• Dipankar Banerjee

The Ultimate HCM Perspective on Why Startups Fail

Poor HCM practices are the most pernicious factor leading to the downfall of over one-fourth of startups.

Real-Life Stories of Niranjan and Suresh

"Everything was progressing nicely as per plan until the point of raising 2nd leg funds. We tried our best but somehow could not raise adequate funds for expansion. Then at some point in time, we had to call it a day,"

said Niranjan, a young entrepreneur in his mid-30s who had to wind up his startup, during an interview for a product head opposition.

"I joined this start-up company with much keenness and hopes. Now I find that there is nothing for me in the company excepting work, work, and work, and blame when things go wrong,"

fumed Suresh, a young professional with 4+ years experience, vexed with his employment at a startup which itself seemed to be in the doldrums. Suresh was making every effort to control his tone and body language so that he did appear reasonable in his views and not spitting venom against his employer.

Over the last 10 years, I came across the same explanation as offered by Niranjan from most of the other startup owners who had met the same fate. Weakness in the sales and marketing front was the other root cause for failure mentioned by a few candidates.

But none of them mentioned failure on the HCM front as the root cause behind closing down their respective business ventures.

I can feel the agony and disappointment of those courageous young leaders whose sincerest efforts ended in smoke due to a poor turn of luck.

On the other hand, I have come across hundreds of candidates like Suresh, fuming and anxiously seeking employment with a fair and conducive work environment.

This paradox is the genesis of this article.

What came out of my discussions with both sides and subsequent analysis of the data and facts that I could gather unambiguously point to poor HCM practices being the most pernicious factor leading to the downfall of over one-fourth of these start-ups spanning across IT and ITeS, retail, financial services, and HR services sectors.

Founders' Misplaced Self-belief of Their HCM Skills

Without a doubt, each of these founders had strength in several of the core disciplines of business management – solution design, production or project management, CRM, sales, marketing, financial management, etc. Moreover, they were decisive, dynamic, and bold enough to take risks.

But several of them had misplaced self-belief about their HCM skills. The crude reality is that their understanding of HCM was neither holistic nor coherent. A below-average people management skill added to the former completed the recipe for the inevitable.

Talent vs. Inner Circle

The stiffest challenge that a startup encounters at the beginning is to attract quality talents who are willing to throw their hats with so many uncertainties. A startup at its infancy is generally manned by people close to the founders such as a classmate, a collegemate, a childhood friend, a relative, a neighbor, or a coworker from previous employment.

Being close or personally known gives a sense of security to founders in terms of their interest, commitment, continuity, and ethics, and makes the team cohesive by design. But this does not ascertain the competence of the incumbents for their respective roles.

Initial success with managing such a pre-bonded team reinforced the self-belief in the founders about their HRM skills and competence.

As the teams expanded with an increasing number of employees getting selected on merit rather than on personal connection, a multitude of challenges crept in. HCM did not remain the same ball game as it was in the infancy stage.

Lack of a Fair Work Environment

Some of the founders were either afraid of delegating some authorities to these personally-unknown but competent members or did delegate few authorities to personally-known members who were not the best choices for the delegation.

Some of the founders failed to recognize the high-handed if not intimidating behavior of some “old employees” towards some of the new employees who attempted to bring new ideas or approaches to the company.

Old employees “managed” to fly to other cities for office work whereas new employees had to travel by night bus or 2nd AC train at the best. While one team enjoyed a lavish team outing on achieving a critical milestone, another team was advised to practice austerity due to “tight purse”. Appraisal happened on the completion of one year for some employees but others had to wait for 16 to 18 months.

Partisan behavior of these founders towards select old employees shattered the expectation of fair treatment among most of the employees. Attrition rose, productivity declined, instability crept in pushing the cost upwards. Angry and negative feedbacks galore in forums like Glassdoor.

Lack of Funds or HCM?

What do you read in all these? Is it lack of funds ruining the organization or a failure to introduce and adhere to HR policies at the right time and poor people management skills of the founder driving the organization towards disarray?

