The Single Most Negative Event That Can Happen to Your Startup And How To Avoid It

The most valuable thing about your startup is not your great product idea. Ideas are a dime a dozen.

It’s not your interesting backstory and connections with investors that will surely fund you. Fundraising is not a measure of success.

It’s not the great partnership you’ve lined up that will give your product access to a large market. Early stage partnerships almost never pan out despite how good they sound on paper.

It’s not your early patent in the space, which you think will protect you from competition. Patents are expensive to litigate and easy to work around (and becoming less relevant).

It’s not even your rolodex of eager customers waiting to pay you as soon as your product go lives — only a small percentage will.

The most valuable asset early stage startups possess is its employees. And if employees are a company’s most valuable asset, the single worst event that can happen to a company is for an employee to leave (or be let go). Your job is to prevent — or at least minimize — that happening.

The Hidden Cost of Employee Turnover

There have been a variety of studies on the cost of an employee leaving a company.

In “Employee Retention Now a Big Issue: Why the Tide has Turned,” Josh Bersin of Deloitte estimates losing an employee can cost tens of thousands of dollars to 1.5–2X annual salary.

Bersin created the graphic below to show the cost to value of an employee over time. In my experience, it takes anywhere from 2 weeks to 3 months before a new employee becomes a net positive for a company.

Source: Employee Retention Now a Big Issue: Why the Tide has Turned

In a piece put out by the Center for American Progress, the authors found the turnover cost for the most highly paid workers is roughly 213% of salary.

A $100K employee can cost $200K to replace!

How can it cost that much? Most entrepreneurs underestimate the hidden costs involved with employee turnover, many of which are hard to quantify.

Let’s consider the impact of an employee leaving:

  • The institutional knowledge the employee has developed over time may be only partially transitioned to someone else. How many internal processes, bugs, customer or partner connections, and product issues is the former employee knowledgable about that won’t get fully migrated to someone else?
  • The internal relationships the former employee has with other employees is impacted. Maybe the former employee was best buddies with another employee, going to lunch together frequently. Now the experience for the employee that is staying is going to be diminished.
  • When someone leaves, it plants a seed in other employees’ mind, possibly starting a cascade effect. The internal dialog goes something like this: “Sally left because she was either unhappy or found more money or better opportunities. I’m not 100% happy with my job or I’d like more money or more opportunities, maybe I should start looking to see what’s out there.”
  • The external relationships the former employee has on behalf of the company have to be transitioned. This rarely happens with 100% coverage. Also, it never looks good to explain to a customer that someone is “moving on” or “pursuing new opportunities.”
  • Hiring a replacement is expensive and can take time. For some period of time you will need to make due without a backfill so everyone else has to pitch in. Then when you hire someone new, you have to hope you did a good job or you might be going through this same cycle yet again in a few weeks, extending the expense of the original person leaving.

All of the above issues are usually mitigated, but it’s part of the disruption that happens when an employee leaves.

Costs are Greater Earlier

The earlier the company, the higher the cost of an employee leaving. Fortunately, over time a single employee has less impact on the overall future of a company. A big part of creating a sustainable company is trying to minimize single points of failure whether that is processes or people. When there are just a handful of employees, each one can be critical. The relationship looks something like this:

Impact of a single employee versus company size.

We often use this relationship when trying to sell candidates on joining a startup. You can have a much bigger impact than at a large company! The other part of the equation is that it hurts a lot more when those employees leave because there are fewer of them.

Working Backwards

Not only are employees responsible for creating and selling the thing that will give oxygen (i.e. money) to your business in the form of a product, they are also the people you will be working with day-in and day-out. It’s always been important to me to work with people I like. Insert “Life’s too short” comment here.

If I’ve done a good job explaining why employees at a startup are so valuable, why wouldn’t you optimize your company around trying to retain them? It seems so obvious, but it’s surprising how many companies don’t really embrace it or simply pay lip service to creating a “fun culture” because it’s the trendy thing to do.

When I started Automated Insights, I knew I wanted to create an environment employees enjoyed coming to work, so I worked backward from that. We were recognized as a Best Place to Work in the Triangle four times in a row and our workplace has had a great reputation around the Raleigh-Durham area.

It has always struck me as odd that we were an outlier. Why do so many companies treat their employees like crap? It’s like the company is doing the employee a favor by employing them. The premise should be that employees are at the center and it’s the company’s duty to try to create the best possible environment for a fulfilling social and work experience.

Creating a “Sticky” Work Environment

How do you create a work environment that employees don’t want to leave? Early stage companies have limitations, but so do departments inside big companies. As Daniel Pink has shown, its not all about money. That’s not some simple platitude either — we had a lot of fun in the early days at Automated Insights despite being in a cramped, unsexy, corporate park office environment with limited funds.

As with most things in life, it’s more about how you treat people than what you give them. It’s more about making memories than making money. Most people don’t join an early stage startup because they are trying to maximize near-term monetary return. They should go to a bigger company for that. A big draw about a startup is the experience. It is your job to squeeze that benefit for all it’s worth.

Here are just a handful of activities we did that cost little or no money at all, but created lasting memories that we’d talk about frequently:

  • “Opening Day” — we used to grill out for lunch on Opening Day of MLB season each year.
  • We became dominate in local Dodgeball competitions, often submitting two and three teams when companies four times our size barely cobbled together one.
  • Pajama day, funny t-shirt day, etc.
  • Early on we’d completely destroy a person’s desk (in a funny way) when they went on vacation for more than a week. Welcome back!
  • We‘d play “around the world” in ping pong where the whole company participated.
  • After my final slide at company meetings, I’d do “One More Thing”, reminiscent of Steve Jobs, where I’d unveil something surprising or funny — often times it involved funny pictures of employees.
  • When the whole company would go out for lunch, I’d invent some sort of bet (that I knew I’d lose) as an excuse to buy everyone lunch. One time this involved a couple people eating the hottest wings at our local wing joint. They did so I bought.

I could keep going. Again, none of the things above cost the company much money, but it all contributes to making memories. We also took a lot of pictures throughout the year. After a couple years, I decided to create a Company Yearbook.

Creating a work environment that doesn’t suck the life out of you and people enjoy isn’t that hard as long as you believe in the value of your employees. The time and effort you put into it will be paid back many times over in the form of employees staying longer.

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