Recent scandals show that the hardest task after becoming a successful start-up is making the transition from youthful disruptor to mature enterprise.
Successful start-ups are often viewed as the gold standard in agility and entrepreneurial thinking. Business analysts like to point to the lessons that so-called old-economy companies can take from these fast-growing, tech-savvy ventures.
However, as the recent spate of scandals emanating from the start-up heartland of Silicon Valley suggests, start-ups also have a lot to learn from established businesses, as they transition from fledgling disruptors to mature enterprises.
Controversy erupted when investors of car-sharing company and start-up poster child Uber pressured its CEO Travis Kalanick to resign in June, following allegations made against other Uber employees of sexual harassment, intellectual property theft and driver manipulation within the company.
Not long after Kalanick’s departure, a toxic culture was revealed within the broader start-up ecosystem when Dave McClure, founder and CEO at seed investment group 500 Startups, was demoted then later resigned as a general partner, following accusations of sexual harassment.
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Justin Caldbeck, partner in venture capital firm Binary Capital, also departed from his post in July after reports of inappropriate behaviour towards six female entrepreneurs, which he at first denied, then later apologised for in general terms.
Neglecting business basics
A sexist culture is just one of the factors that can cause start-ups to stumble. A lack of business experience among the gifted and ambitious founders, and the rapid pace of growth means vital steps can be overlooked. There’s a lack of governance and business plans, poor operational and resourcing structures and a failure to manage not only risks but the venture’s most valuable commodity – its people.
Market research firm CB Insights reports the top reasons for start-up failure are running out of cash, lack of market need, a poor business model, and disharmony among the team.
Only a small fraction of start-ups reach unicorn status, the term used for those valued at US$1 billion or more – Fortune magazine estimated the number of unicorns to be 174 worldwide in 2016. The less fairytale-like story for start-ups is that 90 per cent of them fail.
“It’s only when they raise a lot of funds and one of the larger investors wants a seat on the board that a start-up will say ‘oh, what’s a board?’.” Remco Marcelis CPA
The recent closure of Australian music streaming start-up Guvera, which had raised A$185 million over eight years, is a case in point. Guvera’s hopes for an initial public offering (IPO) were quashed by the Australian Securities Exchange last year when it stopped its float just 24 hours after the Australian Securities and Investments Commission approved its revised prospectus. Controversy surrounded the failed start-up prior to its IPO bid due to its significant debts, low revenue and a loss of A$81 million in 2015.
While established businesses are not immune to poor behaviour, they are well positioned to teach start-ups about the standards and policies required for sustaining long-term business success – good governance, sufficient funding, fiduciary knowledge and operational functions, such as human resources, to promote a culture of inclusion and respect.
A problem with the boys’ club
The recent scandal at Uber served to reinforce perceptions that some start-ups’ problems stem from a bro culture, in which young men are prioritised over all other employees, and where toxic behaviour such as sexual harassment goes largely unchecked.
Data from TechCrunch shows that only 17 per cent of global start-ups have at least one female founder and that their share of venture capital is significantly less than that of their male counterparts.
Across all funding stages in 2016, figures show that US$10 billion went to companies with at least one female founder, while US$94 billion was invested in male-only founder teams. TechCrunch also indicates that only 7 per cent of investing partners in the world’s top 100 venture capital firms are women.
Business execution - linking strategy to people and operations: ommunicate a common understanding of the mission, values, and vision that drives your strategy.
“I don’t know if it’s direct discrimination, but when you look at venture capital [funding] and you look at how many women venture capitalists there are, it’s easy to see that the numbers correlate,” says Colette Grgic, chief innovation officer at start-up accelerator BlueChilli, which provides early-stage start-ups with services such as technology development, funding, strategic assistance and mentorship, in exchange for equity.
Remco Marcelis CPA, co-founder and managing partner at accounting practice Standard Ledger, which works exclusively with start-ups, says many of these young tech-fuelled enterprises lose their way due to egotism, inexperienced leadership and exponential growth. Uber, for example, has been a darling among venture capitalists, rapidly raising US$12 billion since its inception in 2009. In May this year, the company was valued at US$69 billion.
“Some start-up founders have got too much of an ego, particularly the younger males,” states Marcelis. “They often have no business experience and they are getting huge amounts of money thrown at them. They are growing at an accelerated pace and are expected to deliver sometimes extremely unreasonable outcomes within short periods of time.
"The ones that succeed need to succeed really well and the expectations are ‘all in or die trying’.”
Slow down to scale up
Grgic, who is also an adviser at BlueChilli’s female-focused accelerator program SheStarts, notes that the pace of start-up growth means that the importance of culture can get lost along the way.
“The reason why start-ups are able to move so fast is because only the absolute biggest things are a priority – do you have customers, can you identify their problem and can you solve their problem for them?” she states. “Until you lock that in, there’s no point building a Taj Mahal when you’re still experimenting if you can stake up your tent, so I do think that those things are missed.
“I also think there is a stage, and it’s often a difficult transition for a start-up, when they suddenly realise that they are a company and they maybe have a couple of staff,” adds Grgic. “Suddenly, you have to have processes and policies that are very unnatural to a start-up, and I think it’s at that stage that there’s a lot for them to learn from bigger companies.”
“Some start-up founders just don’t get that they are also directors who have fiduciary duties.” Remco Marcelis CPA
In their haste to succeed, many start-ups risk missing vital business steps along the way. Tanya Titman FCPA, founder and managing director of cloud-based accounting practice Consolid8 and the Acceler8 business improvement program, which is designed to educate and empower women in business, says start-ups need to slow down and build the solid foundations that established businesses rely on for sustainable growth.
