the most common human resources challenges in startups and

7/21/2019 The Most common Human Resources Challenges in Startups and

1/28

The Most Common Human Resource Challenges Faced by

Startup Companies and Recommended Approaches to Dealwith Them

Bachelor Paper I

Submitted by: Kristna Paulovi

Matriculation No: 1210633869

at Bachelor Programme

Business Consultanc International

!International "uman #esource $anagement%

Super!isor: &r' (osette )in*ler

"iener Neustadt# $$December $%&'

1


2/28

+a,le o- Contents

& (ntroduction&

$ De)ining the concepts&

$& De)ining a Startup&$$ De)ining Human Resource Management$

* Startup challenges$

*& HR +lueprint$

*&& Dimensions o) ,mployment blueprints*

*&$ Typology o) ,mployment +lueprints'

*&* (mpact o) +lueprints on the Role o) HR-

*&' (mpact o) Changing +lueprints on .abour Turno!er/*$ Attracting and selecting competent personnel/

** Compensation0

**& Creati!e bene)its0

**$ Free bene)its1

*** +ene)its as in!estment1

**' ,2uity and stoc3 options1

**- +etter pay than the C,41

**/ 5art6timers# interns and !olunteers&%

*' .eadership and de!elopment&%

*'& Trans)ormational .eadership&&

*'$ Transactional .eadership&&

*'* .aisse76Faire .eadership&&

*'' 5ic3ing the right style&&

*- Money !ersus 5ower Dilemma&*

*-& 5re)erence )or Money&'

*-$ 5re)erence )or 5ower&-

*/ Mergers and Ac2uisitions&-

*/& De)ining Mergers and Ac2uisitions&-

*/$ The Role o) HRM in M8A&-

*/* The 9Ac2hire phenomenon&0

' Conclusion&1

.ist o) Figures$&

.ist o) Abbre!iations$$

1


3/28

+ibliography$*

.,stract in /nglishStartup companies are o)ten )aced with many challenges throughout their li)e cycle ;)rom the point they are born until the end o) their startup phase when they changeinto )ully grown6up )irms# merge# get ac2uired or become enternehmen !ielenschwierigen Au)gaben stellen Diese Heraus)orderungen beinhalten unter anderem die,ntwic3lung eines sogenannten 9human resource blueprints# Angelegenheitenbe7glich 5ersonalentlohnung# die ,rmittlung des passenden Fhrungsstils# Dilemmader ,ntscheidung 7wischen @eld und Macht# aber auch Heraus)orderungen be7glichdes Firmenwachstums und ,ntscheidungen ber e!entuelle Bbernahmen oderusammenschlsse u +eginn dieser Arbeit wird ede dieser Heraus)orderungen imDetail er3l?rt AnschlieEend werden mgliche Strategien herange)hrt um etwaigen5roblemen entgegenwir3en und 3on3urren7)?hig und er)olgreich bleiben 7u 3nnen

KeorsHuman resource management# Startup# Heraus)orderungen# Angelegenheiten#>nternehmer

2


4/28

1 Introuction

(n the past )ew decades it has become increasingly more attracti!e to set up startupcompanies 4ne o) the main reasons )or this occurrence is the all6time low and still

decreasing cost o) entry to the mar3et The ine


5/28

2'2 &e-ining "uman #esource $anagement

Human resource management GHRM is a concept that describes the way peopleshould be managed within organi7ations GReid et al $%%$# $'- 5innington and,dwards G$%%% argue that HRM is not simply a single theory that is alwaysapplicable# but rather can be !iewed as a set o) competing theories They claim that

HRM theories and models can be subdi!ided into two schools o) thought ; 9hard HRMand 9so)t HRM The 9hard HRM re)ers to trying to achie!e organi7ationJs goals bymanaging and controlling employees The 9so)t HRM# on the other hand# ta3es intoconsideration the employeesJ needs and )ocuses on the importance o) theircommitment to the organi7ation GReid et al $%%$ (n the )ollowing paper# the termHRM will be used to re)er to both o) these concepts

