Recently, the term “culture” has gained prominence. Mentions of culture on earnings calls have increased an average of 12% annually since 2010, making it the most mentioned subject related to talent¹. A topic that was initially viewed as largely subjective has seen increasing scholarly research, leading to compelling quantitative evidence of its business impact². However, despite culture’s growing presence, startups still consistently undervalue its importance. Conversations with founders have revealed a dichotomy in thinking. Culture, at an early stage, seems to be viewed as either a simple box to check — a beer on Fridays after work — or as an issue to be handled once the company has found its footing. Each of these mindsets represents a critical misunderstanding of how a codified culture impacts startups.
Thus, rather than redefining and reiterating what culture is or how to moderate it, this article instead focuses on the impact that a clear vision of company culture has on early stage companies, specifically breaking down the benefits and risks of codifying the culture of a startup.
Benefits of Codifying Culture:
1. Codified values clarify working norms. Perhaps the most important aspect of culture is the least quantifiable: the norms that govern how team members interact with one another. In small teams, values are often assumed to be shared. Yet this is often not the case; 65% of startups fail due to conflict between founders³. While this could be viewed as bad luck, it is actually a symptom of poor culture. Codifying culture does not eliminate this risk, but a thorough understanding of working norms can ease pain points in teams and regulate professional relationships. In worst-case scenarios, it can even serve as a basis for mediation. With a foundation of shared principles, teams can build to a resolution.
2. Communicating culture is critical for early hires. Precisely communicating company values is critical when attracting top talent, and a codified culture provides remarkable clarity. Berkeley Haas proved this by implementing its “Defining Leadership Principles,” the first attempt Haas made to formally codify its values. In the following years, three of every four MBA students said that the strength of the principles swayed their decision to attend Haas⁴. While not in the startup space, this empirically demonstrates that a clear code of values is a driving force in attracting top talent. The reasoning governing this is intuitive: if a startup has a clear culture, potential team members know what to expect, fueling both recruitment and retention.
3. Clear norms align internal decisions. A good strategy attempts to account for upcoming risks. However, in an increasingly volatile climate, it is impossible for decision makers to fully anticipate future conditions. Thus, there is a level of uncertainty created by random events, both big and small. Strategy alone cannot effectively cope with this uncertainty; company culture must serve as a framework for decisive action. As is often said, “Culture eats strategy for breakfast.”⁵ Fundamentally, culture governs how a team thinks about the decision making process. By regulating the internal flow of information, culture is critical to operational decisions in small teams.
4. Codified values are consistent. Nearly every founder sets out to achieve an exceptional culture. However, sustaining it becomes impossible without a clear understanding of what that culture is. Company culture, as a byproduct of its inherently interpersonal nature, can be interpreted in an inconsistent way. A comprehensive, codified set of values serves to regulate these perceptions, ensuring collective understanding. The same can be said in terms of the evolution of these values over time. Codified values provide an unchanging reference, preventing unintentional culture creep over time. Clear values, between people and over time, allows startups to begin building an internal brand. If these values are confusing or overly fluid, that internal brand is weakened.
Common Mistakes when Codifying Culture:
1. Listing idealized principles is not codifying culture. Wells Fargo employees famously opened millions of fraudulent accounts from 2002 to 2016, leading to a settlement of three billion dollars. Investigation revealed that this was a systemic failure of leadership, across departments and seniority levels⁶. However, Wells Fargo’s Vision and Values brochure contained the word “trust’’ twenty-two times⁷. Despite direct mention of trust as a value, Wells Fargo blatantly abused the faith that customers placed in them. While this is an extreme example, startups should still learn from it. A codified culture is only useful if it is true to the company’s practical values. Company culture should not be relegated to a poster on the wall, but it instead should subtly be implemented into every action and every decision made by every employee.
2. Codification should not inhibit growth. Culture is shaped not just by the leadership of the founders, but also by the diverse perspectives in a growing team. For example, a leaked document revealed that Amazon employees have pushed to instill inclusion as a fundamental value of the company in response to systemic racism and gender discrimination⁸. (For a deeper look at the value of diversity, see this article.) As the needs of the team evolve, so should the corresponding values. A startup that fails to recognize this, maintaining a single set of values too rigidly, will suffer for it.
3. Values should be easily interpretable. When formally codifying values, founders often feel pressured to keep values overly vague, in order to be applicable in all scenarios. An extreme example of this would be the codified value of “Do Well.” In theory, this is a good value for a startup to hold. In practice, however, it falls short. “Do Well” is simply too broad to apply to everyday decisions in a fast-paced working environment. Employees will thus lack ownership of the value, even if they agree with the sentiment. However, on the other side of the spectrum, convoluted values also weaken codification of culture. Team members need to have a thorough understanding of the precise meaning for a value to be effective. Founders must identify a reasonable middle ground between these two extremes; the ideal codification is simultaneously simple yet precise.
4. Generic language diminishes value. If a startup presented the principle “Be Prepared,” it would be immediately recognized as the slogan of the Boy Scouts of America⁹. The team’s ownership of the principle is thus severely limited. It might be an accurate value for that company; preparedness is valued near universally, but “Be Prepared” is a poor codification of it. That is not to say that the value must be unique. Integrity, for example, is a corporate value of thousands of companies in one form or another, and it remains critically important. However, in order to truly own its culture, a startup must explicate it uniquely. “Always Ready,” for example, would facilitate a much deeper connection to the culture than “Be Prepared.”
Closing Thoughts: Early stage companies should attempt to codify culture early, despite the risks involved. While it is possible that the result will be imperfect, beginning the conversation early is critical in guiding long-term culture. If you are a young founder looking for advice or funding, reach out to the FoundersXcel team. Stay tuned for a new post next week.