What goes wrong when
Organisational challenges throughout the startup lifecycle
As a Coach, I mostly help startups and scaleups work more effectively - sometimes that means working with individuals, sometimes with leadership teams, sometimes with the company as a whole. What that gives me is some good insight into the common organisational challenges that come up for companies at different stages. It’s the kind of tacit knowledge I often take for granted these days but some recent conversations have inspired me to write a few things down about it.
I will caveat what I’m about to write by saying that of course not all of this is relevant to every company - many companies avoid these pitfalls, whilst others go wrong in weird and wonderful ways not listed here. It’s also worth pointing out that it would be unreasonable to expect any company to have a clean slate - when companies grow incredibly fast, things going wrong is par for the course, and in some cases can be a healthy thing. The challenge is to avoid those issues that prove truly catastrophic and to course correct quickly as others emerge. Jan Hammer of Index Ventures uses the phrase ‘surfing the edge of chaos’ which I think is an apt description.
The lifecycle of a VC-backed company
Forgive me if you know all of this already, but just by way of brief introduction - when I talk about a ‘vc-backed’ company, what I mean is a company that has raised money from an institutional venture capital company.
Depending on who you speak to, VCs are either the wise financial hand that steers good ideas into great companies, or blood-sucking money vampires who turn up to board meetings and ask why the growth graph doesn’t look steep enough (in my experience, both types exist).
Regardless of what you think about them, VCs are, in large part, the fuel behind the technology industry, and vc-backed companies tend to follow a fairly common path of investment rounds throughout their lifetime, with different rounds associated with different goals. If you want more detail on this you can see a good overview here, but if we cut the long story short - vc-backed companies are essentially built on a promise that, whilst they’re often losing money now, if they build what they plan to build, and grow to a certain size and scale, they will become a huge moneymaker in future. The successful end of that road (at least from a venture capital perspective) is often when a company ‘exits’ i.e. it is either sold to another company, or it goes through an IPO and becomes a public company - either of which, if all has gone according to plan and the company is indeed worth a lot more money than has been invested (a big if), is the point at which investors, founders, employees etc. are usually able to sell some or all of their part in the company and make potentially life-changing money. So the ‘ideal’ lifecycle of a vc-backed company is that arc from early promise to lucrative exit.
Now that’s just the financial story - the majority of founders I work with are motivated by more than just money - they have strong ideologies about making positive impact in the world, and many go on to do just that. But the fact that vc-money is what drives the industry means that even the most ideological of founders tend to find themselves doing the dance along the way - having conversations about ‘what’s the story we need to tell investors for the next funding round,’ hence there are some patterns that start to emerge.
Quick sidebar - with interest rates having risen over the last couple of years, it’s been harder for VCs to raise money and a lot of funding has dried up. Partly in response to that there has been an uptick in Private Equity investments into the world of tech. Private Equity firms tend to invest in, or even buy outright, more established companies that they see as being undervalued and something that they can flip for profit in 3-5 years if they can get in there and shake things up from an operational perspective, often getting rid of existing company leadership and bringing in their own team. I have less direct experience with PE-backed businesses but enough exposure to know that some of the challenges are similar but many are quite different in that scenario. That’s all just a reminder of what you already knew - not every company is a vc-backed one, and those that aren’t face some different challenges.
What goes wrong when?
For the sake of avoiding an unreadably long post, I’m going to simplify the stages into early (seed-series A); mid (series B - C); and late (series D+).
Early: Seed - Series A
This is the birth of the company and the phase in which founders are out to prove to investors that they’re onto a winner - they have the right idea, team, market and they’re on the path to reaching the heralded ‘Product Market Fit’ - a vaguely defined, catchall term to describe the signal from ‘the market’ that you’re building something people want and are willing to pay for.
What goes wrong?
