A child with Legos creates a number of fantastical structures, all with the same limited set of blocks and pieces. The child does that by choosing and rejecting blocks, grouping them in different ways, by mixing them up and rearranging them. Building an organisation is a bit like that. We all have a number of building blocks to choose from, and depending on the ones we pick, connect and organise, an organisation takes shape.
If we haven’t chosen the right blocks or haven’t built a strong base, the whole structure will collapse.
In this latest post in my First Principles series, I look at People Practice or the HR function in early-stage startups as the organisation’s foundational block.
(Read the other posts in the series here: Product-first to people-first, Employee-friendly Equity Policy, Solo Founder or Co-founder, Founder to Leader journey, Strategic Thinking, Organisation Design, and designing Organisational Culture)
As companies scale, at times the organisation is just unable to cope. The company and the founder face a slew of issues - from high attrition and employee disaffection to compliance failures. The reason is this: In the hurry to build a great business, enough attention was probably not paid to build an organisation, one that scales smoothly with the business.
In many ways a company’s People Practice function is at the heart of crafting a great organisation—an organisation where employees can get work done together while keeping in-step. However, in the early days of a startup when product and market are Gods, organisation building is put on the backburner, and HR relegated almost to a transactional role. When the startup scales and reaches warp speed, founders and top management realise the organisational building blocks do not have the strength to sustain this speed. The corrective action taken then is too little too late.
I find one of the reasons for this is that many of us are still stuck in our thought process in the earlier era of HR, when the function was all about process and not people. While we do talk about the Google school of HR where people are at the core, many companies still struggle to make their organisation people centric.
Today people management is about culture, engagement, environment, leadership, empowerment and fit. It is also about micro-teams that are empowered to make decisions and who work together in different combinations to achieve common goals. It is about providing frameworks for the people to excel and to facilitate collaboration. It is about building an organisation that is designed for success.
For this to happen, founders need to start at the beginning when the startup is founded—the Formation stage. In this post, I will focus on what early-stage founders need to focus on in organisation building.
Setting the stage
I am considering startups that are under two years old, have less than 100 employees, are in the Seed to Series A funding stage, and have raised up to $5 million.
I am further dividing an early startup into two phases:
Phase 1: Early-stage startup: ARR of 0-Rs 1 cr; 1 location, 1 product.
Phase 2: Early-stage startup: ARR of Rs 15-20 cr, 2-3 locations, 1-2 products.
The question on the minds of many would be: isn’t this too early a stage to worry about HR, shouldn’t the focus be on ‘business’?
Let’s take a closer look at what the founder is going through in the formation stage.
In phase 1, the founder(s) is pursuing growth through creativity. The crisis at this stage is that of leadership and the ability to manage increasing complexity, with founders struggling to both run and manage the business. Conflicts emerge, from which founder will decide which leadership role and what product to focus on.
The founder needs to answer the question ‘what am I going to deliver on?’ There’s always going to be multiple paths to reach the same goal, but the founder needs to decide on what’s most important.
In phase 2, growth should be through direction. Now that the base is set, the founder wants to grow faster. They want to increase the number of products or the number of locations or both. This is when the complexity of operations goes up. The early startup team made up of passionate and hustle-focused individual contributors have to become managers.
This is when they struggle. The startup needs to go through growth with direction, but that doesn’t happen.
This is why the Formation stage is most critical and important. HR is not just a function, it is an integral part of business. If the necessary HR or People Practice related foundational and scaling up steps are taken, then the move from phase 1 to 2 is smooth. When they are able to get the formation stage right, then the validation and growth stages become far easier.
In the minds of many, including those building companies, HR equals talent acquisition. Nothing could be further from the truth. The entire People Practice structure rests on organisational culture—that amorphous element that is hard to measure and assimilate, but which is in reality the foundation or backbone. On top of this are the pillars of People Practice function—Talent Acquisition, Talent Development, Org Design & Structure, Rewards, Compliance & Docs.
All these functions are important, but culture becomes the underlying philosophy that informs how these five pillars are built.
