The need for HR expertise at start-ups

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What is the appeal to HRDs of joining investor-backed start-up ventures and what should they look out for?

Serious money is pouring into the UK tech start-up space. The first seven months of 2019 saw $6.7 billion (£5.1 billion) channelled into UK tech start-ups, according to Tech Nation data.More than half (£2.8 billion) came from the US and Asia – representing more foreign investment than in the whole of 2018.

Some of these businesses will go on to enjoy incredible success, others inevitably will fail. It was ever thus with new ventures. What can be said with confidence is that a number of these fast-scaling young businesses will offer exciting opportunities to ambitious HR practitioners. Opportunities that increasingly include strategic HR director or chief people officer roles.

This is something of a shift from the situation several years ago when many start-ups saw little value in HR. Indeed, a number of the more gung-ho businesses in Silicon Valley proudly boasted they had no need for HR expertise.

But cautionary and unedifying tales of toxic cultures and unfit governance at high-profile companies such as Uber and WeWork have ushered in a reappraisal of HR’s worth in the start-up ecosystem, from private equity (PE) backers as well as the ventures themselves.

Culture first

“One of the things we have seen is smaller organisations investing in a high-level HR leader far earlier in their cycle than they used to,” says Strategic Dimensions managing director Daniel Caro.

“We used to get jobs where companies had been established for a number of years, and as a result of things going wrong – maybe the culture had gone a bit toxic, or they had growing pains, the reward strategy wasn’t right or they couldn’t attract talent to support their growth – they would go ‘Maybe we need an HR person’. And that person would come in and be firefighting and correcting things that were done wrong in the past.”

Now Caro believes there is greater respect for what HR can deliver strategically. In part this has grown out of a realisation that disasters such as the executive misbehaviour, toxic culture and poor reward strategy that led to the ousting of Uber’s CEO and founder Travis Kalanick could have been avoided or minimised had HR played a greater role.

“What has definitely been the case is that tech companies have been deliberately responsible for mass misdirection,” says Twitter VP EMEA Bruce Daisley.

“A tech company quite often is responsible for trying to build up its legend as much as its business, and so quite often you see a tech company claim to have these extraordinarily highly motivated cultures or a culture that seems to be mainlining adrenaline.”

At its worst this has led to the emergence of sexist ‘bro cultures’. Yet this is just the tip of the iceberg given that rapidly growing businesses face many culture-related challenges. Increasingly, adds Daisley, “people are recognising that culture isn’t something you can come to fix in year six”.

Perry Timms, chief energy officer at PTHR and author of Transformational HR, agrees. Recently he has had three separate conversations with founders of fast-scaling start-ups, all of whom indicated they wanted to get the culture right before bringing any people in to shape it.

Such is the power of the people and behavioural elements, Timms explains, that these people are confident Agile principles, task-based processes and governance protections are going to be easier to construct and deliver on.

But people has become a “big-ticket” aspiration that they want to get right as soon as possible.“An enterprising HR/people and culture lead is seen as crucial,” says Timms. “And so all those practitioners wishing for the seat at the table can forget their worries.

The table hasn’t even been set yet and HR is there before the seating plan, cutlery and menus are chosen.”

Rebel firms

That’s probably where the parallels with a convivial dinner end, given the pace of work and change within a typical early-stage firm. Enterprising start-ups tend to see themselves as disruptors, using digital and other technologies to challenge more established players in a wide variety of sectors from finance and transport to leisure, healthcare and beyond.

Considering such companies often aim to outwardly convey edginess and daring as part of their efforts to achieve exponential growth and lasting impact, there is a tendency for them to steer clear of being predictable and formalised internally.

A glut of ‘lift and shift’ HR policies and a litany of prescriptive people practices hold little appeal, and indeed may seem at odds with their disruptive core product or proposition.

In Timms’ experience such firms have three “trademark practices”. First, a resistance to any form of formalisation – which as things scale becomes more disabling than enabling.

Second, a “playbook of things that worked” at high-profile tech success stories such as Google, Spotify, Atlassian and others. And, finally, an overly keen attempt to formalise as a “rite of passage from crazy start-up to mature business”, particularly once they begin landing larger clients.

Such resistance to formalisation may be appealing to HRDs tired of the procedural overkill that can encumber larger organisations. Angela O’Connor, CEO of consultancy The HR Lounge, says a bonfire of HR procedures would warm her heart and knows other senior HR figures who share that view.

