The Wrong Team - Third Leading Cause of Startup Failure

Survival mode is the reality of most startups. Much of the time in early growth stages feels like a constant struggle to acquire customers, raise money, recruit others to join your company and convince existing staff to stick with you – despite the long hours and setbacks. Even then, the odds of success are low. The bleak truth is that 9 out of 10 startups will fail. Research from venture capital database CBInsights broke down the Top 20 Reasons Why Startups Fail and listed “Not the Right Team” as the third leading cause of startup failure.

Over my long career working alongside founders (serving as their Vice President, People and with a heavy bent on operations), I recognized the warning signs from people issues that can compound into much bigger problems. People issues matter. Whether it’s mismatched skill sets, interpersonal conflict or a poorly-chosen team, people problems can sink your startup. If getting the team right is not one of your top priorities, your business is at risk.

To grow a business, many entrepreneurs are rightfully obsessed with product design (engineering) and business strategy (sales, pricing, distribution, fundraising, etc.). Yet, they severely underinvest in or overlook the third equally critical area of organization design. In the context of People, this encompasses everything to do with getting the team right.

People problems don’t age well. Consider the following people dilemmas as your startup matures:

  • Co-Founder Conflicts: In a typical close-knit startup, the “elephant in the room” tensions (co-founder conflicts, for example) are often avoided. No one wants to bring up such issues. Co-founder conflicts kill more startups than people realize.
  • Hiring Friends and Families: Important key positions in the company are filled by the founder CEO’s friends and families who are often completely unqualified. Having family members working at the startup creates some of the most miserable situations, particularly when dealing with performance issues or layoffs.
  • Position Upgrade: Another potential landmine is the situation where you must upgrade key positions because the business has outgrown the current core team’s capabilities. Take for example your controller, a one-person accounting department who severely lacks the skills to take the venture to the next level. The business demands adding sophisticated Chief Financial Officer (CFO) leadership caliber. How do you broach this difficult conversation at the risk of them quitting on the spot and causing profound disruption?
  • Wrong Hire: Sometimes key hires are brought in because of prior relationships with the CEO. Trouble begins when they’re wrong for a leadership position. Teams avoid tackling this issue and instead try to work around the individual.
  • Overinflating Titles: As the startup grows bigger, demoting or replacing “over-titled” key employees can be quite disruptive to the business.

These predictable crises of growth are inherent in young companies’ life cycles. Proactively and effectively dealing with them determines both the future direction and magnitude of growth for your organization.

If most founders are completely honest with themselves, they will recognize that they are dangerously amateur at dealing with these situations. Design is not about how something looks but how something works. Taking organization design seriously by investing in People Operations may be one of the most important decisions founders can make. Of course, it is not a matter of if but when to invest in People Operations. The longer you wait, the greater the business challenges become real – often with dire consequences. If you’re off by even one degree in the early growth stages, you will be off by a mile given the speed of change in a startup.

Start early – and never later than Series A funding – to invest in hiring a professional to build out your People Operations. A great approach regarding your Talent or People is to adopt Google’s simple motto describing their People Operations function: find them, grow them, keep them.

Having said all that, it continues to baffle me that most startups treat the People aspect not as a strategic opportunity but as an afterthought. According to Noam Wasserman (author of the bestselling book The Founder’s Dilemmas), as tech startups mature, 70% will have hired a Chief Financial Officer. Yet even after the fourth round of financing, only 20% of these startups will have hired a senior human resources executive. A study in California Management Review in 2010 found that even after five years, nearly one-third of new companies still don’t have professional People Operations in place.

Then again, maybe this is partly why 9 out of 10 startups fail.

Have you witnessed business problems that are really people problems in disguise? I’d love to talk to you; write to me at mimi.vold@voldinc.com.

Mimi Vold