Leadership in a start up

Here's another article I wrote for SHRM....


As I sat down to write this article, I was wondering where I should begin. The topic of leadership in a start up is so interesting and has so many facets that, for a moment, I was undecided about which aspect I should start with.
Then, I realised that, in some respects, the dilemma I was facing while thinking about commencing the article was the same that a leader faces in a start up. There is one critical question that needs to be answered: Where do I start?
However, if you were expecting me to give you an answer to this question, I am sorry I must disappoint you. The answer is that there is no single place to start. And that is what makes the job of starting up a new company or business unit such an exciting and challenging assignment. There is a whole bunch of moving parts that need to be dealt with and managed, and sequential processing is either not possible or undesirable. Let me explain why.
Most start ups, whether entrepreneurial in nature or as subsidiaries of a large (multinational or Indian) corporation have specific timelines within which the operation has to be established, a high quality team recruited, systems and processes put in place, strategies put together and executed, and, most important, revenues to be generated in order to meet a predefined profit or loss target. If these activities are undertaken on a sequential basis and managed piecemeal, two outcomes are possible.
First, at best, the start up will be delayed vis a vis plans and targets, which will be achieved much later than timelines normally set for such operations. Whether it is a venture capitalist or private equity fund or a large parent corporation that is funding the operation, the investing entity expects the start up to take off and begin generating revenues as soon as possible. A reasonable amount of time is normally accepted as a gestation period, during which critical activities such as recruitment and engagement of a team, implementing processes and putting together strategies can be done. However, my experience is that this gestation period is almost always desperately short of what should be the ideal situation. There is always time pressure. Which is understandable.
Second, at worst, the start up may fail to take off at all.
So, the biggest challenge for a leader in a start up is to confront these circumstances and make the best of them. There is no point complaining about time constraints. They will not go away. So how does one tackle them?
The critical competence that supports a leader in this situation is the ability to manage chaos and build a structure out of nothing. Being able to multi-task is very important, as is the ability to run multiple projects simultaneously without taking the eye off any one of them. And since the environment is dynamic and things are constantly developing, it is a bit like a hunter trying to focus simultaneously on several moving targets and trying to hit each one of them all the time.
Sounds impossible? Actually, it’s not. But if you’re accustomed to working in a large organisation, with established systems and processes and a comfortable support system to fall back on (in terms of HR, finance, operations and administration etc), then it becomes very difficult to adjust to a fluid environment where nothing is certain and anything can happen. I know. I’ve been through this when I worked in my first start up, straight out of a large multinational company where I had an assistant, a large operations team, an established sales team and a strong HR and finance support system at head office. From this comfortable and safe environment I jumped straight into a start up where there was nothing. No office, no assistant, no team. Even financial and HR systems were to be established.
It wasn’t easy. But it wasn’t impossible either, and since then I’ve done it many times over again. The key is to be adaptable and change your mindset. If you are able to let go of the cushy perquisites of working in an established organisational structure, it becomes rather simple. Actually, it is extremely enjoyable and very satisfying once you get down to putting the start up together. You may well ask why? Because, instead of inheriting something that you may or may not like (as most managers do, and I’ve done on occasions), you start with a clean slate in a start up. You can build the organisation the way you want to. You can recruit the people you want. There is no inherited baggage of any kind. Who could ask for more?
So much for the challenge of starting up. The other key competence a leader needs in a start up is the ability to lead people. Notice that I didn’t say manage people. True leadership, of the transformational kind, is required. To begin with, the team in a start up is so small that it is extremely critical that everyone works together and at the same pace. Due to cost constraints, it is often possible that the start up begins by recruiting less people than it actually needs to run at an optimal level. Which means that, like the leader, others in the team need to be willing and able to multi-task. There is no room for development of silos or reluctance to go beyond the official job description. In some sense, the job description only provides a guide to the primary responsibilities of the team member. It does not describe the boundaries or limits to what may be required of the team member.
What does this mean for leadership?
First, the leader cannot afford to stay aloof of the operations and expect to delegate everything. The leader must lead by example and be willing to roll up his/her sleeves and get down to brass tacks. Others will follow. Second, the ability to build strong relationships based on mutual trust and respect is extremely important. In a start up, more than instruction, leadership and guidance are required. If the relationships are strong, people will follow the leader. Third, communication is critical. The leader should be able to articulate and communicate the broad vision to the team, which they will then implement. If a single member of a small team is out of synch with the broad vision and strategy or does not understand or agree with a direction or the need for an action, it becomes extremely difficult to build the business with any degree of success. This does not mean that unanimity is a pre-requisite. It simply means that everyone has to be on the same page where strategic direction is concerned. Getting all team members on board irrespective of their personal opinions is the responsibility of the leader. And communication plays a crucial role in this process.
This competence has important implications for motivation and satisfaction. In many cases, especially in start ups funded by venture capitalists, employees are often hired at lower than market levels of remuneration and compensated through stock options or share of profits. Even if employees are hired at normal levels of remunerations, the time pressures and challenges of putting together a start up are so immense that it is easy for people to get frustrated and for motivation to suffer. This is especially true when the start up is a small part of a much larger organisation. There could be any number of challenges in dealing with the parent organisation. Bureaucracy in decision making and financial or other approvals, political issues in dealing with different hierarchies in the parent organisation, clashes of culture between the start up and the parent organisation (yes, this can happen, especially when the leader consciously cultivates a culture in the start up that is different, because he/she feels that culture is better suited to achieve the objectives of the start up); these are just some of the issues that can stymie the efforts of team members in the start up and lead to dissatisfaction and can affect employee morale.
In such situations, the leader has to be able to handle the issues with the parent organisation in a non antagonistic manner, while simultaneously managing the motivation levels of his/her own team to ensure that they are buffered against any negative signals that may emanate as a result of the issues with the parent organisation. This can be quite a tightrope to walk and the leader’s personal credibility and relationships with his/her team members play a very important role in keeping the team morale high.
There is more to leading in a startup, and one could write a book on this, but for the purposes of this article I hope I have been able to provide a glimpse of what leadership in a start up is all about. It is exciting, fulfilling and challenging to build a business from scratch, but the issues that I have highlighted need to be kept in mind in order to succeed.