“The majority of procedures in organisations do not provide for better performance, greater satisfaction of workers or improved market share,” argues O’Connor. “There are some that are essential, of course, and anything to do with the health and wellbeing of staff is critically important. However, most organisations could lose most of their procedures and policies tomorrow to no detriment.”

A refreshing career

One senior HR figure with experience of both large corporates and start-ups is Dee Jas, who recently set up diversity and inclusion consultancy Colourfull. Earlier in his career Jas held senior HR roles at Santander and the BBC, before moving to mid-size enterprise Net-a-Porter Group, and from there to roles in several start-ups.

Tailoring HR solutions had greater appeal to Jas than working in an environment that had strict policies or processes. Moreover, he relished the freedom to address people challenges in new ways.

He says: “I found the leadership teams I worked with in that [start-up] sector were always interested in trying things differently. Creativity, innovation, freedom – there was a nice big bucket of stuff.

“I remember working at the BBC and thinking ‘this is such a brilliant organisation, in spite of itself’. That legacy or heavy history is something smaller companies just don’t have. They are not held back in the same way. The BBC would always think about the Daily Mail test: the scrutiny we would give to certain decisions on the basis that they might leak.

“Whereas for a smaller organisation it is kind of like a baby. No memories have been imprinted therefore it’s not expected to act or behave in a way that established organisations feel they must always act and behave, and sometimes that is to their detriment as they are slow to change.”

Another aspect to start-up life that Jas enjoyed was the opportunity to build teams and drive transformation. For example, from a D&I perspective he found it far easier to drive change and bring different people in, partly because roles tend to be “slightly more fluid, so you are growing on the job itself”. Start-up philosophy also often embraces the idea of people from different walks of life coming together to solve a common problem, he adds.

Melanie Steel, owner of People Change Expertise, is a transformation specialist and HR director with experience in the private and public sectors. After 20 years in permanent positions she switched to an interim career for personal development reasons and has seen a number of her contemporaries make the same move.

She also notes greater recognition of HR among fast-scaling businesses “that what they are missing around the table is that more strategic element, the senior HRD side of it” to help bring growth plans to fruition.

It is a challenge Steel finds far more attractive than the baggage that came with some of her old roles in the corporate sphere. “I couldn’t think of anything worse than going to do a global HR director role, which actually I’ve spent a big proportion of my time in, doing salary reviews and the more annual calendar event stuff.

"This is really important and needs to be done but can be hugely political and you end up spending a lot of time in that space. A number of us really love getting into a business and effecting change, that’s why we have taken a different route so we can do that,” she says.

Craig McCoy, who has been in HR for around 35 years, is another senior figure who prefers the challenges and opportunities of roles where he can have a genuine commercial impact. Formerly group HR director at BSkyB, he has in recent years concentrated on interim positions and is currently doing his 15th HRD job.

He says: “What I like is the degree to which you can actually make a difference and influence the organisation commercially,” he says. “These things now are much more important to me than getting the badge on your CV for having worked for a large FTSE 100.”

What start-ups want

The draw to work in a start-up among experienced HRDs is clear. According to Steel they want “people who may be a bit more fleet of foot, not wedded to the company and kind of have done it, seen it in other areas a few times”.

Candidates must also be capable of getting to grips with an organisation at a very accelerated pace and be able to drive value that exceeds the cost of paying for an HR heavy-hitter.

“The value piece comes in that you can spot stuff they can’t see,” adds Steel, who is quick to point out that while tech-led start-ups tend to grab the limelight, there is currently plenty of private equity interest in healthcare businesses in fields such as optical and dentistry.

“One thing I would say about private equity is that they, perhaps more than other shareholders, are pretty active in terms of thinking about talent and people from a strategic perspective,” says former Recruitment and Employment Confederation CEO Kevin Green.

“What that means is they are looking for capable HR people who can potentially do more interesting stuff because often they are fast-growth businesses that are growing market share, hiring people, and they are really interested in things like culture.”

PE investors have a clear exit strategy, and turning this into reality usually relies on strong growth so they can make a multiple and extract their cash.

“What they have learnt – and this is a big generalisation – is that people drive the value,” says Green. “Particularly in service-related businesses, whether they are technology or even recruitment, what you need is good leaders and the right type of culture.

"You need to invest and find the right talent, and if you do that effectively you are 60% to 70% of the way there. People are pretty high in the strategic mix for these organisations.”

