Last May, Silicon Valley HR start-up Zenefits was being called a “unicorn” and sending its top salespeople to Vegas for a bacchanal to rival The Wolf of Wall Street. My, how things have changed. Over the last several weeks, as news of compliance failures and employees run amok (between all the sex and drinking in the office, the place was, ironically, an HR nightmare) has surfaced, it’s become clear that Zenefits’ spectacular growth has also been, at least in the short term, its undoing. Last week I discussed several common reasons start-ups like this one suffer, and today I want to explore a few others.
A new firm can maintain healthy expansion only to the extent that its internal mechanisms are seamlessly coordinated. The problems of coordination—such as with the rapid addition of new locations and employees (both huge issues for Zenefits, which added a satellite office and hired hundreds of underqualified new employees over the past year)—are directly proportional to the rate of growth. An organization’s capacity to digest new elements depends on a complex set of organizational processes. It’s difficult to add employees and customers at an extremely fast rate without diminishing the quality of output or running out of cash. Failure to define processes for recruitment, selection, motivation, control systems, and development of values within the organizational culture creates chaos rather than providing the kind of transformation that will allow a new business to thrive. Ultimately, these issues can crush any hope of sustainability. Each person who began with the firm must change as the organization does, entailing a shift that can feel profound. The days of ad hoc management disappear, and managers must learn how to work at a strategically higher and faster level and to define the principles that will govern decisions such as who should be hired and fired. They must learn, quickly, how to create new structures so the company can spend serious money while taking bigger risks for bigger returns. And they often must learn to let go of traditions and established practices in favor of more professional norms. Beer pong at the office might be fine for a company of five, but it’s not hard to imagine why that won’t work for a company of one thousand.
The Fantasy That There’s a Map
Sustainable growth for any entrepreneurial venture requires moving methodically through a series of developmental stages. In one analysis of entrepreneurial growth patterns, 51 percent of the companies progressed sequentially through the expected stages. They followed a traditional linear pattern of development and growth. That’s good news. But the other side of this equation is the bad news: Did firms in the 49 percent that skipped the traditional stages of development one might assume to be necessary end up spiraling out of control and failing? With nearly half the successfully scaled firms not following any model that explains or predicts growth stages, it stands to reason that models accepted and used in the past may be poor predictors of how an organization might successfully scale in the future. A slew of “growth stage models” exists, but most are based on anecdotal observations rather than rigorous research. Warp-speed growth doesn’t follow a tidy linear progression. Analysis of successfully scaled organizations reveals that the stages or patterns of development vary. There is no universal road map that guides scaling. Only the road map that results from managing a unique, comprehensive vision can predict whether a scaled firm will sustain itself.
The Struggle to Maintain the Family
Watching a start-up scale without an adequate vision is a familiar scene: As the need for processes and values takes center stage, old rules disappear, time becomes woefully scarce, work life and personal life merge, and corporate gestures that used to mean one thing suddenly mean the opposite. A warm family atmosphere where everyone knew one another and virtually everything was transparent becomes an environment where silence replaces the easy, informal communications. To compensate for that silence—which is often both unintentional and inevitable—a plethora of ad hoc processes are set in place. Reporting systems, budgets, and performance reviews—often inconsistent in their implementation—attempt to direct employee behavior. When the easy, informal communications channels begin to fade and are replaced by more formal chains of command and departmental silos, people begin to feel overlooked, if not abandoned, by upper management. As the firm launches, the environment feels intimate. Everyone knows who is getting married, having babies, caring for a sick parent. But the venture has to get bigger, add more systems, and implement more controls. What used to happen spontaneously now happens systematically. Through email and voicemail, perhaps even with stringent reporting structures and weekly meetings, everyone may know everyone else’s business—but they no longer know everyone else’s name. The venture that begins as a team or family becomes an impersonal company as it scales. People within will likely remain strangers to one another in spite of the desire and hard work by some to keep the memory and spirit of the family alive. Often, the people who left a big corporation to become part of a start-up realize the firm is evolving into something all-too familiar and distasteful. It will be fascinating to see what Zenefits’ remaining employees do now that the party, quite literally, is over.
Facing the Enemy
If we step back and consider these organizational perils, a picture emerges of the firm’s biggest enemy to survival: its own executive management team. It may be a founding entrepreneur, a COO hired to “bring discipline” to the original vision, or the entire team. These hardworking people have enormous responsibilities for managing the liability of newness, coordinating organizational transformations, and determining which growing pains to address at different times. If correct and timely actions are not taken to address these issues, the team will probably fail at one or another goal. And when they do, there is the probability—however unintended and well meaning—of holding someone or something else accountable.