I have discussed and elaborated upon org culture in my earlier First Principles posts. But to recap, culture at its core is ‘how things are done inside an organisation’.
To understand the culture, the desired and undesired ‘behaviours’ need to be defined. Behaviour is often confused with ‘value’. For instance, a founder might say ‘integrity’ is a desired behaviour, when in fact it is a value.
Behaviour at its simplest is the thought process of getting things done.
For example, communicating effectively is a behaviour. When the founder understands the desired behaviours, it is easier to assimilate values. Why is it important to define the desired behaviours? Humans clearly understand behaviours.
A founder needs to state these are behaviours that I don't desire to have in the organisation. But how does a founder arrive at this and how does behaviour and culture inform other areas, especially in the formation or early-stage?
The start: When the startup begins life, it has unstated values and behaviours. The founder most likely hasn’t had a chance to think about org culture or is unaware and unclear of the impact of culture. The founder is building the product, figuring out the market and is pretty well focused on the core task of getting a business up and running. But the founder needs to carve out time for standardising culture.
Step 1: Do a leaders’ offsite or a huddle to clearly establish the startup’s Purpose and Goal. This is to define the startup’s and in turn the founder’s and the employees’ purpose. The desired behaviours are derived from the purpose and goal, an early version of the startup’s vision and mission.
Step 2: Identifying purpose and goal also translates to the leader(’s) understanding or realising their impact on others in the startup.
Step 3: Then begins the exercise of identifying desired behaviours and values, which will act as an extension of the leader and their impact and will become the framework for the team to follow in their day-to-day work.
Step 4: Identifying behaviours and values is one thing; communicating them effectively to the team, which includes embodying it everyday, along with purpose and goal is key.
Step 5: Policies, which an early stage startup will start creating and implementing, need to reflect the behaviours and values. If policies aren’t aligned with behaviours and values, this creates a dichotomy. For instance, if the founder has called for an empowered organisation, but the policies, like leave policy, have multiple approvals built in, the message the employee is getting is that the stated values and behaviour do not matter in practice. At such an early stage, a startup’s main policies could be leave, travel, and reimbursement. Policies need to reiterate and reinforce behaviours and values.
Step 6: When culture is institutionalised, it starts attracting people. This happens because the storytelling around the startup becomes powerful. New hires and employees have a clear line of sight on what they are solving, which in turn gives them visibility of where their career is headed. The purpose and goal have articulated the startup’s purpose for the next few years and the lived behaviours and values show the employees that the purpose and goal can become reality.
Step 7: At this stage, the founder might also perceive that certain undesired behaviours are being followed. Or they might want to do a rethink, maybe further detail out desired behaviours and values. This is typically at the stage when the startup has moved from phase 1 to 2. This is when they start hiring for culture fit. The founder by then has realised that skill sets and capability are not the only qualifications that matter; culture fit is equally, if not more, important.
The org culture then supports the other People Practice Pillars and offers clarity on how each of these pillars need to be built.
The various subsets of People Practice, like talent acquisition and policies, will develop step by step with the culture steps illustrated above. The idea is to allow culture to guide the establishment and development of the People Practice pillar.
Let’s take Talent Acquisition (TA) for instance. A founder typically starts by tapping their network for the first set of hires. There is rarely a job description and the hiring is almost entirely referral-based. But once the startup reaches the stage where values and behaviours have been identified, then the TA process needs to become thoughtful.
One of the important points to note is that while the startup may not have clear cut job descriptions, it should clearly state what success in this role looks like. If an HR manager is being hired, what are the results that are expected of them. This will lead to better fit. Similarly, a thoughtful TA experience would involve not making candidates wait, deciding on giving potential hires assignments or problems to solve, sending a post interview note of feedback, and putting various such steps in place.
This is important, as:
a) the candidate is the startup’s brand ambassador and,
b) the TA process at an early stage becomes almost set in stone even at a later stage. It becomes the process the team swears by, the process that the org does not want to change.
Employees know they are cared for when they know what, where and how their career is moving.
