Sometimes when I read tales of startups riddled with problems of corporate culture and poor conduct, I want to grab the founders by their shoulders and shout, “You’re doing it wrong!” I suspect I’m not alone among compliance professionals.
The failures themselves, in hindsight, are always painfully clear. Too much growth, too little attention to people and conduct.
We have several examples in the news lately. Foremost is Uber—a company that has arguably grown out of its startup phase – which is facing accusations that it allowed a sexually harassing culture to fester for years. Additionally, an embarrassing video of founder and CEO Travis Kalanick surfaced showing him berating an Uber driver who had complained that the company’s pricing policies were costing him money. (To his credit, Kalanick has since apologized for his behavior, and Uber has begun searching for a chief operating officer to help him.)
But Uber is the foremost example only because its app exists on so many phones. A more telling example may be NastyGal.com, an online fashion retailer. NastyGal began in 2006 with a founder rummaging for vintage clothes and selling them on eBay. By 2014 the firm was making $85 million a year—but by January the company was in bankruptcy, with “toxic” used to describe company culture. Another victim of too much growth and too little attention to culture.
The failures themselves, in hindsight, are always painfully clear. Too much growth, too little attention to people and conduct. What were they thinking, ethics and compliance officers ask? How could they not have known better?
Data on how many startups fail because of ethics and culture problems is hard to find. One research firm, Fractl, examined 193 blog posts from founders of startups that failed, trying to get some answers.
Operations-related challenges were easily the biggest reason; half the posts referred to a business model that wasn’t viable, or running out of cash. The study had no single category for culture, but 17 posts cited “lack of focus,” 14 identified “disharmony among team/investors,” another 11 cited skills gaps, and nine mentioned hiring mistakes.
The faster a startup grows, the more it struggles to find the right structure to sustain that growth.
If we group those reasons together under a “poor culture management” category, that’s 51 failures; or roughly 26% of all startups examined. So even in this study, which examines only a tiny fraction of all startups, culture problems are a big headache.
What’s more, the CEOs at startups usually know the importance of culture. In fact, they often obsess over it. Which returns us to our original question: why is corporate culture such a challenge for them?
3 Missteps for Startup Culture
#1 The necessary people and structure aren’t in place before high growth begins.
The faster a startup grows, the more it struggles to find the right structure to sustain that growth. Perhaps the executive roles to nurture ethics & compliance have not been defined yet. Or if the roles have been defined, the necessary people haven’t been hired. Or if the people have been hired, they don’t know the culture they’re supposed to support.
#2 The company structures a compliance function but ignores the ethics part.
Many startups see culture and values—that is, the ethics part of “ethics and compliance”—as the domain of the founding visionaries at the company. The compliance function, if it exists at all, addresses only regulatory compliance and assumes that ethics and culture will take care of themselves. This is especially true if the startup has payments processing or data collection as part of its business.
#3 The company’s priorities shunt ethics and conduct to the bottom.
Plenty of startups are backed by venture capitalists, and we should be clear-eyed about what VC firms want: to make money from their investment. Hence startups can have wonderful mechanisms to ramp up revenue growth, but they lack mechanisms to ramp up ethics and corporate culture at the same time. Their boards, populated with VCs, don’t see ethics and culture in the same way the board of a mature, public company does.
What Startup Culture Needs
People in charge of ethics and compliance at startups face an uphill task. We can’t even call them “ethics & compliance officers” confidently, because many will have the responsibility but not the title. So they work out of the accounting or legal department, with HR on speed-dial and a quarterly appointment on the CEO’s schedule, but does that enable them to build the firm’s capacity for ethical culture in that environment? Not likely.
Ethics & compliance officers in these situations should first remember the most effective argument: the faster a company grows, the more reputation risk it faces—and poor reputation undermines future value. That gets the attention of a VC-backed board, hoping for a payoff down the road. A strong corporate culture is the bedrock upon which good reputation rests. It allows a focus on all the operational issues that usually challenge a startup.
Second, have a roadmap to accelerate the oversight of corporate culture when the company does start to grow rapidly. Study how culture is governed in the main office. Study how other startups expand. Ponder the misconduct risks your company is likely to encounter in a high-growth phase, and match those risks to the roadmap you want to have at the ready.
The reality is that most startups fail. You may never unfold that roadmap to its full size. Still, many startups overlook the path to a strong culture completely—and look at how lost they are.