(n order to speci)y what e


6/28

$%&' Trying to cope with all o) that# the problem o) human resource management iso)ten neglected or e!en o!erloo3ed HRM is considered to be 9a useless di!ersion o)leadersJ time and energy away )rom more important and immediate concerns G+aronand Hannan $%%$# 0 4thers !iew HRM as only something that ta3es care o) the day6to6day acti!ities and administrati!e duties and belie!e it could easily be managed bythe )ounders themsel!es or by distributing the tas3s among some o) the employeesGFirmology $%&* The persuasion that HRM should rather 9ta3e the bac3 seat is)urther supported by those who percei!e it as not really cost e))ecti!e (ndeed# it maybe hard to usti)y the hiring o) a person GHR specialist to the small starting business#which is not generating any )easible re!enue GCommunities Digital News $%&'

Despite all what was said# the role o) HRM at the )irst stage o) a )irm is !eryimportant and should not be underestimated 4n the contrary# the )ounders should be!ery cautious when launching their businesses and pic3ing Gmaybe e!enunconsciously the HR blueprint )or them As the research group ; Stan)ord 5roect on,merging Companies GS5,C; has e


7/28

employees ; 9lo!e ; that would create a )amily6li3e atmosphere# inspire e))ort andhelp to retain the core members who are strategically important )or the )irm 4therC,4s belie!ed the wor3 itsel) should be the primary moti!ator that would help toattract and retain their employees (n comparison with the 9lo!e orientation# the)ounders that placed emphasis on 9wor3 did not e


8/28

Figure $: Typology o) ,mployment +lueprints# +ased on Three Dimensions GSource: +aron and Hannan$%%$# &&

The )irst model ; Star ; in!ol!es attachment based on challenging wor3# whereemployees are selected based on the top talent criterion and long6term potential Theemployees are gi!en a good deal o) autonomy and the )ounder relies on pro)essionalcontrol The second model ; ,ngineering ; also 3eeps the employees attachedthrough challenging wor3# howe!er# they are not selected based on their potential butrather based on their uni2ue 3nowledge and s3ills that can help them per)orm thegi!en tas3 The engineering model uses control through peers and organi7ationalculture# and is the most common type among high6tech startups The third model ;Commitment ; e


9/28

most !aluable assets are top6talent employees and recruitment and selection were acrucial brea3ing point )or their success The 3ey HRM challenge )or Commitmentcompanies was to create a strong organi7ational culture and attract hires that matchthis culture (n companies based on the ,ngineering model# the 3ey )unction o) thehuman resource department was supposed to be 3eeping the employees energi7edand buying 9the beer# chips and dip )or the Friday a)ternoon )esti!ities G+aron andHannan $%%$# &' The +ureaucracy companies understood the role o) HRM ascreators and promoters o) rules and procedures that needed to be done Finally# theAutocracy model tried to a!oid HRM completely# percei!ing it only as a cost itemThese autocratic entrepreneurs in these companies pre)erred to ta3e the control o!erthe employees in their own hands# sometimes delegating the 9human resource tas3sGre)erring mostly to payroll processing to their secretaries G+aron and Hannan $%%$#&-

3'1'5 Impact o- Changing Blueprints on a,our +urnover

For startup companies with lac3 o) resources# the people are the 3ey to success andthere)ore being able to retain them is !ery essential The study carried out by S5,C)ound considerable e!idence that changing the HR blueprint has a destabili7ing e))ecton the company They claim that by changing the blueprint the )irm rapidly increasesits employee turno!er# particularly o) the employees that ha!e stayed with thecompany the longest The S5,C also obser!ed that turno!er is dri!en by the 9changesin the nature o) employment relationships which are o)ten a result o) a C,4succession Howe!er# they do not consider the entry o) a new leadership to be thecause o) the turno!er# but rather a mere accompanying )actor G+aron and Hannan$%%$# $&6$$

