Find - Attract - Engage - Retain. It's all about people.
Tech startups have had a very tumultuous past, and have defined the need for engineering a ‘business culture’. From the ‘cowboy days’ of the dotcom boom to today’s lockdown-fuelled online business renaissance, there have been many ways to organise such a business – including a few lacking any ‘organisation’ at all. But how many of these strategies really worked, and how many were only successful enough to generate a buzz and sell out before that buzz died? Here, we’ll look at a few of the most notable high-tech startup organisational frameworks, how they defined their business cultures, how they have succeeded and how they have failed.
To do that, we’ll be looking at the research of the Stanford Project on Emerging Companies (SPEC), and specifically their work tracking and categorising high-tech startups on California’s Silicon Valley. SPEC was able to identify the HR and organisational strategies of some of the industry’s biggest successes, as well as some of its most spectacular failures. They conducted interviews with the CEOs, HR Directors and Founders of these companies. They also collected publicly available data to track the formation and evolution of some 200 Silicon Valley startups formed between 1980 and 1996. They began this study in 1994, when personal recollections were still quite fresh.
Although fairly dated now, it still provides some great insight into how startup leaders approached things like culture, hiring, ways of working, the war for talent and how they tried to keep that talent around. The study outlined certain operating models – what we’ll call ‘organisational frameworks’ – of these companies, how effective they were and which types failed, which succeeded, and why.
What is an operating model or organisational framework?
Whether you know it or not, you already have an operating model. The way you start your business – whether it is formal or informal, whether you have a detailed business plan, a simple org chart or are literally ‘just 3 geeks in a garage’ – will have long lasting effects on your business culture and the way your company grows (or fails to do so).
This study highlighted three primary axes along which organisational frameworks were organised – how they attract and retain talent, how they select and assign employees, and how they co-ordinate the work of those employees. We’ll call these axes ‘Attachment’, ‘Selection’ and ‘Control’.
Within the attachment axis, there are three types.
Some seek to bring together people who truly feel passionate about what they do, and simply want a place and a community in which they can follow that passion. They work at company X because they love their work.
Some work at company X because they love the community that they find there. It is a social attachment to the organisation, a feeling of family, or at least like-mindedness.
Lastly, some people work at company X because of the rewards – high pay, benefits or even status.
Again, we’ve divided Selection into three types.
Some companies identify a need for a particular set of skills, and seek out workers who bring everything they need to the table.
Others look for employees with flexibility, and long-term potential to grow into roles.
Lastly, some companies look primarily for employees who fit the ‘work culture’ well, and would easily connect with existing employees.
As with Selection and Attachment, different leans of controlling and coordinating work are divided into three types.
Some companies rely almost exclusively on very informal, peer-driven cultural influence to encourage and direct productive efforts. This could be almost self-managing teams.
Others encouraged autonomy and independence, relaying on professionalism and clear performance expectations to keep employees engaged and on task.
Lastly, some companies relied on a founder or other influential figure to manage all employers (or at least all high-level employees) personally, utilising direct supervision.
With all these contributing themes, you get a kind of 3-dimensional grid of 27 possible organisational frameworks, and each describes a different type of business culture. Confusing right. You will have noticed that, though there are 27 possible organisational frameworks, only a handful of those frameworks fit anything like modern or historical stereotypes of business organisations. The ones that just seem like bizarre combinations that could never work – are generally bizarre combinations that could never work.
Unsurprisingly perhaps, a founder or founding team tend to have an overarching approach. For example, with a preference for building a tight community in terms of attachment comes the desire to select people based on culture fit. The study outlined how 5 main combinations of approaches to attachment, selection and control emerged.
These are the kinds of organisations where the founder successfully built the kind of company where people happily spend their entire careers – almost a family business, without being composed relatives.
Characterised by direct control of subordinates selected only for their skills and motivated only by their pay.
Characterised by professional control, personnel selected for their potential to grow, and motivated by their passion for the work. These also perform well but are difficult to engineer.
Selects employees for their skills, relies on office culture or peer influence for control, and is also motivated by passion for the work itself.
Using formal bureaucratic control methods, selecting people for their skills and motivating them with love for their work.
How do you choose a framework?
It would be nice if we could say ‘framework X performs best for medical technology startups, whilst framework Y outperforms the others by a wide margin for purely digital products’… but we can’t. We will outline the few conclusions we could reach at the end, but this is ‘managing expectations’ time.
The simple fact is that many of these startups aren’t formed with a clear framework in mind. They often didn’t formally address what operating model they would be using. Even those startups who attempted to engineer a particular business culture from day one often missed the mark in practice. There are many different philosophies of management and organisation out there – both among those with a formal business education and those without. Everyone has their own idea about the best ways to attract and retain talent. That means almost no two companies are organised exactly alike, even if they occupy the same square on our organisational framework ‘grid’.
In the end, we have only identified one factor which most of the successful startups seem to use when selecting an organisational framework – again, often subconsciously. The founder usually had a clear business culture in mind, and had every intention of managing to optimise that strategy. This led them to work towards certain organisational stereotypes with or without deliberate changes.
Framework selection, then, is very ‘a la carte’. You choose a method of attracting talent, a method of putting people where they need to be, and a method of managing their output which suits the way you imagine your perfect organisation running. There is no ‘perfect combination’ or ‘secret code’ for creating one perfect organisational framework.
How does an organisational framework affect a startup?
Consciously selected or not, informed by years of study and an MBA or arrived at by throwing darts at a grid, the organisational framework your company starts with will have long term effects on that organisation, no matter what happens next. This has been referred to as the ‘company’s DNA’, but it is a much simpler concept. It simply becomes ‘how we do things here’.
