Does a startup need HR Director?

Over the last 12 months, I have spoken to around 600 companies, and I can’t think of a single presentation I’ve seen where HR personnel were mentioned alongside other team members. This strongly suggests that most current founders do not view HR as playing a critical role in their team’s success.

When discussing with seed / series A stage startup CEOs about their ideal executive management structure, it is also rare to hear the role of HR Director (HRD) brought up. Moreover, the CEOs who are aware of the need for a HRD, or who have already hired one, usually only make reference to recruitment as their sole function. Corporations tend to use the “HR Business Partner” position on their organigrams, but for the purposes of simplicity, I will use the term HR Director in this article going forward, which I think is more appropriate for the organigram of a startup.

In view of this, I decided to look into whether a startup really needs an HRD, and if so, for what purposes. While writing this post, I incorporated the views of startup founders and CEOs, HR directors from startups, and colleagues from Venture Capital, prior to making any conclusions.

This post aims to provide a complete picture of the requisite skills and knowledge of an HRD. I subsequently hope it will help startups to understand the need to hire an HRD in general, as well as for the candidate selection process.

As I wrote in my previous post, at the earliest stages of a startup, founders often will play more than 2 roles in the team at any given time. However, the faster the startup is growing, the more likely an overburdened founder can negatively impact the speed and maintenance of the company’s growth rate. In my experience, I most often see founders focusing on product or sales, while also being responsible for other roles like HR, marketing, operations management, and international development at the same time.

Usually, founders are professionals in their core area of responsibility, for example, in sales or product creation. However, they often lead other functions based on their intuition/experience, and may also not have enough time to oversee the competency properly, which can weaken the company. This can happen for a variety of reasons. First, there can be no guarantee that the founder’s experience. Second, founders often lack the specific skills to effectively perform other managerial roles. Hiring an HRD is not just about getting someone who can fulfill their responsibilities, but employing doing so will also allow companies to more easily find quality candidates for other roles in the company.

Of course, one of the main functions of an HRD is to search for and hire employees, but it is fortunately not the only one. Many startups, however, outsource this function to recruiting agencies. Often, the founders and the startup’s management will also look for personnel through their own networks for candidates. And while it is true that highly strong personnel can sometimes be hired this way, it is impossible to cover all the needs of a growing company through a network, no matter how well connected you are.

Usually, the idea of hiring an HRD comes to a startup at the round B/C stage, because this is when a greater number of issues start to arise in relation to HR. An array of problems and hiring tasks push business owners to look for an inhouse HRD. However, I strongly believe in the effectiveness of hiring HRDs as soon as startups have attracted seed round investors. Even if you are the founder of a Deep Tech company and sales are not yet close, the HRD can at least provide qualitative benefits in the formation of the R&D team, its motivation, a greater control of the “pulse and pressure” in the team, competent onboarding of new team members, and internal communications. If a company is at the stage of sales growth and going through a phase of scaling operations, the need for a HRD is even more pronounced.

The HRD is a full-fledged business partner of the company’s CEO. He or she deeply understands the company, the business, and the situation in the product market. They are also able to offer insight into HR strategy, help companies with opening a foreign office, and have a sense when changes in the top management team are needed. A good HRD ensures explosive growth of the company, without a reduction of quality in their services, or a deterioration of operational management. The HRD is the person that can confidentially discuss the performance of each top-manager with the CEO, identify problems in the management, and develop individual motivation and development plans jointly with the CEO. A further discussion of the key areas an HRD can help a company with are detailed in the following section on this post.

Balance of roles in the team

A startup has a number of key competencies or areas of responsibility it must account for to be successful, namely strategy, operations, product, sales, marketing, and HR.

Depending on the maturity of the company, one manager, the CEO for example, may be responsible for a number of these functions at once. If the number of competencies overseen by one individual is more than 2 or 3, it can affect the quality of management or the performance of these functions during the growth of the company.

First-time founders can find managing this balance particularly difficult, as it becomes overly challenging for them to prioritize tasks. With time management for founders containing a high amount of float, emotional burnout and physical fatigue periodically set in, which can reduce drive and, as a consequence, affect the morale of the entire team. This can subsequently pose a significant threat to the company’s growth rate. Investors and the Board of Directors may insist on speeding up development, thus creating further conflicts, and exacerbating these issues. I have modeled one of the situations which can be generic. The imbalance of roles and responsibilities is one of the reasons why a startup’s growth rate slows down, and the HRD’s task is to prevent this scenario from happening.

Hiring plan

The HRD is a full-fledged top-manager of the company they work for, as he or she is aware of both its financial indicators and strategic goals. His or her task is to provide support for development plans through timely hiring from the external market, facilitating the career growth of talented internal employees, the formation of a talent pool, and reducing the company’s number of employees who are either underachieving or not a fit with the startup’s specific corporate culture.

Talent pool

The HRD is intimately aware of the company’s plan, and in view of this, should proactively shape the company’s talent pool in the external labor market. This should include the creation of new positions in top and middle management, the establishment of mass line positions, the advertisement of promising new vacancies in the company, and the anticipation of upcoming changes in the company’s management. HRDs possess a network of reliable contacts at top-executive search agencies and recruiting companies on different continents. The HRD most often has his or her own experience of personnel search, is active on LinkedIn, knows how to use his / her network of contacts, and understands how to correctly use networks of colleagues, top-managers, board members and even shareholders of the company for the purposes of personnel search and talent pool formation.