The hunt for the lesser-spotted technical co-founder leads to the wrong dynamics
In the very early stages it’s all about getting the right team together. Founders and Founding Teams come in lots of shapes and sizes - there’s no gold standard for exactly what the team needs to look like to be successful, but there is typically a desire for a mix of technical i.e. someone/some people who can write code and build things; and non-technical skills i.e. someone/some people who can sell, market, handle operations etc. I don’t have any concrete statistics on this, but you only need to step into any accelerator type of program that aims to match-make founders to know that there are many more non-technical wannabe founders, than technical. Herein lies the first common mistake - bringing someone on as a co-founder purely because they have decent technical skills. It takes so much to get a startup off the ground, that any founder, no matter their functional skills, needs to have the desire and resilience to build a company, not just a product. If not, at best they’re an employee.
Getting this wrong leads to all sorts of challenging dynamics - resentment, frustration, and usually a messy breakup at some stage. In fact, there are studies to suggest that 10% of co-founders break up in the first year of business, and a whopping 55% in the first 4 years.
Founders struggle to adapt. They and the company feel the pain of that.
Founders need to continuously reinvent themselves as their company grows. There’s a piece of folk wisdom I heard when working as a product leader, that when you work in a startup it’s an entirely new company every 6 months - and each new version of the company calls for different skills, styles, processes, ways of thinking. This early stage is often the first big inflection point when a Founder needs to shift their focus from building the product, to building the team and the company. In the blink of an eye they can go from an individual contributor getting their hands dirty, to being a manager, and then a manager of managers. This can leave many Founders struggling to know how best to add value - what kind of altitude they need to be operating at, what and how to delegate, where to be in the detail, and how to manage and lead people who may have more experience than they do. The slower that adaptation, the greater the risk to the company.
The company is slow to bring together a coherent leadership team and vision of leadership. Alignment suffers. Some bad hires are made.
In the very early days there is little need for too much structure - it’s usually the founders and then everyone else. As the team grows to say ~20+ there might be an one or two others who start to drive some of the leadership decisions. By the time series A comes around, the headcount of the company may be 50+ (this can vary widely) by which point any company is just operationally way more complex than its humble beginnings. One very important solution to that operational complexity is the creation of a leadership team with a shared understanding and language around what it’s there to do, and what leadership should look like within the company. I love working with companies who are being very deliberate about this, but many simply aren’t and a few common challenges emerge:
The first bad leadership hire is made. Founders at this stage often lack experience in leadership hiring. Perhaps recognising some of the leadership challenges starting to emerge within the business they go looking for external leaders to bring in, some of whom are great, but usually there’s at least one who looks great on paper and has some impressive big companies on their CV, but is then entirely ill-equipped and/or unwilling to get their hands dirty in the manner that’s required in a company of this stage.
Some early employees take on leadership roles but aren’t given support - oftentimes, early employees who’ve added a lot of value as individual contributors will be rewarded with promotions into positions of leadership. Some thrive in that position and may be long-term superstars for the company, but some will have zero experience in managing or leading and when left to learn on the job can make big and costly mistakes that impact the wider team.
Departmental siloes form - when a leadership team is lacking, that dysfunction gets mirrored by the organisation. The team may have reached a size where it’s no longer the case that everyone knows everyone (particularly if teams are distributed and/or entirely remote) so it becomes easy for people to interpret what are actually organisational gaps as an ‘us vs. them’ situation.
Processes fall out of sync with the needs of the company
Process? What process? What was once a small group that was easy to coordinate becomes an unwieldy team without some structure and process. Some companies are too slow to adopt new process and chaos reigns supreme; others go too far in the other direction and adopt processes suited to far larger companies (this is particularly likely to happen if the bad hire listed above is made and comes in with a ‘playbook’ of things that worked at X big company).
Flow of information can become a big issue without the right channels and processes for keeping people informed, contributing to the sense of departmental siloes mentioned above; whilst decision-making responsibility can become ambiguous, leading to slower decisions or decisions made without the right information.