“Start-ups are often fuelled by a great idea and a lot of passion but they tend to look at the immediate stuff in front of them rather than the things they need to set up for the future,” says Titman.
“They’re moving so fast that they can overlook structure and discipline. The key is to help them to slow down and get the foundations right in terms of finances, operations and administration, sales and marketing, and HR. When you break it into those four blocks and get them to develop a strategy around each of them, it helps them to scale up more successfully.”
The value of mentors
Christina Teo, founder of start-up support group Startup Asia Women and the first general manager of Yahoo! in Singapore, believes mentors are essential to start-up success. Formed in 2016, Startup Asia Women provides a platform for sharing experiences and support among women involved in start-ups in Asia and holds regular guest speaker and networking events in Singapore.
“Young founders may not have the relevant mentors to help them narrow the gap in business fundamentals, marketing, strategy, business modelling and industry knowledge,” she says. “They also tend to have a young team, or mostly interns, so it is like they are in constant test mode rather than having the mindset of truly running a business.”
Marcelis agrees that mentors are vital as start-ups begin to grow beyond their founding members. “It’s only when they raise a lot of funds and one of the larger investors wants a seat on the board that a start-up will say ‘oh, what’s a board?’,” he says.
“Before they get to this point, having an experienced mentor who can teach them about good governance can be invaluable. Some start-up founders just don’t get that they are also directors who have fiduciary duties and, if they are looking at raising capital, they need to have their house in order.”
Getting with the program
Lack of business nous is a trap for start-ups, says Lewis Chen, deputy general director of commercialisation and industry service centre at Taiwan’s Industrial Technology Research Institute (ITRI), which helps tech start-ups assess market opportunities, develop prototypes and business plans, and raise funds. He believes accelerator programs, such as ITRI’s Open Lab project, which has fostered the development of about 200 start-ups with an accumulated capital of more than NT$63.4 billion, can help instil the discipline start-ups require.
“More start-ups need to understand the business case for their product and service and investigate their potential customer base before they launch, otherwise it affects their financial performance down the track,” he says.
Alex Scandurra, CEO of Australian fintech hub Stone and Chalk, agrees start-ups have a lot to learn about business as they scale up. Stone and Chalk facilitates collaboration between established finance companies and the start-ups trying to disrupt them, and provides support and mentorship to help start-ups raise capital and grow. In just over 18 months, its start-ups have secured more than A$100 million in direct equity funding.
Scandurra notes many start-ups struggle with a business model in their early days. “We have a lot of start-ups with founders and employees that have deep technical skills. While this is important for creating new technology, it can also create blind spots when it comes to focusing enough on their business model and how they are going to monetise their new innovation.”
Leading by example
As the start-up world continues to grapple with the many challenges that accompany the fast-paced road to success, Grgic says established businesses can be better at sharing valuable resources that can help show them the way.
She notes that Google Australia is one company to have stepped up to the plate. Google Australia’s engineering community and outreach program manager, Sally-Ann Williams, “recently shared with the start-up community Google’s policy on behaviour at events, which includes how to make sure you are inclusive, how you are avoiding harassment, how you are making sure that everybody gets a chance to talk and what is in and what is out,” explains Grgic. “She said, ‘This is our policy, now write yours’.
“Instead of having to go back and reinvent the wheel, are there any resources like this that a company is willing to share with start-ups?” asks Grgic. “That might be helpful.”
Culture comes first
Paying attention to the culture being developed in the start-up hub isn’t always a priority for fast-thinking founders, but Singapore-based online recruitment start-up Glints says defining a culture of inclusion has paved its way for growth.
“Culture shapes behaviour and it shapes results,” says Glints co-founder Oswald Yeo. “Work forms a big part of your life, especially if you’re a start-up, so you’ve got to create an environment where everyone loves what they are doing.”
Glints, which helps recent university graduates and early-career professionals find jobs and internships, was formed in 2013 by Yeo and co-founders Looi Qin En and Seah Ying Cong, when the then 21-year-olds were serving in Singapore’s military.
With no business experience, the founders joined South-East Asian accelerator program JFDI on completion of their military service and gained much-needed mentorship and business tools.
Last year, Glints raised US$2 million in a Series A round co-led by Golden Equator Capital and Gobi Partners. Today, it has a network of 22,000 young professionals on its platform and employs 17 full-time staff in Singapore and Indonesia.
“Having a great culture with clear values allows you to attract, retain and motivate the best talent to help you to grow your company,” says Yeo. That also means they recruit the best people for the job, regardless of gender.
“The ratio of [women] in our company is slightly higher than the typical tech start-up,” says Yeo. “We’ve definitely seen the benefits of having an equal gender ratio. I think it just brings a certain kind of balance to the company and a wider perspective and energy.”
Pivoting from start-up
Want to avoid growing pains as you scale up? Try these four tactics.
1. Engage an experienced accountant
An accountant can do more than manage your books. They can help build the financial foundations and strategies required for sustainable growth.
2. Foolproof the fundamentals
Before you start scaling your start-up, make sure that you have your house in order. This includes having a clearly defined business model, a thorough understanding of your customer base and sufficient funding.
3. Establish a professional culture
Many start-ups pride themselves on having a cool culture, but as you grow and increase your employee base, your culture will need to be supported by operational functions, including HR policies that clearly communicate your values and help build a culture of respect and professionalism.
4. Seek out a mentor
Mentors can be valuable sounding boards and provide impartial advice on matters such as good governance, strategy and raising funds. They can also introduce you to a broader network of people.