The companies that were con)ronted with higher turno!er were )urther )ound toha!e e


10/28

to analyse the startupJs beha!iour in both them ; the startup phase and the growthphase

(n the !ery early stage o) a startup# the )irm is handicapped by two )actors# whichpotential employees )ind !ery important when applying )or a ob ; lac3 o)organi7ational )amiliarity and un3nown employerJs image G"illiamson# Cabel and

Aldrich $%%$# 0/600 The )amiliarity is 2uite necessary when attracting the potentialemployeeJs attention in the )irst place# while percei!ed organi7ational image is animportant determinant that di))erentiates one )irm )rom another G"illiamson# Cabeland Aldrich $%%$# 0/600 Since startups are 2uite new to the business# they o))er arather high le!el o) uncertainty and there)ore cannot rely solely on talent mar3ets astheir employee pool Furthermore# due to lac3 o) )inancial resources# they can rarelya))ord to employ sophisticated recruitment and selection programs or pro!ide potentialemployees with well6de)ined ob descriptions G.eung et al $%%/# //16/L% There)orein the )irst stage o) the startup the most commonly used practice is the recruitmentthrough networ3s GRTN

Core members o) a startup are usually recruited )rom social and businessnetwor3s o) the )ounders Gotto and @usta)sson $%%L# '# such as )amily# )riends orac2uaintances which may be con!enient due to easier approachability and greatertrust The problem is# startup C,4s o)ten underestimate the importance o) such HRdecisions# and by relying only on the RTN# they lose the chance to get the best talentson the mar3et Furthermore# i) the new employees do not )it the culture# they candestroy it easily and since they are close ac2uaintances o) the )ounders# it may bedi))icult to get rid o) them as soon as they reali7e their mista3e GCommunities DigitalNews $%&'

There are se!eral strategies that can help a startup to combat these early6stageproblems According to the +rand6Mar3eting Approach# suggested by "illiamson et al#the recruitment e))ecti!eness is strongly tied to ob see3ersJ organi7ational 3nowledgeand there)ore it is imperati!e to increase this 3nowledge through brand mar3eting Tocon2uer legitimacy issues# the same author also suggests a method called Strategicisomorphism >nderlying logic o) this strategy is that small businesses can impro!etheir credibility and be more li3ely percei!ed as legitimate by copying the pattern o)recruitment practices used by larger organi7ations Although this imitation may beconstrained by the a!ailable )inancial capital o) the startups# incorporating the core)eatures o) these practices pro!ed to be highly bene)icial G"illiamson# Cabel andAldrich $%%$# 1'6&%%

() the company already mo!ed )rom the inception and sur!i!al stage to thegrowth stage# the recruitment practices change notably (t already started attractingmore media co!erage# has a signi)icant customer base and e


11/28

The problem in the growing stage in startups may still arise )rom the inability to)oresee the indi!idualJs )it within the ne


12/28

3'3'2 7ree ,ene-its

5eople o)ten tend to !alue some per3s much more than is their actual )inancial !alueSome employees# )or e


13/28

talents usually are in the position to negotiate their compensation conditions# which isalso enabled than3s to

the )lat organi7ational structure and missing )ormal HR policies Gotto and @usta)sson$%%L# -

3'3'6 Part;timers< interns an volunteers

Asheesh Ad!ani# in his article on ,ntrepreneurcom# suggests another solution to thestartups that are unable to pay regular employees ; the use o) part6time wor3ers# orinterns and !olunteers G,ntrepreneur$%&' 5art6time employees# especially stay6at6home mothers and )athers seem to be the 9secret weapon )or startups This way thecompanies are able to attract 2uali)ied employees and cut their compensation costs bymore than hal) The only ris3y matter to beware when deciding )or this 3ind o)employment is the )act that these people are really doing it only part6time andthere)ore may prioriti7e their personal issues o!er the ones o) the business