Across nearly half of these failed start-up companies, the following four traits were unmistakably common.

HCM Trait: Not Recognizing Value of HR

The founders duly consulted tax consultants on matters of statutory compliance but did not consult any seasoned HR professional on HRM strategy or policies.

“What is there in HR other than recruitment and payroll?” opined the founders of some of these companies. Either the HR in these companies mostly acted as a puppet of the founders or there was a frequent change in guard in the HR team.

Borrowing words from Suresh, these companies were “a set of people working under the same roof but never a team."

HCM Trait: Poor Compensation

Employees barring a few closely-known persons were hired at rock-bottom compensation level and fired after a few months on the ground of poor productivity. This cycle repeated a few times gradually pushing the company towards fund crunch.

HCM Trait: Poor Work-Life Balance

Reckless insensitivity towards employees' need for balance between work and personal life. Employees accepted the diktat to stretch on working days, slog even on Sundays, postpone personal work week after week, cancel leaves approved well-in-advance till it reached a point of irreversible breach of patience.

Instances of absconding outnumbered instances of absenteeism. And the reading of the founders was “selfish behavior from immature guys who are neither industry-ready nor have a sense of ethics”.

HCM Trait: Poor Appraisal

The performance evaluation criteria were conveyed very late in the appraisal cycle. Appraisal took into account performance only during the 2 or 3 months immediately preceding the instance of the appraisal.

Myth: Small Companies Do Not Need Manpower Planning

Several years back, one founder-cum-CEO of a startup of 40+ employees dismissed my point about manpower planning, with a bit of annoyance reflected on his face, as he was “damn sure” that a small company of that size did not require manpower planning.

I avoided getting into argument with him but kept a close watch on that company more to educate myself if my understanding of the threats posed by the complete absence of manpower planning turned out to be realistic or theoretical in the long run.

Almost 20 months later the same CEO invited me to join him for tea for discussing “some business alternatives.” However, what he discussed was what kind of position and package he can expect if he sought employment as he had run into a problem with raising funds.

It surprised me as I was aware of an investor who had taken much interest to fund that company. During the discussion, the CEO told me that the investor decided to keep away as his cost estimates were revised upwards 4 times during the negotiations.

Further discussion revealed that the investor insisted on a detailed manpower plan and budget and that exercise pushed up the cost estimates gradually by over 40%. So the real issue was no dearth of funds but the investor’s confidence shaken by poor manpower planning and budgeting skill of the CEO.

I have observed identical problems crippling a few more startups I knew closely. Let me present another instance in support of my observation.

Myth: Founder Can Best Manage Human Capital

During the detailed discussion on the business plan and funds required for a startup company of about 14 months age, one investor who was much warm to the product concept noticed that the proposal did not mention any HCM manpower and budget for a team that was supposed to be ramped up from 12 to 40+.

As he dwelt upon this point, the CEO mentioned that HC would be managed strictly by himself with the support of one office coordinator who would keep attendance and leave records and compute salaries.

The budget for the office coordinator was lower than what might have attracted an ordinary graduate as per the investor’s understanding. He observed that the budget for travel, mostly to be undertaken by the CEO, was over 15% of the total budget.

As he dwelt upon this point for better understanding, he got to know that the CEO would travel intensely to ensure “maximum prospective customers” for his product. So the investor inquired how and when he would allocate time for HCM.

The CEO put up a brave face explaining how close HCM was to his heart but the investor was far from being convinced. The CEO failed to attract any other investor and closed down his company after another 5 months.

Why They Don't Admit

Before I end, one may question why none concerned admitted his or her failure on the HCM front if that was the real cause.

The answer is pretty simple. These professionals were seeking employment at middle management positions at least.

Strong people management skill is an essential requirement for these positions. Therefore, admission of weakness or failure on the HCM front might have caused the impromptu rejection of their candidature for such positions.

So better to be safe than sorry.

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