Personal motivation of key employees

An HRD who understands people’s motivating factors is able to tell management the right keys to ensuring high performance from their personnel. Let’s call this the principle of inflamed eyes, as one of my BCG alumni friends says. Each employee has several key personal drivers. One of these is driven by goal achievement, another by teamwork, and others are driven by power, fairness, independence, security, or other factors. It is important for HRDs to understand the top 3 drivers of the company’s employees, or at the very least, the team of employees which has the highest impact factor in the company. This is because doing so will equip their managers with the requisite knowledge to select, together with the HRD, appropriate motivation tools for their workers, as well as enable management to monitor the level of employee engagement. You can find more details in this post.

Motivation system

On the basis of the goals agreed at a shareholders’ meeting or by the BoD, companies should necessarily build an internal system of staff motivation. This is a structure of Objectives and Key Results (OKRs) (or KPIs), distributed across employees and/or departments, tied to Employee Stock Ownership Plans (ESOPs)), material bonuses or, less frequently, intangible rewards. The good thing about a startup is that there is a direct correlation between risk and return, even for its employees. The first employees of a startup who find themselves in a situation of high uncertainty (in all senses) for the company can get the most options, and as a result, earn very well on a takeover or IPO.

An effective motivation system should also take into account the individual motivational track of key employees.

Control the level of motivation of top management and key personnel

The HRD should record signals of employee demotivation. These signals can include an increase in conflicts involving the employee, a higher amount of complaints, a decrease in performance, and a decrease in hours of work. In the crisis moments of a company, the majority of employees can be subject to a decrease in motivation. As a consequence, it is at this time when it is necessary to mobilize all forces in overcoming the crisis. The HRD’s task is to communicate any signals of employee demotivation to either the top management group or the immediate superior of the demotivated employee. Regular one-to-one conversations are a particularly effective tool in this scenario, as they help to establish a frank conversation with the employee, to extinguish the employee’s emotional crisis, and to form a set of steps to improve the situation.

Building a corporate culture

Building a corporate culture is often not among the top priorities of the founders at the seed and round A stages of development. However, it is worth noting that the quality of corporate culture affects a company’s staff turnover, the attractiveness of the company to talented applicants, and the company’s overall image on the labor market. In response to this, corporations have developed the ENPS or employee Net Promoter Score, an index of employee loyalty, which allows them to assess their personnel’s satisfaction with the company, and effectively understand whether employees would likely recommend the company to their friends and peers or not.

Corporate culture is a humanitarian concept that has to do with the extent to which the goals and values set in the company are shared by employees, and whether these goals and values effectively motivate them. For an example, look at Netflix and their approach.

Corporate culture begins to have a significant impact on businesses when they reach 20–30+ employees. This is the moment when it starts becoming difficult for the CEO to effectively oversee the whole team. When the number of employees exceeds 50, culture begins to play a highly significant role in the growth of the company.

A positive corporate culture can provide a company with the following:

  • A decrease in sales churn rate;
  • A reduction in employee turnover;
  • The creation of a strong employer brand;
  • The development of an entrepreneurial atmosphere in the team, as well as the emergence of fresh business ideas and new points of growth for the company;
  • A foundation for scaling your company.

Guide to building culture: Builtin

Mashable provides an interesting article on the importance of corporate culture to startups.

Global development

The HRD is directly involved in the building of a team for a new branch. The head of the new office should necessarily be strong and trustworthy employee. As a result, the task of leading a new branch is usually a kind of promotion, as it involves a substantial increase in responsibility. The CEO, in conjunction with the HRD, decides on the candidate, considering the fit of the new role with the employee’s specific type of motivation. Usually, people with a goal motivation will do well, while staff who are primarily driven by independence or security are less likely to be effective leaders of the new branch.

An important factor in the development of a startup is global growth. Opening branches or representative offices in new countries requires the HRD to have knowledge and experience in cross-cultural communications; though the HRD should also know that assistance will be needed in finding, hiring, and adapting personnel with a different cultural code.

When considering this point, I think it’s relevant to point out that failed global development is one of the top 20 reasons why startups fail, according to CB Insights.

Onboarding staff

In a startup, staff onboarding is usually handled by the immediate supervisor, who may urgently need fresh heads and hands. The HRD must consequently establish a more consistent process of onboarding. The HRD should advocate for the utilization of the company’s knowledge base, which he or she can help create tools for rapid learning with, as well as help facilitate its company-wide adoption. An effective supporting tool used in onboarding is the allocation of a Buddy (permanent or temporary) to employees, who is either a more experienced employee or a top manager.