Yet in Green’s opinion “steady-state HR directors” are not a great choice in helping drive these businesses forward. The best candidates, he feels, will already have been involved in a lot of change and will be entrepreneurial in nature. As well as working at pace, they must be willing to roll up their sleeves and make things happen themselves because they will be part of a very lean team.

Resilience is also a prerequisite. “Quite often HR will be sat on the board and these are quite robust places,” says Green. “As [start-ups] are not the easiest places to operate in you have got to be good on your feet and execute stuff. They don’t suffer fools gladly.”

Bringing in expertise

It’s interesting to note that some PE firms have also invested in heavyweight HR capability, with a view to giving their portfolio companies access to strategic firepower.

One such firm is Atomico, which has invested in more than 130 companies. A year ago it hired Caroline Chayot as talent partner, who has an HR background at Google and Twitter.

“Founders can spend half of their time building teams,” says Chayot. “But when they do it they may do it badly, and that can lead to a lot of churn.”

Chayot says that when she speaks to founders she discovers it is always people issues keeping them awake at night. Alongside this, the time between funding rounds is shortening as businesses look to scale up and internationalise faster, and the talent war in fields such as software engineering remains intense.

"Combined this means entrepreneurs need high-quality HR expertise earlier in the life of an enterprise than was once the case.“We see the issues that happen when they scale, what does and does not work,” says Chayot. “We are here to advise them on what should happen at this stage.”

Yet where necessary her role is also very operational. For example, getting her “hands dirty” helping companies rewrite their talent plans and sitting in on calls with recruiters for vital C-level and VP-level hires. Additionally, some companies in the Atomico portfolio ask her to observe their board to make sure they are covering the necessary issues and having the right discussions from a people standpoint.

“You have to get deep into some areas to be able to help these companies because they don’t all have the same structure or challenges,” adds Chayot. “And you have to be agile and fast-paced. I learn more in a week than I learnt in a year in my previous roles because we invest in very different areas.”

A stretch project

HR professionals moving into the start-ups themselves are also likely to be confronted with a steep learning curve and an expectation that they will cover a lot of ground – and quickly.

Áine Hurley, head of the HR practice at executive search firm Odgers Berndtson, says the prospects outside of traditional HR can be very attractive for the right sort of individual.

A really good HR leader, she says, might get involved in compliance and risk, customer experience, branding and communications and other areas outside the people function in a way that would be unthinkable at bigger, more siloed entities. All of which will help in developing broader leadership capability and commercial rigour.

“There’s the opportunity to influence your very senior stakeholders on the board,” says Hurley. “And you might spend quite a bit of time getting grilled by the operating partners from the private equity firm – those experiences are incredibly developmental.”

The potential for rapid personal development is one of the lures for a move into a PE-backed start-up. Anna Penfold, head of the human resources practice at Russell Reynolds, says she has seen “quite a shift in recent years, due to a host of factors, away from big corporates or plcs being the only real career destination for group HR directors”.

Yet while observing the rise and rise of PE as a vehicle for company growth and investment she has also seen it meet with mixed results with regard to human capital.

She believes that the HRDs best equipped to thrive in PE-backed ventures are extremely commercial and results-orientated. “The more the HR community are able to track, analyse, measure and quantify the value of what we do as professionals then the more that fits with the modus operandi of private equity.”

Circling back to the earlier point about culture, Penfold adds that high-profile crises remind executives at the boardroom table of the necessity to treat people well and stay true to the company mission and values. And this feeds the demand for strategic HR leaders in early-life companies.

A life-changing experience

Of course, it would be remiss to not mention the allure of potentially making it big. There is always the dream of IPO riches regardless of your functional expertise.

“Everyone hangs on to those stories of people who genuinely make their fortune in a very short time by being part of something that goes stellar,” says Strategic Dimensions’ Caro. “People do want skin in the game, to be part of something.

“It may not be your idea or business but you have got an ownership stake in it; a vested interest in growing this thing that could be a life-changing experience, both financially and in career terms.

“That is really exciting, but there is no reward without risk and that often means making sacrifices such as lower base salary, lower annual cash bonus, healthcare, pension, those sorts of things. Because the potential upside is significant.”

Risk and uncertainty are certainly not for everybody. But if you are a commercially-astute, entrepreneurially-minded HRD a start-up could be right for you.

This piece appeared in the January 2020 print issue. Subscribe today to have all our latest articles delivered right to your desk

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