Abstract
Dear Readers
Over the last decade, we have seen that startups have become common in our business world. Most startups are started by entrepreneurs looking to bring change into the world with their products and services, which are very unique in nature. These new-age organisations normally do not get bogged down by bureaucracy and concentrate mainly on achieving faster growth and showing results to their multiple stakeholders, especially their investors. Their main focus in human resources (HR) remains inculcating and driving an agile and result-driven work culture in a short span of time. As a result, startups have different requirements in terms of HR processes and hence the HR challenges they face are often very different from large established organisations. Studies have found that while established businesses focus on the execution of known business models, startups create new business models through testing and pivoting under an uncertain atmosphere. This difference creates a different atmosphere for the employee and hence requires different human resource management (HRM) approaches than those used for established businesses.
The Indian startup scene’s rate of growth is nothing short of remarkable. The overall number of startups has significantly increased, as evidenced by annual trends that show a steadily rising trend. With over 99,000 startups and 107 unicorn companies valued at $30 billion, India is currently referred to as the ‘startup hub’ (Jordensky, 2024). Indian startups mopped up $2.77 billion across 326 deals in the March quarter or Q1 2024, as per data compiled by TheKredible. This included 74 growth-stage deals worth $1.87 billion and 213 early-stage deals amounting to $898 million. There were 39 undisclosed rounds (Upadhyay & Pathak, 2024). India now has the third-largest startup ecosystem in the world (Rao, 2024).
With the spectacular growth journeys on one hand, the failure rates are also very high in India as well as globally. A research study (Ghosh, 2012) indicated that out of 2,000 venture-backed companies that raised more than $1 million as capital, 75 per cent failed eventually.
It is very interesting to note that research studies found HR issues as both enabling and hindering factors for facilitating the success and failures of startups.
Let us look at them with an evidence-based approach.
Five different challenges a startup often faces, according to a founder CEO of a startup, are listed as follows (Reddy, 2021):
Lack of buy-in from management Policy documentation and performance alignment A continuous feedback system Building culture in startups Impart training and development
In another study, Balch (2015) found four significant challenges for startups. These were:
Policies not being in the right place Underestimated records and paperwork Hiring and retention of smarter workforce Caring less for the issues
In contrast to the above reasons for failure, let us look at those factors that were found to be facilitating success at startups. A founder (Patel, 2015) of many startups reported the following:
The product is perfect for the market The entrepreneur does not ignore anything The company grows fast The team knows how to recover
On the other hand, Griffith (2014) reported that reasons for startup failures can be attributed to the following:
Lack of sufficient capital The assembly of the wrong team for the project Superior competition (19 per cent) as the top reason for failure
An interesting point to note here is that while looking at the quality of leadership that can be attributed to the success of startups, it has been defined as ‘versatile leadership’. As aptly defined by Patel (2015), ‘“Versatility” is often viewed in a limited sense, that of possessing more than one skill or talent. Versatility in the startup environment involves much more than someone’s skillset. It involves mindset. Startup teams must possess the ability to change products, adjust to different compensation plans, take up a new marketing approach, shift industries, rebrand the business, or even tear down a business and start all over again’.
Calderón et al. (2018) in their study reported that when looking at the startup failure reasons from a HR point of view, 60 per cent of startup failures were due to human-based factors such as quality and efficiency, innovation, lack of focus and strategy.
The HRM practices in large organisations tend to focus mainly on aligning employees with organisational needs, but an additional requirement for HRM in startups is building relationships between employees and key stakeholder inside the startup. These kinds of relationships empower the flow of knowledge that is necessary for the innovation process. Moreover, open communication between employees and managers is crucial for fostering entrepreneurial activity within startups. As innovation is an insensible part of entrepreneurial activity, an intrinsic rewarding system should also be in place in order to motivate employees to be creative, which results in innovation promotion at the startup level (Bennett & Lemoine, 2014). While this is an important perspective from the point of encouraging creativity and innovation inside the startups, there is also a contrasting perspective that the startup leaders cannot afford to lose focus on formal HRM systems and processes to keep up with the rapid pace of growth they generally witness.