,!en though this option is o)ten o!erloo3ed# hiring interns and !oluntarywor3ers is a great way to sa!e money while getting the necessary obs done>ni!ersity students and college graduates are an in!aluable source o) potentialtalents# all eager to gain e


14/28

)aire (t is important to understand these concepts# since each o) them has its ownimpact on the o!erall organi7ationJs per)ormance and growth

3'5'1 +rans-ormational eaership

This leadership style can be described as the most e))ecti!e and acti!e one#

generating per)ormance beyond the original e


15/28

leaders must ha!e an e


16/28

et al $%%$ cited in otto and @usta)sson $%%L# - Furthermore# delegating decisionma3ing to the employees and challenging them to sol!e stimulating tas3s cancontribute immensely to their internal moti!ation Since encouraging team spirit andinspiring internal moti!ation are the )eatures o) a trans)ormational leader# it impliesthat this style will be the most e))ecti!e one to adopt )or startup companies

Trans)ormational leaders are able to create organi7ational cultures which arebased on trust# tolerance# learning and e))ort Howe!er# these leaders sometimes ha!ethe tendency o) becoming too authoritarian and trying to do all the decision6ma3ingon their own This 3ind o) beha!iour can ha!e discouraging e))ects especially on highlycompetent and e


17/28

,!ery startup entrepreneur is ob!iously aiming )or both# being rich and being incontrol o) their business Howe!er# as the company grows# it is ine!itable to reali7ethat only a small )raction o) 9the chosen ones can actually bring that o)) The rest o)the businesses ha!e to sooner or later )ace the 2uestion o) money !s power# depictedin Figure ' The reason is simple ; e!ery startup needs some )inancial resources tolaunch# run or grow the business and when deciding how to raise the money as wellas how much to rise# the )ounder has to understand# which o) the two is o) a greatersigni)icance G"asserman $%%0# &60

Figure ': The Trade64)) ,ntrepreneurs Ma3e GSource: "asserman $%%0# '

3''1 Pre-erence -or $one

() the entrepreneur thin3s it is the money that is o) the most crucial importance# he orshe can easily raise the )inancial capital through in!estors e!en i) they gain a greatershare o) the company "hat the )ounder also has to reali7e is that when owning aminor share o) their company# he or she is losing the power o!er it and may be )orcedto descend )rom the C,4 position to a managerial chair This can in turn ha!e great

impact on the o!erall per)ormance o) the startup From the )inancial point o) !iew# thesituation )or the whole company and its employees should impro!e by ha!ingnominated a new C,4 who is more competent in the )ield Howe!er# the case can alsodeteriorate i)# )or e


18/28

3''2 Pre-erence -or Poer

Some entrepreneurs re)er to their businesses as being 9their babies and there)ore#despite ha!ing the chance to accept e.

The Q5M@ (nternational sur!ey monitoring per)ormance o) companies a)ter being parto) a merger or ac2uisition came to a surprising conclusion: "hen trac3ing the !aluecreated through M8A# the maority o) the companies did not enhance it This meansthey either stayed on the same le!el as they were be)ore the M8A or# e!en worse#

their !alue was# as demonstrated in Figure - This leads us to an obser!ation thatprobably something is not alrightP something important must ha!e been neglected

15


19/28

4ur interest is to analyse this )act )rom the HR point o) !iew and then demonstrate itsimportance and applicability to startups

Figure -: Trac3ing Trends in M8A alue ,nhancement o!er the 5ast &$ ears GSource: Q5M@ $%& /

According to a &111 @lobal M8A sur!ey conducted by Q5M@ 9>nloc3ingshareholder !alue: 3eys to success# there are si< 93eys used by companies to unloc3!alue )rom deals that they ta3e part in Three o) the 3eys are 9hard and include

synergy e!aluation# integration proect planning and due diligence The other threes3ills are called 9so)t and re)er to management team selection# addressing o) crossborder cultural issues# and internal and e


