Plan Strategically: Don’t Let a Lack of Financial Discipline & Culture Derail Growth
Don't let bad practices turn into stormy nightmares.
Running a successful startup is a feat of enduring determination. What begins as an awesome idea for a couple entrepreneurs, becomes a growing Company that demands more attention to how you administer the business than those things which captured your excitement to begin with (i.e., product design, marketing plan, technology roadmap). Careful early attention to Finance and Administration (i.e., process, procedure, and people stuff) can avoid trouble later in what I term "nightmare growth." This is when you are growing but your time, attention, and pleasant dreams are sacrificed to frustrations even as you sleep!
Here are four examples how a lack of discipline and culture can turn the small cracks in a wall appearing with growth over time, into a watershed dam rupture that ultimately derails a business. Avoid pending nightmares as you grow by paying attention early on to how you administer your Company.
- Management Discipline
Top management sets the tone. How they conduct business, treat people, deal with big and small Company issues, and portray the Company to the world establishes the values and social mores to be emulated internally. I’ve seen leaders in good times become driven by ego and limelight and in bad times experience significant stress – but in both cases – I’ve witnessed leaders who stray and become unpredictable or undisciplined in their behavior, causing volatility in the foundation of their culture. Guard yourself to maintain culture in good times and bad, or you’ll have employees adopt your poor behaviors or just leave.
A talented Strategic CFO can help you guard culture and even repair it in times of decay. Leaders need to regularly engage in conversations about culture, defining the values intrinsic to culture, and take the pulse of the organization through surveys or other formats to make sure they stay on course.
- Hiring and Culture
We've all heard stories of crazy dynamics inside startups that often make venture investors impose "adult supervision," many times in the form of a new CEO. I wonder if Facebook would be Facebook if a seasoned CEO had replaced Mark Zuckerberg early on. The truth is that many times the vision and drive that a founder has is key to driving the business forward. Often, the problems begin when startups ignore cultural fit as they hire people to fill key positions, focusing more on specific skills a potential candidate brings to the job. This approach to hiring for growth can lead to "people problems” later.
I've found that hiring people who share the same passion that drives the founders and the CEO is more important than hiring people who seem to have the perfect skills. Spending time understanding where a candidate comes from, what inspires them, and how the work habits they bring fits with your culture will pay off in good times and in bad!
Humans are wired for fairness, so when your team perceives things as unfair, you will lose their energy and passion as they emotionally check out. In my personal experience, I witnessed a young and thriving small Company with highly paid key executives and a weak Board (i.e., proxied votes) drift into a downward spiral as employee effort dwindled and ‘pseudo sabotage’ set in as employees demonstrated who is really key to success. Compensation was not the Company’s only problem as culture was also weak, but it proved that comp structure is a cultural glue, for you nonbelievers try not paying people adequately and you’ll find out.
The Company would have been better off designing a formal comp plan that rewards a larger set of employees for rowing in the same boat in the early stages, striking a balance between base pay, incentives and upside in an exit. Prioritize creating a compensation plan early, one which you can flex up with incentives to balance growth objectives across your most critical employee base.
- Financial Discipline
Cash flow always seems to be in short supply. It is a slippery slope where you lose footing fast if you start funding expenses through payables to buy time for cash to come in. This works (but still with risk) for Companies that have reliable recurring revenues, stable liquidity sources, and market power with vendors. They make tradeoffs with short term liquidity in mind as they take creative measures to pay bills.
The problem occurs with smaller and less stable Companies that begin financing growth initiatives through vendor payables. If you don’t have adequate capital to fund a growth initiative, the temptation to fund growth by slow paying vendors and growing payables is hard to avoid. After all, you have employees inside who are critical to the initiative at hand, and vendors outside who are less so. Having adequate capital to support investment decisions is an issue management needs to solve at the time the decision is made, not doing so turns growth decisions into bad decisions that create bigger problems. There is always embedded risk in any strategic decision you make (e.g., one that requires incremental short or long-term resource investment), understanding that risk and how/when it trades into cash is key to understanding how you should fund the initiative at conception.
Photo courtesy of Christopher Michel.