Let us examine this phenomenon.
Due to the relatively small number of employees in startups, managers tend to use informal HR practices in order to establish employee connections and continue to use them even when they start growing in size at a very fast pace. This management style often creates problems and raises an important question, so as to build a realistic HR strategy for the startups to move from informal to formal approach in line with the rate of their growth. However, a point of caution here is that it requires competent and mature HR leaders to manage this shift from informality to formality. While informality stimulates satisfaction and formality stimulates tension, both HR and line managers should find a balance between these two practices in order to prepare a workforce that is capable of achieving growth (Hayton et al., 2013).
Startups, by their nature of growth, require a culture that also requires high-commitment work systems (HCWS). HCWS can be defined as a set of HRM practices that were found to be very effective for managing big organisations workforce to enhance their overall performances. HCWS is mainly about increasing employees’ involvement, investing in employee’s development, training, promotions and sharing the firm profits. A study (Burton & O’Reilly, 2004) was done to measure the impact of HCWS practices on startups. This study measured 30 practices of HCWS and took the likelihood of initial public offering (IPO) and the likelihood of firm failure as measures for the effectiveness of the HCWS practices and found that applying HCWS practices was associated with an increased likelihood of IPO and a decreased likelihood of firm failure.
While talking about HR practices, one can ignore one of the most important factors where enablers are put into place to enhance employee performance in startups. It is in this context we need to look at high-performance work systems (HPWS). HPWS are, by definition, a collection of HRM practices that emphasise self-managed teams, decentralised decision-making, flexible work, open communication and compensation system leading to enhanced performance. Research suggested that startups adopting this strategy outperform their peers. A research study (Dabić et al., 2011) reported that those startups that utilised HPWS had a higher chance of experiencing higher levels of growth, survival, development of capabilities and goal achievement.
In another study, Gurnari (2022) found eight HR challenges that startups face. These are the following:
Building company culture Recruiting for senior roles Attracting talent Writing HR policies Communicating policies Effectively training employees Employee feedback Getting HR funding
Finally, talking about failures in the Indian context, Sharma (2024) concluded the following reasons which attribute to their failure. These are:
The lack of strong HR in early-stage ventures Lack of financial compliance Navigating greed and ethical compromises Cultivating a sustainable startup ecosystem
It will not be out of the way to indicate that there is a huge problem that exists in many founders in India about the role of HR professionals in building sustainable organisation. As aptly concluded by Sharma (2024), ‘Senior HR and management professionals have a crucial role in mentoring and guiding these nascent companies to recognize the intrinsic value of these foundational practices. By embedding robust governance frameworks and cultivating a culture of compliance and ethics, startups can significantly enhance their survival prospects and pave the way for sustainable success’.
So where do we go from here? Certainly, a lot of work is needed both by researchers and practitioners to find out the solution. Our hope is that this issue will be a small input to this direction as India grows as a hub country for startups and shows the way to the world to harness entrepreneurship and innovation in the 21st century.
Before I end my editorial, we, on behalf of the editorial board, would like to thank Dr Neelanjana Bhaduri, Senior Director—Learning & Organization Development from Cyient who took the responsibility of guest editing this issue when our previous guest editor dropped out due to some personal commitment. Dr PNSV Narasimham, President & Head of Corporate Functions, Cyient, and also a member of our editorial board, guided her through this process. This being a very relevant topic today for HR professionals, they left no stone unturned in bringing out this issue. I am sure all of you will find the contents of this issue extremely insightful. Our sincere thanks to both of them for taking the responsibility at the last moment and accomplishing the task. However, due to the delay in releasing this issue to our readers, we have decided to make this issue a combined one for January and April. We sincerely apologise for this.
Finally, I am happy to share with you that we have decided to cover one more contemporary theme for our next issue. This will be our July 2024 issue on the theme ‘Employee Engagement—Current Issues and Future Directions’, guest edited by Dr Krish Shankar, a leading HR practitioner and thought leader from Bengaluru.
Please continue to offer your feedback and suggestions for improving the content and reach of our journal at me@nationalhrd.org.