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01-05-2017 - - 0 comments
Looking for high-growth? Speak to employees #4 and more

It can be tempting to assess a startup like a rock and roll band. Focus all your energy on the attributes of the lead singer, and remain oblivious to the musicians, backing vocalists, managers and other behind-the-scenes staff. Yet behind every Bono there is The Edge, and forgetting about that can be a costly investment decision for you too...

 

Recent startup research by Coad et al. (2017) highlights that human capital shortfalls separate the thriving from the just-about-surviving. Their data set: surveys of 202 UK high-tech firms taken over a period of 13+ years.

The academics find that functional skills are critical management team assets in the early stages. Firms with a below-average growth trajectory were more likely to report issues hiring qualified managerial staff in their formative years, particularly in such areas as marketing and finance. This deficiency left a long shadow, suppressing the pace of expansion for the first decade of operations.

Thriving startups reported no such teething issues. Their human capital concerns tend to surface when they had matured and required greater technical expertise to remain innovative and market leading. When such R&D vacancies stayed open, their founders become considerably more likely to simply exit the business.

Why don’t their low-growth comrades follow suit? Coad and his colleagues believe the answer lies in aspirations. Entrepreneurs that have tasted success develop a lower threshold for ending their venture and moving on to a new challenge. The strugglers are more tolerant of low growth. They will keep plodding along, but are unlikely to amass the experts that will provide you with a high return on investment.

The moral of the research? Don’t forget to scrutinise the quality of the wider team, employees #4 and more. Meet with the CEO, by all means, but also pencil in time with the CFO, CMO or CTO.

 

 

Coad, A.; Cowling, M.; Siepel, J. (2017). “Non-founder human capital and the long-run growth and survival of high-tech ventures”. Technovation 59: 34-43

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