Interestingly, the organisational framework seems to affect how long a company takes to build or import HR management expertise. If your startup was founded on bringing in the best of the best from day one, you’ll likely begin with some HR ability and will quickly see when more expertise is needed. If you went onto business intended to create a closely knit community of workers, you will have realised quickly that an expert relationship manager was vital.
On the other hand, if your startup was organised in terms of bringing in ‘antisocial geniuses’ and giving them the autonomy they needed to produce without oversight, you might not have seriously considered the HR function at all, only seeking that skillset when the organisation becomes too large (or too riddled with personal feuds) to manage by yourself.
In the most extreme examples, the founder themselves does any interpersonal managing that is absolutely required, specific HR personnel are avoided as an unnecessary expense, and the closest thing the organisation has to an HR professional is whoever does the payroll – assuming that payroll itself isn’t outsourced.
We see similar patterns with other organisational milestones, such as bringing in the first non-founding employees, creating their first org charts, or writing an employee’s handbook.
Can you swap out an underperforming framework as part of a scaleup?
As a wise man once said, ‘You can certainly try’. Scaleups and reorganisations are very delicate times. Remember that one of the reasons the organisational framework is referred to as the company’s ‘DNA’ is that it is not easy to change. Some change is inevitable, of course. Especially in the early days of a company, when it might have only a handful of employees, they all have to find their footing and discover ways to actually produce useful work that someone will eventually pay for. This is the time to start assessing whether you’re attracting the right talent, and retaining your best employees. Your ‘company DNA’ isn’t usually ‘set’ until the company starts making a profit, or at least secures some form of long-term funding. Then they can settle into working. And ‘this is the way we do things here’ gets established. If you can manage your scaleup during that time, you’ll be more likely to succeed.
After that, it can be difficult to change indeed. Except for a tendency for the organisational framework to become more formal and bureaucratic over time and as the number of employees goes up – which is just about inevitable – few companies really change their organisational framework. Some prosper, some fail, but less than 11% ever managed to switch to a different place on the grid, no matter how profitable it would be for them to do so. Of those, most only changed along a single axis – and that was typically a case of the founder giving up direct personal control when the company was simply too large, and their time too valuable to actually understand what everyone on the organisation was doing.
That said, 11% is far from zero. What do we know about the companies that *did* dramatically change their organisational frameworks? More than ¾ of the companies who are no longer run by their founder underwent a substantial change to their organisational framework when new management was brought in.
If you do try to change your startup’s organisational framework, will you regret it?
The scholarly perspective – the one that supplies terms like ‘institutional DNA’ – tends strongly to the idea that changing the organisational framework of a company is destabilising. It is survivable, but there is always a cost. That cost has to be weighed against your estimate of how much more profitable a new framework would be for this organisation in particular.
The evidence that we have certainly seems to support this perspective, up to a point. Once an organisational framework ‘sets’, the founding leadership and other stakeholders adopt it on a personal level. It’s not just ‘a’ way of doing things, it is ‘their’ way of doing things. Sometimes this is well-earned pride in an excellent work culture. Other times it can be hard not to see it as clinging to a toxic mess out of stubbornness or fear of change. It may be an utter mess, but it is ‘their utter mess’ and they’d rather go down in flames than change it. Unfortunately, many do.
Organisational psychologists can conform that any change – whether ‘for the better’ or not – is traumatic. Even the best employees can fear change, and if they have witnessed a disastrous reorganisation at an earlier employer, they are doubly likely to be gun-shy.
The high cost of changing business
Startups tend to be lean, agile affairs. They don’t have a great deal of administrative overhead and they wouldn’t be profitable if they did. Changing the way a company is managed often means bringing in consultants, change managers and a lot more admin expenses overall. This can be a difficult burden for a startup but something worth getting right from the start before it gets even more costly.
Retention of key personnel
Retention of talent is important, and doubly so if you’re the only organisation doing something – all of your new hires have to be trained from scratch, and all of your talent needs to be developed internally. If you change your organisational framework, you’ll experience a spike in turnover. Even if the change in framework is often accompanied by a change in CEO, it isn’t generally the change in management that cripples retention. It is the change in the business culture – in the framework itself that some people won’t tolerate. You’ll never convince everyone that the new culture is better, and some will leave. Be prepared, plan for it, acknowledge it.
Not all companies can survive these costs, especially if they are already in the kind of straights where they need to change the way they do things.
Choosing a startup organisational framework for short-term success and long-term stability
Statistically, the best performing organisational framework overall is the ‘Commitment’ framework.
So, why isn’t every startup using the ‘Commitment’ framework?
Well, it is a particularly hard one to pull off. Organisational psychology tells us something unsurprising – people are messy, imperfect jerks more often than not, and if you put any 10 of them in a jar, inject money and shake, what you pour out is almost never going to be a personally committed ‘crew’ or ‘family’ that will react to stress with understanding, compassion and tolerance. You can want that for your start up all day long, but you mostly can’t engineer for it. You *might* get lucky with your startup members, but it’s easier to win the lottery.
OK. There are no clear winners that are achievable. Is there a ‘loser’ organisational framework?
Oh, yes! The ‘Autocracy’ framework is very common – some 7% of the startups reviewed in the literature – yet they are very prone to failure.
So, what can we take from all this? Mainly you should know that your organisation framework really does matter. You can’t always control it, you can’t engineer for the best, and you might have to ‘work with what you get’, but if you’re trying to build something that has real staying power you need to have some idea what a successful, healthy organisation looks like. You should also be aware that if you see it going really wrong it might be less expensive to flush the organisation and start over rather than failing to change that toxic DNA in any meaningful way.
How do you attract, select and coordinate your people?
Baron, JN & Hannan, M. (2002). Organizational blueprints for success in high-tech start-ups: Lessons from the Stanford Project on emerging companies. California management review. 44. 8.