Most startups begin life full of enthusiasm and energy, with a scrappy team of visionaries working hard to build the next big thing. It’s easy for those in charge to ride this wave of adrenalin without giving enough thought to what comes next, which is invariably a new phase of the business that involves an expanding staff, a more methodical approach, and – if companies aren’t careful – the onset of employee dissatisfaction.
A study of 100 early-stage ventures by David Niu, CEO of TINYpulse, and Mark Roberge, CRO of HubSpot, found that some 70% of startups start having problems in years three and four, with staff reporting increasing unhappiness. This dip in the team’s morale occurs no matter how blissed-out they were at the beginning.
What causes the chasm?
The researchers dub this perilous period for startups the “cultural chasm,” since the problem can be traced to mismanagement of company culture.
The phenomenon is most pronounced in companies that have been growing the fastest. These hard-charging startups usually have the highest employee-happiness scores in year two, but the faster they are growing, the lower their scores sink in years three and four.
The study’s authors surmise that fast growth equates to a deep cultural chasm because founders of explosive startups are often so busy and distracted by the venture’s success that they neglect the careful work of building a quality company culture. When the inevitable growing pains start in years three and four, the fact that there’s no cultural foundation only makes things worse.
Voluntary attrition at companies with weak company culture starts picking up after a couple years. Those founders who did not rate company culture as of the very highest importance (10 out of 10) were 70% more likely to have higher attrition rates than those who saw culture as a primary concern. Startups with high attrition see their management difficulties compound, since these young, small companies don’t have the established systems and deep talent benches that larger companies can rely on to course-correct.
How to avoid the chasm
It’s clear that building a strong and positive company culture is the key to sailing through years three and four unscathed. But what does that look like?
The researchers found that investing in culture at the early stages helps retain employees later on. And a major key to continued employee satisfaction is their perception of management transparency. The strength of this factor was more strongly correlated with a quality company culture than other concerns such as benefits and work-life balance.
Part of transparency is being upfront about what changes employees can expect as the company grows and changes. Leaders should anticipate that in years three and four they’ll be hiring more specialists and putting more bureaucratic processes in place, leading to a turn away from a freewheeling, seat-of-the-pants culture and toward a more “corporate” feel that may rub some of the team the wrong way. Founders will find it useful to be transparent about these changes and portray them as a natural part of the growth process.
During this process, it’s important to keep in mind that regardless of how transparent management thinks it is being, it is employees’ opinion on that question that really matters. If employees perceive a lack of transparency, there is effectively a lack of transparency no matter what the company’s leaders perceive.
Non-monetary recognition of employee contributions is also a major boon to culture and happiness. These kudos can come not only from managers to employees but should also be encouraged among peers on teams and across the entire company. The study found that employees who both received and gave plenty of positive feedback performed better than their colleagues.
How to address unhappiness
What can startup leaders do if they find themselves wallowing in the unhappiness of years three and four, regretting that they didn’t focus on company culture early on?
The best method of bolstering foundering employees is to take their concerns seriously and address them straightforwardly. Solicit their feedback and address it publicly, even — or especially — if that feedback is something you know they don’t want to hear. Create a formalized plan for career advancement so employees know where they stand and where hard work might get them. Find ways to recognize employees and encourage peer-to-peer recognition throughout the company. And finally, communicate abundantly — to the point of over-communicating — about expectations, goals, and vision for both the company and employees.
The good news is that those who do fall into the cultural chasm and overcome it will start doing much better. Years five and six frequently see a dramatic rebound in company culture, especially in those firms that have worked hard to correct any problems that emerged during the chasm period.
Startups will never be able to return to that thrilling honeymoon of the early days when anything seemed possible if you simply wanted it enough — and were willing to work until 3 a.m. to get it. But the post-chasm period can bring a new depth of satisfaction as companies overcome challenges and learn to move forward as an expanding team toward lasting stability and success.