The Importance of Startup Culture

August 1, 2017

When Yoav Lurie raised $6 million in Series B funding, he quickly grew his team from 20 to more than 60 people in a matter of months.

As Founder and CEO of Simple Energy, he was excited to position his company for growth.

Yoav hired expensive consultants to help define the company’s core values and culture because he understood how important it was to do so.

But while his burn rate grew rapidly, his revenues couldn’t keep up. Soon, Yoav would find himself letting 21 people go in one day.

“How I blew $10M and came back from the dead” was one of the most memorable talks I have attended to date. Yoav, speaking at Techstars’ annual FounderCon event, shared a brutally honest story about how he nearly ran his startup to the ground — all because of cultural misalignment within the company.

“We had our core values painted on the wall, and the company mission statement was visible to anyone,” he said. And with those written values and mission statement, they hired highly skilled, highly qualified, and very experienced individuals to join the team. “But the problem was that individuals were about five degrees misaligned.”

Yoav realized they had expanded too quickly without defining their culture clearly from the very beginning.

So, the founders of Simple Energy got together in 2015 and began redefining their core values based on the original principles upon which they founded the business. In the process, they let go of 21 people in one day, many of whom didn’t align with these core values. It was a ballsy, but critical move to save the company.

In the end, Simple Energy dramatically reduced their burn, avoided bankruptcy, and ended up far surpassing the original revenue targets with a far more aligned team.

Yoav’s story epitomizes what it means to become an Efficient Startup.

The value of culture

When people think of ‘company culture,’ they conjure up images of free booze, foosball tables, and bean bag chairs. These perks are nothing but manifestations of culture. Over time, even the prospect of free massages gets a little old.

Individuals who stick with your business for the long run are looking for something much deeper — something about your company and its mission that resonates with their own personal values. Why do you exist? If the answer to this question completely contradicts with what an individual believes in, there is almost no chance for cultural alignment — no matter how many company perks you throw at someone.

In my opinion, defining culture is the most crucial step a startup should take before they grow beyond 10 people.

Brian Chesky, the CEO and co-founder of Airbnb, explained his thoughts on this phenomenon in an excellent blog post that has made its rounds in the startup world.

“[Culture] is living the core values when you hire; when you write an email; when you are working on a project; when you are walking in the hall. […] The culture is what creates the foundation for all future innovation,” writes Chesky. “If you break the culture, you break the machine that creates your products.”

Business professor Raj Sisodia found that a selection of 18 top companies with a higher purpose and a values-driven culture — otherwise known as conscious capitalism — did 10 times better than the S&P 500 index over a period of 15 years.

In their book “Built to Last: Successful Habits of Visionary Companies,” authors Jim Collins and Jerry I. Porras argue that many great businesses succeeded because they have a cult-like culture. They performed an extensive semi-quantitative study comparing big successes alongside big failures in many industries across a multitude of parameters, and concluded that the biggest determinant for success is a strong alignment around core values.

Meanwhile, in his book “The Advantage,” business writer Patrick Lencioni argues that any company’s most important goal should be organizational health, of which culture is a crucial part.

Creating your culture

Alright, so I have you convinced that company culture is important. Now, how does one go about creating one?

Whether you’re aware of it or not, you have already created a “de facto” company culture. It forms organically from the founders and the first hires, because if you’re crazy enough to take a little idea and devote your waking (and non-waking) moments to making it grow, some of that passion and spark is bound to rub off on the rest of the team and the company itself.

This means that the founders’ personalities and philosophies will naturally be reflected in the way the business operates. Competitive, aggressive founders tend to create a fast-paced organization that prioritizes achievement above all else (I’m lookin’ at you, Uber), while idealistic and socially conscience founders will naturally inspire their team members to do good and make the world a better place (as cheesy as this sounds, it’s true).

Because companies are made up of human beings, a company’s culture is constantly “on,” depending on many individual actions. Culture is the emergent property if you viewed your startup as a superorganism. Your culture naturally evolves as your company grows and more people join your mission.

If you let culture grow organically, your garden will inevitably start to grow weeds. For a team smaller than 10, this may still be manageable. For every additional person you bring on board, the number of communication channels will grow exponentially, and your culture gets diluted quickly. If you don’t tend to your garden closely, it will grow wild into an unrecognizable state, destroying any resemblance of the original vision you had for your culture.

In the wise words of Peter Thiel after investing $150M in AirBnB: “Don’t fuck up your culture.”

Founders need to define what kind of culture they want in the early days of the company. The sooner you do this, the more genuinely close it will be to the original founders’ values. Lencioni recommends answering two simple questions first: “Why do we exist?” and “How do we behave?”

These are not easy questions. The process of answering is probably more important than the answers themselves. We’ll share how we approached this process in our next post. The resulting answers should vaguely resemble your vision, mission, and core values.

The founders’ philosophy should be obvious and omnipresent to all team members, even to those hired long after the founders have departed. Many visionary companies that Collins studied in “Built to Last” (e.g. IBM, P&G, Nordstrom, American Express, Ford) were founded over a hundred years ago! What these great companies have in common is a cult-like culture that has lived on through the generations.

In our next post titled Simple tools for building your culture, we’ll share our experiences with setting and maintaining our culture as we grow our startup. Stay tuned!