More on Corporate Social Responsibility

I recently wrote an article for SHRM on Corporate Social Responsibility, which took further the address at the Humane Capitalism Conclave and the SHRM event which I've already posted earlier. This one explains a bit more about my viewpoint on CSR.


CORPORATE SOCIAL RESPONSIBILITY: CHASING A CHIMERA?


This is not an article on economic theory. But, in order to understand why I believe that Corporate Social Responsibility (CSR) is an unsustainable concept in the context of the capitalist system within which business today operates, it is necessary to look at what economic theory says about capitalism itself. While the analysis of economic theory that follows is a bit simplistic, it will be sufficient to explain the factors that underpin the capitalist system.

Let us begin the journey with Adam Smith. In The Wealth of Nations (1776), Smith presented the capitalist system as the interplay of capital, labour and land (the factors of production) and profits, wages and rent (returns on the factors of production respectively), within a structure of market exchanges involving production, income and expenditure. Smith described an “invisible hand” at work, created by the market forces of supply and demand, which in turn are the result of the independent decisions of countless individuals. Smith posited that it is this invisible hand that drives markets to a state of equilibrium. Underlying these decisions is the pursuit of self interest (by consumers) and the pursuit of profit (by owners of capital). The point to note is that owners of capital will productively employ capital where it yields the maximum profit.

Karl Marx believed that this theory was flawed. According to him, capitalism has inherent contradictions that are not explained by Smith’s theory. Marx postulated that capitalism promotes the production of commodities that have an “exchange value”, over the satisfaction of human needs through commodities that have a “use value”. This is the conflict that is inherent in capitalism and it is driven by the pursuit of profits. According to Marx, the biggest failure of capitalism is the inability to maximise collective welfare as a result of the pursuit of individual interest in the market.

Max Weber, in his work General Economic History, defines capitalism as a system in which enterprises engage in industrial production in the pursuit of “net profit” which is rationally calculated. By introducing the notion of net profit as an accounting concept, Weber further accentuates the profit motive inherent in an enterprise operating in a capitalist system.

Joseph Schumpeter introduced the concept of “creative destruction”, wherein an entrepreneur exists not to compete, but to change the nature of competition. Through innovation, either the productivity of the factors of production is enhanced or new goods are produced. This leads to profit. This process of creative destruction sweeps away old industries and methods of production, creating new markets or segments in the pursuit of profit. In this scheme of things, entrepreneurs innovate, not for the greater social good or to satisfy human needs, but to build a competitive advantage in the pursuit of greater profits.

Finally, John Maynard Keynes, whose thoughts have been resurrected in the wake of the global economic downturn, explained the role of money and the capital and labour markets in the capitalist system, in his seminal work, The General Theory of Employment, Interest and Money (1936). Without going into the details of this theory, which explained the role of money and interest rates in capitalism, one assertion stands out: capitalism is a monetary production economy which operates with the objective of realising profits.

What do we conclude after this quick look at economic theory over the last two hundred and thirty years? While we’ve just skimmed the surface, there are three inescapable conclusions.

First, capitalism is driven by a single minded obsession with profitability. Second, capitalism is not based on social or collective action, but on the pursuit of self interest. Third, the primary objective for the existence of an enterprise is generating profit for its shareholders, the owners of capital.

