Reply To: How would you assess the culture in start-up company

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While many have very accurately answered with how one would describe the culture or where does culture originate in a start-up, the question asked is “how would you assess the culture”. This struggle to answer the question reflects the very reason why so many transactions fail within the first 1 – 3 years post-transaction close: ineffective human capital due diligence of which culture assessment is a critical component. While we all understand certain elements of the origin of culture and can see culture in action, assessing culture is a totally different animal to tackle. And the short answer is – you tackle it the same way you should assess culture in any organization whether start-up or far more mature in the business life cycle.

Assessing culture requires defining the existing culture, defining the desired culture, and then measuring the gap. Culture in action (the existing culture) can be measured by looking at the efficiency and effectiveness of communications up and down the organization, the decision tree for decisions of nearly every magnitude, by surveying or interviewing members up and down the hierarchy, and examining the programs, policies, practices, and total rewards that impact the organization. One will require full, complete, and transparent access to all departments and business functions to see this culture in action in every element of the business. But that is just the data collection around the existing culture.

Next you would have to examine the desired culture. This is where it can get a little tricky for many Start-up organizations. Desired culture is often articulated through comprehensive and well established Mission, Vision, and Value statements as well as a solid strategic plan. Such documents chart directionality and SHOULD be the yardstick against which all business decisions no matter how big or small are measured. Too many start-up companies launch on the fly and while they have a business plan that was good enough to get funding and enable the launch, and where such a business plan is often the very first “strategic plan” of an organization, too often they are not robust enough to define the desired culture and rarely does a start-up take the extra steps of clearly defining a mission, vision or set of values that represent their organizations directionality. Absent these, there is enormous risk to the organization as you WILL have decision makers making decisions without a unified guide and often in terms of what is best for them and their sphere of influence within an organization rather than what is in the best interests of the organization and the attainment of its strategic plan.

Once you have defined the existing culture, defined the desired culture (or absence of such definition), you have to measure the gap. This is comparing the two to see how far apart they are. While a typical accounting approach would be wonderful, people are far more than the sum of their parts and often their actions or inactions carry ramifications that ripple through an organization in far more ways than a dependency trace can connect dots. As such, this is very difficult and requires a strong competence in human capital risk assessment/analysis. But even measuring the gap does not quite paint the full picture, there is one final element to include in the assessment.

Assuming in simple graphical terms that the desired culture (as defined as it may be) is (0,0) on the (X,Y) axis, the actual culture could slope in a positive or negative direction. A negative sloping assessment reflects that the existing culture (culture in action) is ineffective, inefficient, and holds the company back from achieving its strategic plan. It may not prevent achievement of the strategic plan, depending on the magnitude of the slope, but in order to achieve the objectives of the strategic plan, the company likely consumes more resources (financial capital, human capital, or both) than necessary in order to achieve it. Conversely, a positive sloping assessment reflects that the existing culture is actually more effective, efficient, and propels the company farther and faster to the achievement of its strategic plan. While it may be hard for many of us to imagine this scenario, it can and does happen. Deviation from the desired culture is not always a bad thing and often occurs when there is an organic shift in the organization’s culture brought about by new hires with innovative ideas that propel the organization more quickly in the desired direction. But just as such new hires can drive positive change, they can drive negative change as well, so finding the right balance between internal promotion and external hires is critical. There is no universal constant on this as each company and the unique cultures within it are different.

It all comes back to the people – the most important asset of the business – and exemplifies the importance of effective Human Capital Due Diligence in the M&A transaction.

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