However, we would argue that developing and sustaining engagement and collaboration is an individual journey and is as relevant to organizations of one or two as it is to those that run to double digits or more. If entrepreneurs build a culture of engagement right from the beginning, this will also have a positive impact on when they wish to scale up and recruit people and grow their business. An organization with obvious high levels of engagement and collaboration and a commitment to such a culture is very attractive to talent both in terms of recruitment and retention.
This reason for failure focuses on the different skills and capabilities needed to manage an organisation of double digit numbers as opposed to 2 or 3.
What HR can offer: There are numerous ways that HR professionals can help manage this challenge. One of the most obvious is talent management. Through the development of comprehensive talent plans, HR can identify what future talent is likely to be needed and where it may come from. In start-up mode, it should not be beyond the wit of the HR person to start to talk to people some months prior to ramp up and identify the critical talent that will be needed to go to scale. A good HR person will begin conversations with interested and available people who want to join and help take the start-up to the next stage. HR folks also know what type of remuneration packages, pay, shares, benefits, etc are likely to be needed in order to attract and retain necessary talent.
On the issue of managing and leading the enterprise as it grows, a good HRD or OD person can very quickly help the entrepreneur assess leadership style, identify how they may need to work differently to manage a growing company and how to undertake this type of development. This is unlikely to be through a two-month course at a blue chip university but more likely through feedback, coaching, mentoring and workplace-based development activities, thus keeping the disruption in the organization to a minimum.
In a subsequent article we will look at the other side of the coin. That is, why HR professionals don’t seem to see startups as a place to practice their craft.
Until then, what do you think?