This is closely linked to TA. For instance, defining a role’s success parameters shows the new hire their goals. Map it with the desired behaviours, which comes from culture. The startup needs to show them a career path to attract talent and that comes from supporting the employee with acquiring the skills and knowledge needed to move up.
I recommend that companies start thinking about TD very early on, as the company is growing much faster than the founders. The founders are just catching up. For the next line of leaders, they are a further step behind. This often leads to conflict. Much of this boils down to lack of visibility of the startup’s future and that of the employee.
At this stage itself the employee needs to feel they are the owner of their career, which derives from them being able to not just visualise their career path, but also acquire the skills needed to traverse that path. When the employee is not able to take ownership, it directly and adversely impacts the startup’s ability to scale.
A very important step at this stage is for the founder to identify the startup’s critical talent. When a startup transitions from Phase 1 to 2 in the early stage, specialists start replacing or augmenting generalists. Senior talent is hired, including an HR manager. This critical or top talent needs extra attention, maybe one-on-one sessions and further learning experiences.
At this stage, it is good to create a framework document where the organisation (or People Practice head) charts out the various levels in each function and identifies the capabilities, key behaviours, and success metrics for each level. This serves the following purposes:
Organisations today work through clusters. Small teams in various functions collaborate with each other for different business goals, with the clusters changing form as per need. This comes down to the information flow, with teams converging based on what information is needed at that point in time.
While roles and hierarchies are important, it is even more critical to understand and build the org design, of how functions and teams work with each other. I go back to the point made earlier of when an early stage startup moves on to more than one product and one location. Without a well orchestrated org design, conflicts, unclear roles, gaps in capabilities and other issues will become the norm.
But this does not happen overnight. A startup’s org structure will start out informal, and as complexity increases and functions and teams emerge and solidify, the functional structure gets created and centralised functions like HR and Finance are formed.
The founder starts to coordinate rather than control and they feel the need for agility as they realise they become the bottleneck if they cling to decision making. This is also the stage when the startup has achieved PMF, has multiple products, and starts expanding their operation to more regions.The founder will start decentralising and that is when the clusters start emerging.
Assessment becomes critical here as communication breaks, rigidity in structure and lack of collaboration at the right levels and time can lead to failure. One quick way to understand this is to follow the information and data flows; if there are too many nodes and the process is too complex for various teams to get the relevant information, the org design needs to change.
At the early stage, rewards is essentially the compensation, which typically is a gross payment. Slowly the variable pay or bonus, insurance, retirals like PF and Gratuity, and ESOPs start getting added. Founders who have clearly articulated their startup’s organisation goals, will start off with a more well-thought out compensation plan right at the start.
Further, rewards get added and then the startup institutionalises compensation plans. At this early stage, when a startup starts scaling up hiring and the phase 1 to 2 transition is underway, a market mapping exercise is useful to understand where the startup stands in comparison to competition. This should lead to the startup’s compensation philosophy.
The compensation philosophy is important at an early stage as it directly impacts a business’ profitability. People cost is typically the largest expense for most startups. Startups sometimes pay 80% of the market when their margins are only 1% to 2%. This is unsustainable. Like most other practices, the compensation philosophy at an early stage becomes “the way things are done here” and it is tough to break out and reset.
Document, document, document—this needs to be a startup founder’s mantra right from early-stage. In their rush and excitement to build a product and take it to market, founders sometimes miss out on the various other elements of organisational compliance that could cause problems at a later date. For instance, when a large potential investor does due diligence at the Series B or Series C stage, they will want to see the startup’s documentation as part of it.
At the early stage, a startup needs to be compliant with laws like the labour laws and the PoSH Act, should have documentation like offer letters, leave, and compensation guidelines, and ESOPs. The goal is to be compliant with the laws and have the right documentation so there are no legal hassles.
In the thrill of bringing an idea to life, the founder should not forget that they are creating a brand new company as well. A number of building blocks need to be put together to create a strong organisation and this work never really ends. A strong People Practice function is a critical tool for the founder in this journey of building an organisation that is ‘fated’ for success.