Early-stage start-ups challenges | People and Culture

Introduction to our series on early-stage start-ups challenges

Despite SVB's recent crisis, Capital Markets firms’ interest in innovation has never been so prominent. 2022 marked a record on the percentage of IT budget spent on new technologies (~40%). Just JP Morgan’s expenses on Technology reached $6,7 Billion. However, despite of the tailwinds many start-ups still fail to reach their potential.

As start-ups embark on their journey, founding teams will face a diverse and unique set of challenges in their early stages, which are key to become a unicorn.

Then, how can start-ups best prepare to grow from seed to maturity? Over the last few months, we interviewed start-up founders and VC investors from seed to series B across several industries to obtain their view. Our key objective was to increase our understanding of:

1. the challenges they experienced,

2. the accelerators that helped, and

3. the areas where they could use more support.

This is the first of a series of posts that share the insights start-ups and VCs shared with us and identify trends emerging on three key categories.  In this first blog we’ll focus on ‘People and Culture’, we’ll then explore ‘Scaling’ and ‘Expansion’.

We are very grateful for the time these organisations spent with us.Here's what they told us.

Figure 1: A high level view of the seed to Series B journey

People and Culture

The founding team and a clear vision: the key foundational stones

A strong leadership team sets the direction for the start-up including how the product or service is developed and the organisational culture. All the start-ups and VCs interviewed agreed that the most important piece of the puzzle at this stage is the founding team. The right mix of skillsets with a common vision keeps the start-up working towards achieving those goals and objectives.

Early in the journey, one of the critical success factors is a clear vision. The founding team should not only be able to articulate the vision, but they should also become storytellers to take investors and customers on a journey of their vision.

“Great founders need to be able to sell the vision to investors, employees and customers, before you even have anything […] and a real understanding and love for the pain point” - Early-stage VC investor

Attracting talent (I): balance between experience over capacity

Start-ups struggle to attract the best technical and sales talent during their early stages because they have limited funds to compensate them. Attracting skilled talent for the right compensation may mean a compromise between hiring capacity over capability.

Start-ups face the challenge to either increase headcount at a more junior level or hire fewer experienced subject matter experts (SMEs). However, choosing headcount over skillset may come at a costly price down the line as shared by a Series B founder:

“Start-ups don't have the money to hire the best technical people. Therefore, some architectural decisions taken at the beginning are not the best. Later, when start-ups need to scale their systems, they need to redo everything. They end up with the same dilution effect as if they would have taken the money earlier because they raise a much higher round to redo the work” - Series B Founder

This has become so common that it is commonly known among venture professionals as technical debt.

However, compensation is not all talent looks for. The same Series B founder mentioned that start-ups developing high-tech products have an advantage because working on state-of-the-art technology attracts tech talent.

Attracting talent (II): leveraging the vision and start-up potential

As funds are limited to reward new joiners today, compensation can take the shape of equity options, which is uncertain income in the future. Therefore, founders must clearly articulate the vision and start-up potential to motivate and attract talent.

For example, one start-up mentioned that a well-defined story around their unique selling point (USP) made hiring talented salespeople easier. Candidates understand early in the hiring process that they can build a powerful pitch around the USP to sell the product.

“Beyond the founding team, investors look at quality. Followership is a big focus for VC as they need to draw the biggest talent in the market from the googles of the world” – Early-stage VC investor

Attracting talent (III): the riddle of assessing hidden skills

One key challenge when hiring talent is that skills needed to thrive in a start-up environment, like adaptability, proactivity, and resiliency, are difficult to assess during a standard interview. As shared by a Pre-Series A Founder:

“Start-ups need some skills that are difficult to test in an interview; adaptable to change, proactivity, curiosity, resiliency (spending a lot of time researching something and dropping it in the end because it is not what is needed)” - Pre-Series A Founder

The impact of hiring mistakes is exponentially bigger on early-stage start-ups with small teams than in consolidated companies with hundreds of employees.

