If you were to grade the tech sector on its ability to build sustainably successful businesses, what grade would you give?
For ‘sustainably successful’, let’s use the revenue of tech unicorns. An average US unicorn has annual revenues of around $125 million. These are mid-sized companies in revenue terms. They are also the sort of companies we want to create more of. They get their innovations to market, create jobs, raise capital and have a good chance of becoming large businesses.
So, how good are we at building them? As it turns out, not very.
GP Bullhound, a corporate finance firm, puts the odds of building a UK or European tech unicorn at 0.27%. While this is from a standing start, these aren’t great odds. There are ways to improve these odds, of course. Access to capital, recruitment of the right talent and exploitation of the right network are the three most cited tools of leverage. This is why a Silicon Valley-based company with financial backing from Sequoia, KPCB or A16Z has the greatest chance of becoming a unicorn.
And just how good are these chances? The odds climb from 0.27% to 8%.
8%. I don’t know about you but these still don’t seem like great odds to me. After 30+ years of deliberate practice in building tech companies by some of the best and brightest people in the world, a tech company’s odds of achieving sustainable success are still very low. What’s worse, the absolute failure rate of tech startups within 5-years remains at 90%.
Not all companies deserve to be successful. Natural selection keeps a company sharper and striving to be the best. But if there is interest in developing more unicorns, there needs to be a deeper discussion about what’s holding them back. This is not just to do with capital, talent or access to an exploitable network.
I have been observing these businesses for 20 years and have come to the view that the real issue is something else, something deeper. In my experience, most companies are ill-equipped to succeed. They are also ill-equipped to change, grow or make mistakes. And they are ill-equipped for the same reason that anyone is ever ill-equipped. They fail to prepare.
Every decision, big and small, draws a company closer or further from its goal. Most leaders plan for big decisions – business models, investment, product plans, sales approach, etc., but very few plan for smaller decisions – handling failure, success, internal conflicts, incentivisation, onboarding processes. Many leaders claim not to have the time to plan for such things. After all, life in a startup is crazy. Things are moving too fast. People must ‘get on board’ or get out.
For me, this is the issue. I’ve seen more businesses stall or fail for reasons related to these ‘small’ decisions than for big ones. They fail because they can’t hold on to good people, or achieve breakthroughs, or make the right products. Each of these is the product of ‘small’ decisions. You see, these ‘small’ decisions aren’t really small at all.
Deliberate Cultural Design
Big and small decisions affect culture; not away days, or bean bag chairs, or the odd trip to the pub. Culture defines the mindset, discipline and behavior of individuals within a company. It defines how milestones are pursued, how people are treated, how setbacks are handled, how new joiners are made to feel. It represents what is ‘real’ and ultimately determines what is achievable.
In my experience, most companies are very task focused, but pay little mind to culture. They acknowledge its importance but they’re not quite sure why. Most feel it’s to do with motivation or ping pong tables. Very few view it as the most critical tool they have for achieving success. Fewer still understand how to design it.
Deliberate cultural design is the most significant exercise an organisation can undertake to ensure sustainable success – more important than capital raising, or recruitment of talent, or the exploitation of networks.
It is the reason why a club like Leicester City lifted the Premiership title last year, against far richer, more talented clubs. It is why NASA successfully managed the Apollo missions with space vehicles that had less computing power than one of today’s smartphones. Make no mistake, these were feats of deliberate cultural design.
Such cultures are distinctive and represented by the following 5 qualities:
Selflessness – decisions, big and small, are made with the organisation’s best interest in mind;
Authenticity – people feel free to be themselves, enjoying deeper connections with colleagues, enabling more productive collaboration, leading to more breakthroughs;
Autonomy – people control their approach to work, reporting higher levels of motivation;
Challenge – people are challenged by work, reporting greater feelings of ‘flow’ or ‘being in the zone’.
Purpose – people are rewarded by their work in ways beyond compensation;
Cultures that have been deliberately designed create better outcomes. They do this by having systems in place to handle challenges that would normally bring other companies to a standstill. These systems give team members the confidence and security to relax, connect and enjoy their work more. When this is done, potential is unlocked and breakthroughs happen.
In order to be able to create cultures like this, leaders need to connect with individuals and teams. They need well developed human technology, like authenticity, vulnerability and empathy. These qualities, applied in the right way, create environments defined by intrinsic motivation, which is the fuel for breakthrough innovations.
Over the next 2 months I will deepen this discussion. This will kick off with an event on Tuesday, 15th November, exploring deliberate cultural design, and continue with additional content throughout November and December. Please feel free to get involved.
In closing, too many startups are boring, unpleasant places to work. If we want to improve our odds of building great businesses, we need to design great cultures. Without it, companies are nothing but a collection of individuals with competing interests, priorities and motivations; nothing more than lost productivity and high staff turnover; nothing more than just a part of the failed 90%.