Startups are Failing Miserably by Ignoring Human Resources Strategy – and There’s Statistical Proof!
You’ve heard the statistics about how hard it is to run a business these days but have you considered that neglecting startup Human Resources strategy issues are a major blind spot hurting small businesses across the country? If you talk to many Founders, the reality is that Human Resources is an afterthought and strategic HR is rarely discusses until a) the company is in serious trouble financially or b) a serious HR issue happens that might land the organization in court. Recently, Entrepreneur.com shared an infographic that chronicled why businesses fail, how many companies are started and closed every year, and how long most startups last (hint: 50% fail by year five). When we consider the amount of time, money, and momentum invested in starting and running a business, a 50% failure rate is not okay. I’ve met business owners who’ve dumped their 401k’s into a debt-ridden business and worse – entrepreneurs whose home life has been wrecked due to the difficult rollercoaster ride of running a startup. Running a startup is a grueling grind and there’s no guarantee that you’ll be successful; but the one area that startups should try to invest in if they want to succeed is their strategic startup human resources operations.
Here are the five reasons why startups fail and my take on the HR adjustment that can fix or alleviate these challenges:
19% of small businesses fail because they are outcompeted.
The Strategic HR Fix: Small businesses that are outcompeted either need a) faster, smarter decision-making skills or b) talented and qualified people on board who can address business issues of the day and the future. The reality is that some small businesses hire with a collaborative mindset that gives unqualified people chances to do things they’re passionate about but not technically proficient in. I once had a $13million dollar software development client but the CTO had very little experience in modern technologies that were relevant in their field. The company was losing market share to competitors who did not offer the total package approach my client offered but instead they offered modern solutions that were easily upgradable and plugged in well with other tech systems in their customer’s organizations.
When you’re losing to competition you need intel and a plan. A strategic HR advisor can identify skills gaps within your organization and set growth goals for your people or suggest new hires that need to come in and breathe life into your organization.
Key Takeaway: A strategic HR advisor can be the champion for creating a competitive learning environment which raises the quality of your team output.
23% of small businesses fail because they don’t have the right team.
The Strategic HR Fix: This one is pretty obvious – you need new players on your team – but the “why” behind having the wrong employees varies from small business to small business. In my experience, family businesses tend to struggle with this the most because sons, spouses, and siblings can be given preferential treatment when it comes to hiring and promotions – which means responsibility is being given to someone who hasn’t actually proven they can get the job done. Small businesses can also have a “family” atmosphere which means relationships are formed and it’s harder to make decisions based on a person’s ability to get their job done. Small businesses that ignore sound HR influences suffer from having team members they might love as people but hate from a productivity and results perspective.
When you don’t have the right team, it’s important to assess what’s working and what isn’t. A strategic HR advisor can identify who is making the greatest contributions to your organization and who are the bottlenecks.
Key Takeaway: A strategic HR advisor can be the neutral third party who makes recommendations based less on relationships and more about a small business’s strategic business goals.
29% of small businesses fail because they run out of cash.
The Strategic HR Fix: Did you know that the top expenses in business are 1) insurance 2) taxes and 3) employees? (source). If you do not have a strategic HR advisor there to assist you in managing these expenses, it’s quite possible that you’re paying too much. Recently, a former client of mine was struggling with letting a six-figure executive go who’s impact and skills were no longer felt in a tangible way at the company. To make matters worse, the company was very much cash-strapped and failed to have oversight on employee vacation accrual and use. We were able to put the financial projections and implications on paper and make recommendations for what to do next. The difficult decisions to let the executive go (gracefully) and put in accountability measures for vacation usage wound up saving the organization a significant amount of money that could be re-invested into the business or set aside for a rainy day.
Key Takeaway: A strategic HR advisor can project the financial implications of employee-oriented decisions and recommend a clear path forward.
42% of small businesses fail because there is no market need for products or services.
The Strategic HR Fix: This one can be tricky because in a small business – especially in a startup where the current owners are the founders – there can be a dogged obsession with seeing a singular idea come to fruition. This obsession can pay dividends if there’s a market for the product and/or services the founder wants to bring to market but what happens when there is no market? What happens if there is a market but the company is trying to sell to the wrong demographic or packages it the wrong way? I remember feeling really bad for an older gentleman at my incubator who dumped his entire 401k into entrepreneurial efforts. He was working on developing a mobile game that was so singular in focus that there was no market for it and the cost to bring it to market was too much of a burden to bear. Small businesses who fail because there is no market need for their products or services usually establish an organizational culture where no one can tell the CEO “no.” It doesn’t take a rocket scientist to figure out no one’s buying what you’re selling but it does take a reality check and courage to pivot and say “okay, what’s next?” and to create an environment where subordinate employees feel empowered to add value even if it means disagreeing with senior leadership.
Key Takeaway: A strategic HR advisor can help create a culture of trust and help identify talented professionals who can help your vision become profitable.
82% of small businesses fail because they experience cash flow problems.
The Strategic HR Fix: If we are being totally honest here, most small businesses are one emergency away from going out of business. That emergency could be dried up sales, an inability to make a bloated payroll, a customer who wants to sue the organization, or legal fines and fees due to legal non-compliance (just to name a few). A strategic HR advisor is able to help manage corporate expenses and make smart recommendations – like business and errors and omissions insurance – that reduce overhead and serve as a safety net in the event of a business emergency. Taking an intentional and strategic approach to managing the human resources in your organization is the missing key to small business longevity.
Key Takeaway: A strategic HR advisor can manage costs on the biggest overhead items in your budget while also making recommendations that preserve peace of mind in the midst of the ebbs and flows of business.
This article was first published on Jumpstart HR.