Mid: Series B - Series C
By this point the startup is starting to enter it’s teenage years. It’s had a good amount of growth in terms of revenue and headcount, but still has plenty of growing up to do to show that it can be a large scale, profitable company worthy of an exit. This tends to be a stage for highest turnover of staff, as those who like to work in early stage startups become frustrated by an increase in process and a change in culture.
What goes wrong?
Founders struggle to manage Execs
A significant number of founders step back into less operational roles at this stage, but those that remain in the business may be wrestling with how best to line manage established Execs who often have a lot more experience than they do. Some Founders might step back too far, not staying sufficiently involved to be able to judge if a good job is being done or if issues are simmering. This can lead to organisational problems only becoming known about once they’re a major issue. Other Founders will bring in great leaders but then frustrate them by seeming to micromanage.
Exec and leadership teams are left to self-organise but struggle to do so effectively
By this point there is usually an Exec team (consisting of C-level roles, sometimes plus a few more) and a leadership team (consisting of a slightly wider cross-section of leaders across the business). A number of companies work on an assumption that as these are ‘leaders’, they should effectively be able to self-organise and operate as a well-functioning team without much formal guidance. In my experience this is not true for a range of reasons:
There is usually some organisational politics and strong egos amongst the team
There may be some culture clash as by this point there is often a mix of leaders who’ve grown within the company and those brought in externally, often from bigger companies
These teams typically don’t spend enough time together and when they do, conversation is too shallow with not enough meaningful debate on key issues for the business
The teams are often unclear on what decisions need to be made by who, how - what is a decision worthy of the exec team vs. the wider leadership team; if we have a topic we discuss and debate how do we actually bring it to a clear decision which we align around and then communicate.
There is an identity crisis in the culture of the business
As the make up of the company changes - often with more people being hired who come from larger companies and/or prefer to work in a company that’s more mature - the company can go through a bit of an identity crisis. Are we even a startup anymore?
With more organisational complexity, velocity and dynamism can suffer, and if some of these issues aren’t well addressed then a lot of high-performers get frustrated and leave - some who simply aren’t well-suited to working in a bigger organisation and want to be back in a smaller team again, others who might have been real superstars that simply become a bit disillusioned.
Companies search desperately for an appropriate planning process
Planning and goal setting at all levels becomes more imperative but also more complex than ever, with many companies not really knowing what good looks like and struggling to design the appropriate processes. Planning often becomes a highly burdensome process that people resent, knowing that plans are rarely stuck to.
Late: Series D+
By this point the company is becoming a fully-fledged adult, and starting to wear a metaphorical suit (or maybe some chinos, a button down shirt and a Patagonia gilet to fit in) to look at its most presentable to the outside world. Emphasis is often on exit-readiness so profitability, efficiency, governance all become a greater focus.
What goes wrong?
Founder rebel spirit clashes with the idea of being a big/public company
There’s often a bit of a rebel spirit in founders, and for some, when faced with the proposition of being the leader of a public company, they start to ask themselves when everything changed - it’s kinda the founder equivalent of a midlife crisis, but rather than buying a motorbike, some can cause a lot of organisational thrash at this stage - trying to steer the company like a speedboat, not realising it’s more of a tanker these days, whilst sometimes backlashing against the very people they’ve brought in to tighten up on things like governance in preparation for an exit.
Frustration builds around bureaucratic layers and an organisational malaise sets in
Things move slower. There are more hoops to jump through. People start to realise that this is no longer a startup and is in fact a sizeable company. People’s activation energy for doing bold new things is generally diminished in the face of the effort to get things done.
Organisational politics erodes culture
Some senior leaders become kingdom builders. Too much happens behind closed doors based on soft influence rather than clear reason.
So there you have it - just a few of the common challenges I see cropping up throughout the lifecycle. If you’d like to know more about how I and my partners at Evolution can help your company to navigate them, then please get in touch seb@sebagertoft.com | www.sebagertoft.com