Recently I supported the DEX Innovation Centre in Liberec, Czech Republic during a mentor day that involved helping several of their startups from across Europe in their attempts to scale up. The topic of the day revolved around ensuring that you have the right resources to scale, and while this often refers to financial resources, the day was devoted primarily to human capital.
As such, it was interesting to read a recent paper from INSEAD and Harvard that explored how founders gain access to the capital (in all its forms) they need to thrive. The paper analyzed around 150 previously published works to try and find clearly defined patterns, and a 3-step process emerged.
1. Search for resources – While this is commonly regarded as financial capital, the analysis found that human capital was much more important. This often meant co-founders or employees, but it also means partners, customers and other stakeholders who can help to grow the startup. Given the complexity of the task, this can often overwhelm entrepreneurs, many of whom may have exceptional technical skills, but lack the network or competencies to even know where to begin. This can often result in entrepreneurs remaining stuck in the world they know rather than venturing outside their comfort zone. Entrepreneurs from privileged backgrounds tend to have a wider social network to tap into, and therefore can easily thrive as a result. If you’re not so lucky, then you have to become an active networker to broaden your social network and gain access to the human resources required to grow.
2. Persuade those with the resources to join you – The next step, once you’ve identified both your weaknesses and the resources available to plug those gaps, is to persuade the relevant resources to join you on your adventure. Whilst there is considerable research on how startups can secure financial resources, much less is available on attracting human capital. This is crucial, however, as you will need the right employees, the right alliance partners, the right regulators and government supporters, and various other stakeholder groups that will be vital to the growth of your startup. This can sometimes be made easier by gaining a high-profile backer, be that a VC fund, an accelerator, a corporate partner or government agency. Your board of directors can be a crucial way into such channels, so it’s important to choose your board wisely. It may seem a rather useless quality, but being able to craft and then tell a compelling story about you and your business is crucial in securing the human resources you need.
3. Put the acquired resources to use – The final step is to then deploy the resources you’ve accumulated. This sounds like the easy finale after the hard work has been done, but it’s not always as straightforward as we would like. Indeed, the very nature of startups creates a power imbalance that is typically in favor of the resource holder rather than the entrepreneur. This can create an inherent sense of vulnerability, especially if the resource holder is from a similar sector, as we’ve seen with the tech giants taking an intense interest in any startup operating within their gravitational field.
Data highlights the fact that a great idea is a tiny part of any successful startup, and a much bigger factor in the success of the new venture is the ability to mobilize resources to execute the opportunity at hand.
The rise of the unicorns has created an impression that securing vast wads of venture capital backing is the holy grail of any startup, but in reality, the data doesn’t support that claim. Indeed, over 90% of startups that have secured $1bn in both revenue and valuation grew to that scale with no venture backing at all.
Securing the human capital you need to make your startup successful may be the unsexy brethren to venture investment, but it is far more likely to drive your business forward. The lessons from the INSEAD/Harvard study should provide you with some useful pointers on how to do so successfully.
“The image of entrepreneurship is mythologized by the lone genius in their garage creating the future, but the reality is that startups require strong networks and partnerships in order to grow their business,” Jan Kubalik, CEO of DEX Innovation Centre says. “Startups lack the resources they require internally, so it’s vital that they can develop these partnerships if they are to grow.”
This was emphasized by a recent study from McGill University that explored how startups in rural Switzerland managed to thrive, despite being outside of traditional tech clusters. The authors examine seven successful high-tech firms that reside in five small towns in the east of Switzerland. Each of the firms is a global leader in their niche, and the researchers set out to explore how they were able both to thrive and innovate, despite operating in largely homogeneous communities.
“We hypothesize that diversity has various dimensions, some of which are not related to urban density,” the authors say. “In our analysis, we identify different types of diversity mentioned by interviewees in order to provide corroborative evidence supporting the claims made recently by some economic geographers, as well as the observations on the nature of rural social networks (which were unconnected to economic or innovation concerns).”
The three dimensions mentioned above to increase the exposure to diversity by each firm each manifested themselves in unique ways:
- Internal workforce – The first strategy firms deployed was to try and create a diverse workforce. Given the relative homogeneity of the local community, this typically required firms to spread their recruitment net widely and try and attract talent from the major metropolitan areas within Switzerland or from overseas.
- Open cultures – A second clear strategy observed in the firms was to adopt an open culture whereby employees were encouraged to interact across organizational silos. The authors believe that in many ways this kind of culture reflects the small town vibe of their host communities.
- External networks – A third core strategy then was to develop broad external networks that allow them to access diverse sources of knowledge. These typically come from clients, universities and conferences, with firms all too well aware of the importance of non-local knowledge to their business.
The authors argue that these three methods of tapping into diverse sources of knowledge allow firms to remain innovative, even if their host communities lack the knowledge diversity present in much larger cities. Whilst none of the factors are necessarily specific to rural communities, they argue that they do allow innovation to occur nonetheless, regardless of one’s location. They underline the vital role human capital plays in the success of any business, and it’s something that should be overlooked at your peril.