And that means that everyone in the system--whether it is enterprises or individuals like you and me—is driven by self interest.

Is it any surprise, then, that larger objectives like social and environmental issues and the quality of life have been subordinated to the pursuit of profit?

I can see some readers saying that this conclusion is not new. We’ve all known all along that the pursuit of profit lies at the heart of capitalism. We really didn’t have to study the theories of five famous economists to reach this conclusion.

True. But the point I am making is this: we’ve just seen how economic theory, irrespective of the ideology of the economist in question, supports the profit motive as the basis for an enterprise operating in the capitalist system.

But, where is the economic theory that supports the contention that pursuing social good or--as it is termed nowadays--social responsibility, is a key objective of an enterprise in the capitalist system?

And that brings me to the problem I have with the concept of CSR. It has an inherent conflict with the concept and operation of the capitalist system.

Don’t get me wrong. I have nothing against the objectives of CSR. Indeed, they are laudable. It is in the implementation of the concept that I see an inherent weakness that will prevent CSR from ever becoming a tool that will reshape the factors influencing social and environmental welfare.

This is not to say that CSR has not had or will never have any beneficial impact on social welfare or the environment. Far from that. However, I believe that this impact, however positive, will be limited in its scale and magnitude. From that perspective, the concept of CSR has been hyped beyond its limitations.

Moreover, quite apart from the limitation of the ability of CSR to impact social and environmental welfare on a large scale, there are drawbacks inherent in the concept, which dilute its effectiveness as a tool of welfare.

To begin with, take the words “social responsibility”. If, after the preceding discussion, anyone still believes that the words “social responsibility” have a place in capitalism, I will urge them to delve deeply into the economic theories I have referred to, before reading the rest of this piece. The only responsibility an enterprise has, in capitalism, is to deliver profitability to the owners of capital. I think that, too, has been conclusively established.

The problem with CSR is that it tries to modify the behaviour of a capitalist enterprise by imposing a social objective that is in conflict with its objective of profit. And this can never be as simple as it sounds. CSR is, in essence, an attempt to change the nature of the capitalist system. It espouses the philosophy that an enterprise exists in a community and therefore has a responsibility for the well being of the community. The philosophy is noble and I have no quarrel with it. However, capitalism is not a social or collective socio-economic system as I have demonstrated earlier. Depending on your perspective, you may view that as a serious flaw in the system or the critical factor that makes it the dominant system in the world today. But that doesn’t change the nature of the beast. Let’s face the truth: there is no place in capitalism for social objectives, unless they are profitable in themselves.

The second issue I have with CSR is that this philosophy of giving back to the community is linked closely to the reputation and image of the enterprise. I believe that this is rather a tenuous basis for the pursuit of socially responsible initiatives. While capitalist enterprises strive to be viewed as ethical in their pursuit for profits, that endeavour stems from the fact that their profitability would be adversely impacted if their ethical image were to suffer, since other enterprises would not do business with them for fear of the risk involved in dealing with a firm that is viewed as being less than ethical. There is nothing else in the concept of reputation and image, apart from this profit driven ethical orientation, which would motivate a capitalist enterprise to value reputation or image, especially when it is linked to social responsibility.

The third drawback of CSR is the fuzziness of definition. Ask a clutch of enterprises to define CSR and you will get a variety of definitions. In many cases, CSR really boils down to philanthropy, especially where the enterprise is driven by a promoter family with philanthropic beliefs. And, philanthropy is not a responsibility. It is a philosophy, a way of life.

It is this variability in the definition of CSR and the flexibility of interpretation that opens it up to misuse and affects its implementation. Misuse, because enterprises often pay lip service to CSR and ignore situations where there is a genuine human need, concentrating instead on situations that offer them the opportunity to enhance their reputation and image as a socially responsible organisation. What this means is that, in the pursuit of image and reputation, genuine social or environmental welfare is often neglected, and CSR fails to achieve its objective.

Even where enterprises are genuine about their CSR initiatives, they often focus on areas that are far removed from their core business. This leads to problems of consistency and sustainability of the initiatives. If the CSR activity is not integrated with the business, it becomes difficult to sustain in the long term, unless there is a strong philanthropic motive driving it. Moreover, in such cases, the CSR activity is often driven by the vision of the CEO. It is quite common to find that the nature of the activity and the beneficiaries change when the CEO changes. And, in the long term, no one really benefits.

In summary, therefore, CSR has great objectives, but the concept itself is open to misuse, and because of the variability of interpretation inherent in its definition, it can often be poorly implemented. Finally, as a concept that is imposed on an enterprise, it conflicts with its core business objective, and ends up being a poor tool for driving social and environmental welfare.