Another start-up mentioned that people coming from other start-ups are usually more successful than people coming from big companies because they are used to the same type of environment and challenges. Thus, minimizing the risk of hiring mistakes.

Also, a VC pointed out that the recent layoffs and hiring freezes at big tech firms have opened an opportunity for start-ups to recruit talent with the right skills and attitude.

Culture: maintaining disruption through maturity

A key theme for the start-ups we interviewed is to maintain a start-up culture while becoming a more established organisation. This becomes increasingly difficult as additional layers of management and controls are implemented across the organisational structure. However, the leadership team can support the retention of the culture by leaning into what makes the start-up stand out from others and the qualities that attracted the talent.

Start-ups can also look to large or mature start-up organisations to build on what works or to have an educated view on what the start-up would like to do, for example, the use of a flat versus hierarchical structure.

“When a team grows beyond 20 people, they are not all in the same place, cannot overhear everything or cannot learn together. This is an inflection point. Culture didn’t change but the way we do things did, and we had to put processes in place […]. It is important to have good leadership, empower them and trust them to change things, otherwise you cannot scale” - Series A Founder

Culture and communication: the importance of preventing silos

Another key challenge mentioned by start-ups is to prevent that know-how is concentrated in a few team members, especially those that have been working for the company longer. This problem is particularly worrying for start-ups as know how is owned by a few individuals instead of by the organization.

Also, one start-up mentioned that the onboarding process slows down when know-how is concentrated in silos. It takes longer to absorb key information when new joiners rely on a few sources. This has a large impact on start-ups as they have higher hiring growth rates and smaller teams.

Therefore, it is key to establish a culture and communication plan that ensures company know-how permeates at all levels, speeding up on-boarding and preventing the risk of losing key knowledge when team members leave the company.

“When we were hiring people very quickly, we had to reinvent the wheel so many times due to the lack of proper knowledge sharing” - Series B Founder

Team structure: reshuffling since day one

When start-ups grow, refreshing the organisational structure presents an opportunity to re-prioritise the skills required to deliver the product, increase sales, or manage support functions in-house.

In early stages, start-up’ teams must be on top of several areas outside their core areas because they cannot afford to have resources dedicated to non-core areas. For instance, heavier legal and compliance requirements represent a challenge along the journey to become a Series B+ start-up because they require hiring expensive resources, which usually don’t generate extra revenues.

Start-ups should have a broad view of where the skills gap lies within the organisation and remain focused on hiring talent where is best utilised to continue growing. One key takeaway from a VC investor is for tech-focused start-ups to appoint a CTO early on, the skills and experience can set up the product for success.

Conclusion

During our interviews, we found that VC investors share common areas of interest and founders face similar challenges across early stages. Both, founders and investors, look at start-ups with different lenses. Therefore, the key takeaways from our conversations can be summarized based on each of those perspectives.

Start-up priorities on people and culture:

• Establish a great leadership team and recruit the right team for development and delivery.
• Leverage a clear vision and state of the art technology to attract talent in early stages.
• Define a culture early on that works for the founding team and maintain it at later stages.
• Establish a fluent communication strategy to facilitate know-how sharing.
• Remain focus on hiring talent where the return on investment is higher.

VC priorities when looking at people and culture before making an investment decision:

• Identify strong founding team with clear articulation of vision.
• Assess quality of the team beyond the founding team.
• Evaluate that people in key positions have the right skills and experience.

The challenges noted above are not unique to each funding cycle, however they were presented by the different start-up founders and VCs who kindly shared their very valuable experience. Please feel free to reach out to any of the authors of this article if you would like further information or are looking for support in any of these areas.

Start-ups mentioned several times that they benefited from experienced advisors and partners support to overcome their key challenges. Some of those key challenges and how expert support makes a difference are summarized below:

To learn more about our conversations with Fintechs and VC investors, read our next blog on Scaling.