20/28

much earlier G@i))in and Schmidt $%%$# 0 There)ore this paper will analyse the HRMrole in each o) the )our M8A stages

Figure /: Types o) Due Diligence Done by Companies GSource: Q5M@ $%& /

(n the )irst# pre6deal stage# the tas3 o) HRM is to e!aluate the culture o) the twocompanies that are about to become one The cultures as well as the successre2uirements in the lines o) business that will be combined should be compatible TheHRM must )or e


21/28

regarding the happening M8A ; )rom changes in bene)it programs# through obsecurity and relocation 2uestions to in)ormation about the otherJs culture (t isimportant to pro!ide the employees with the sense o) security# otherwise the companymight be )acing loss o) their 3ey personnel and increased turno!er Not only the HRMunit# but also the C,4 has to step in right )rom the beginning Their role is to clari)ythe tas3s o) human resources in the M8A process and grant them competencies )ore


22/28

5 Conclusion

The main goal o) this paper was to determine# what are the most common humanresource challenges that startup companies ha!e to )ace# and to suggest strategiesthat are recommended to deal with them A)ter an e


23/28

Another 2uestion the startup )ounders ha!e to as3 themsel!es is whether theyha!e pre)erence )or money or rather power Many entrepreneurs thin3 they can ha!eit all# but the reality is di))erent and there)ore the paper highlights the importance o)being able to decide either )or money# which may result in gi!ing up the C,4 positionin order )or the business to )lourish# or )or power# which may end up in inability toraise enough money and slower growth >nless the )ounders )igure out which mattersto them more# they might 9end up being neither rich nor 3ing G"asserman $%%0# $

.ast but not least# with the e


24/28

ist o- 7igures

Figure &: Dimensions o) ,mployment +lueprints *Figure $: Typology o) ,mployment +lueprints# +ased on Three Dimensions -

Figure *: The Full Range o) .eadership Model &$Figure ': The Trade64)) ,ntrepreneurs Ma3e &'Figure -: Trac3ing Trends in M8A alue ,nhancement o!er the 5ast &$ ears &/Figure /: Types o) Due Diligence Done by Companies &L

21


25/28

ist o- .,,reviations

C,4 Chie) ,


26/28

Bi,liographAldrich# Howard and Auster# ,llen R &10/ 9,!en Dwar)s Started Small: .iabilities o)

Age and Si7e and Their Strategic (mplications Research in OrganizationalBehavior# ol 0# &/-6&10

+aron# =ames N and Hannan# Michael T $%%$ 94rgani7ational +lueprints )or Success

in High6Tech Start6>ps: .essons )rom the Stan)ord 5roect on ,mergingCompanies California Management Reviewol ''# No *# 06*/

+usiness Dictionary $%&' 9Human Resource Management GHRM De)initionAccessed No!ember * http:KKwwwbusinessdictionarycomKde)initionKhuman6resource6management6HRMhtml

+usiness Dictionary $%&' 9Startup De)inition Accessed No!ember* http:KKwwwbusinessdictionarycomKde)initionKstartuphtml

Cardon# Melissa S and Ste!ens# Christopher , $%%' 9Managing human resources in

small organi7ations: "hat do we 3nowI Human Resource Management Review&'# $1-6*$*

Communities Digital News $%&' 9Managing a Start6up company: The Hard 5artAccessed No!ember * http:KKwwwcommdiginewscomKbusiness6$Kmanaging6a6start6up6company6thehard6part6L/*/K

Cubi3s $%&' 9The Ris3s o) Ha!ing a Charismatic Company .eader AccessedNo!ember *http:KKwwwcubi3scomKarticlesKThought.eadershipK5agesKthoughtUleadershipUcharismaticleaderasp

the most common human resources challenges in startups and

Documents