Psychological help for the team

It is obviously great news if the HRD you hire is qualified as a psychologist or coach, but of course this is not the most important thing in this respect. Instead, a high level of empathy and trust on the part of the company’s employees is necessary. Working in a startup means often operating in an environment of high uncertainty, as well as being in a constant race for growth rates, investments, and clients, while also facing continuous competitive struggle. Breakdowns and emotional burnout (also one of the top 20 reasons why startups fail) are therefore not uncommon in these circumstances. If you’ve watched the Billions TV series, you can imagine Andy Rhodes’ daily routine. HRDs consequently must take on a high psychological load, and have to be prepared to handle this.

Conflict Arbitration

It is rare to find a startup without some degree of conflict among the founders. This is another one of the main reasons for early-stage startups to fail. Conflicts among employees are fairly common, in general. The subsequent task of the HRD is to act as a third party in conflicts in a timely manner, and to prohibit any conflicts from spoiling the atmosphere in the team, affecting company results, or irrevocably damaging the company.

Organizational structure

A two-tiered structure is usually the most logical and feasible option for a company at the seed stage. Using a flat organization allows employees to make decisions based on their knowledge, experience, and the strength of their ideas, rather than their hierarchical position. Maximum flexibility is required at the seed stage, so the fact that this organizational structure facilitates this is largely beneficial to startups.

Two-level organizational chart

An org chart with a formal structure should be implemented when a startup becomes a company of 20–30+ people. Often, the CEO is late in adopting the new structure, and this is where the HRD can help the startup by initiating this change. The increase in headcount is indicative of the expansion of the business. The founders or the CEO can’t effectively complete all of the work or manage all the staff, both because of the limits of their specialization and their energy. In addition, they must also maintain sufficient focus on other factors, such as strategy, company development, or fundraising. In view of these challenges, a three-level organizational structure is depicted below. I note that for many startups, a matrix structure, based on the principle of dual reporting to executives, may be relevant.

3-level organizational chart

Employee development

The experience, knowledge, loyalty, and dedication of the first employees of a startup are so important that it is worth investing in training them, even if their competencies lag critically behind the level of new positions being created. Establishing a proper system of employee development is therefore an important task for startups, despite the fact that the CEO or founders often do not take a hands-on approach to it. This consequently falls directly under the HRD’s remit of activity. The audit of employees’ competencies begins with gathering information from managers, and defining a set of competencies and knowledge that current and future positions in the company must have.

During this process, it is also useful to collect feedback directly from employees, as many of them will understand themselves what competencies they should concentrate on in terms of professional development. Based on the data collected, the HRD can form individual development plans for management and employees alike.

Employer brand

A startup’s employer brand is the company’s reputation as an employer. Simply put, it’s what applicants and employees think of you. The employer brand may not be tangible, but it is nevertheless an asset that needs constant attention and development.

This is because startups are in constant competition with other corporations for the most talented employees. It is therefore the task of the CEO and HRD to create company value for job seekers. The following statistics demonstrate the importance of a strong employer brand in respect to this.

  • Glassdoor research shows that 95% of candidates consider company reputation to be a key factor in choosing a job.
  • LinkedIn survey results found that 66% of candidates learn about a company’s culture and values first if they are offered a new career opportunity with that organization.
  • CR Magazine research shows that 69% of job seekers are not willing to accept an offer when they are aware the company has a negative employer brand.

At the early stages of a project, a startup’s PR can also act as a company’s employer brand. The HRD’s task is thus to adjust company PR based on employer brand objectives, and offer specialized tools related to this. A useful guide to employer brand can be found here with a list of tools.

Internal communications

Internal Communications (IC) are the eyes, ears and voice of the organization. In essence, it is the connection of all of the above initiatives and actions, though its full scope extends far beyond this. Broadly, IC refers to the quality and clarity of interactions between employees in different departments and the company’s management. In building internal communications, the HRD is responsible for making sure that employees receive the right information, that the organization is sufficiently transparent, and that employees are properly engaged. I would like to particularly address the following aspects related to IC in further detail:

· Internal and executive communications plan: Internal and official messages conveying the vision and positioning of the company, including presentations, announcements, and blogs, which will be transmitted through various communication channels. These are generally used to communicate new policies and internal company rules to employees.

· The development of internal communication channels and tools, such as email, messengers, online & offline meetings, etc. The internal communication tools of companies can include meetings, presentations, lunch & learn sessions, offsite events, random coffee meetings, magazine clubs, and corporate sports events, among other things.

· Collecting feedback from employees on strategy and operational interaction can help the HRD further determine how to better streamline IC within the company.

· Ongoing consultations of top management on the style of communications and the style of employee treatment should be encouraged. As the company grows, the importance of building internal communications grows correspondingly. It is therefore important that the topic is reviewed frequently with key management personnel.

To summarize, it is clear from the above considerations that the HRD can have a substantial impact on the running of a startup, even from an early stage. But how, then, should the founders or CEO of a startup motivate the HRD? The role of HRD is crucial to a company’s success and his / her motivation should be exclusively long-term, at least until the company is sold. It is consequently reasonable to include HRDs in the ESOP, because his or her work directly affects the capitalization of the startup. This will enable and encourage the HRD to achieve significant long-term results.

Daniel is a Partner in Phystech Ventures. Hydrogen fuel cells pioneer in Eastern Europe. Venture capital professional focused on DeepTech, Robotics, Quantum, AI