How should a new startup develop and sustain a strong company culture? originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.

Answer by Brett Fox, former CEO at Touchstone Semiconductor, GM at Micrel, EIR at Crosslink Capital, on Quora:

A good friend of mine just a joined a hot startup here in Silicon Valley. The company is on fire. The executive team has previously been uber-successful. Revenue is getting close to what I call escape velocity. They've exceeded their revenue goals every quarter for two years straight.

I think my friend is going to hit it big.

But lately when I see him, he's been complaining. Things seem to be changing at his new company, and not for the better. When I ask him what's wrong, he says it has to do with a new executive the company has hired.

The Importance of Culture on a Company's Success

According to my friend, this new executive (a vice-president) is creating havoc. He's not meshing well with his new team, and he behaves in a rude and obnoxious manner. He doesn't appear to be building confidence with his team. He's also not shy, and he has displayed his bad temper in front of the CEO and other senior executives.

Isn't it amazing how hiring just one person (especially a senior executive) can totally change the dynamics of a company?

My friend is quietly going crazy because this new VP is making life miserable for him and others. I keep reassuring my friend that eventually, the CEO will have had enough and will fire the VP. My only two questions are:

  1. How long will it be before the new VP leaves the company?
  2. How much harm will the new VP cause before he leaves?

This is why culture is critical to a company's success.

This realization is nothing new. All the way back in 2002 (ancient times, I know), James Baron and Michael Hannan published the results of an eight-year study of startup cultures called Organizational Blueprints for Success in High-Tech Start-Ups: Lessons from the Stanford Project on Emerging Companies.

The authors studied over 200 startups. The results of their study indicate that a startup's culture has a massive impact on the probability of success. In fact, the culture choice of the company's founders is the one single factor that has the most impact on a company's chances of success. There are five types of culture that are prevalent in startups. They are:

  1. Star: "We recruit only top talent, pay them top wages, and give them the resources and autonomy they need to do their jobs."
  2. Commitment: "I wanted to build the kind of company where people would only leave when they retire."
  3. Bureaucracy: "We make sure things are documented, have job descriptions, project descriptions, and pretty rigorous project management techniques."
  4. Engineering: "We're very committed. It's a skunk-works mentality and the binding energy is very high."
  5. Autocracy: "You work, you get paid."

Do you want to get your company to some sort of liquidity event, be it an IPO or a sale? If so, the commitment culture is your best chance for success, as demonstrated here:

I also know from personal experience that culture is crucial to a company's success. But it is really the most important thing? I would have thought money, then the idea, and then culture, so the results of that study were kind of mind blowing.

But there's no denying the information, which is that there's an unbelievable correlation between culture and success.

So why don't founders think about culture first?

Well, I can only go by my own personal experience. The money (or at least the promise of money) came first. I was asked by a venture capital firm to incubate a company as an Entrepreneur in Residence (EIR), so I thought the money was in the bag.

It wasn't. Surprise!

I started my company with two co-founders: Jim and John (not their real names). I was the CEO, Jim was the marketing guy, and John was the engineering guy.

I knew all the steps that were necessary, and I knew exactly how to implement the steps. But we got tripped up long before we could implement the plan.

We didn't mesh as a team.

John didn't understand my value. He convinced Jim they didn't need me. They quit the company, and started another company built on my idea and plan.

I am sure Jim and John thought they left me for dead. I'm sure they thought I would just give up, go home, and move on with my life.

I didn't.

I recruited new co-founders, and we started raising money. Jim and John started raising money as well. We were successful in raising funding and they weren't. (For more on this story, read: What Are the Eleven Steps You Can Take When a Co-Founder Quits?)

I would bet that a lot of companies never get off the ground because of founder mismatch, so you can already see that culture, even in its most basic form, is critical to your success.

All through the life of your company, culture will be a determinant of your success and failure. Every employee you hire, and (more importantly) every employee you don't hire, is critical to your success.

Every employee or co-founder you bring on impacts your culture in a big way. Think about it: let's say you have four co-founders, and you are going to add a fifth. That new co-founder will increase your workforce by 20%.

That's a huge number. So yes, every new hire you make is critical. That's why you also need to let go of anyone who doesn't work out. Employees who aren't a good fit have a huge impact on your culture.

As important as the employees are to your company culture (and they are very important), you, the CEO, are the most important influence on your company's culture.

Start Developing Your Company Culture Before You Start Your Company

How can you pull off this magic trick? It's actually quite easy, because the company culture starts with you. If you need some inspiration for how you might want to build your company culture, then read Reid Hastings' fantastic manifesto about Netflix's company culture.

This is a fantastic blueprint for building a great company with a great culture. I am not ashamed to say I liberally stole from Netflix's playbook in building the culture for my company.

I want to emphasize that I think Netflix's culture is fantastic, but these six things really stood out to us:

A. Adequate performance gets a generous severance package. Nothing kills a company quicker than mediocre coworkers, and this is especially true at a start-up where there is tremendous pressure to hire key personnel. Think about a 20-person startup with one bad employee.

That translates to 5% of your workforce being ineffective, so that one person can really wreak havoc. Hiring mistakes will happen, and you need to take quick action. That being said, handle these terminations with class and grace.

B. Get rid of jerks, even brilliant jerks. Diverse styles are fine as long as the person embodies the company values. It's easy to tolerate jerks when things are going well, but things don't always go well.

One jerk, especially in a small startup, can destroy a company. Hiring pressure can push you to hire a jerk, and you will likely regret it. We did hire a couple of jerks along the way. Shortly thereafter, they were given a generous severance package.

C. Responsible people are worthy of freedom, and they thrive on it. The natural tendency of all companies as they grow is to create more rules and procedures. Resist this at all costs.

Instead, make the bold decision that Netflix made to increase employee freedom (shown brilliantly in slides 43 and 55 of Hastings' presentation). We did, and it paid off for the team. Do it, and your team's motivation will go up big time.

D. Don't set a limit on vacation days. To put it another way, take as much vacation as you want as long as you get your work done. You're worried about abuse, of course, and you're right. There will be abuse if you haven't hired the right people. Hire the right people and this issue is self-correcting. By the way, a hidden benefit is that you don't have to financially budget for vacation when you don't have a vacation policy.

E. Act in the company's best interest. Our executive staff had a vigorous debate about enacting a rigid expense and travel policy. Again, the concern was abuse. Our theory was that it's a self-correcting issue. Employees that continually abused the policy would be given a generous severance package.

I do remember one employee who tried to expense a one-mile car trip to interview a candidate. Can you imagine receiving a $0.55 expense report? I couldn't. We talked about it in our staff meeting, and one of his peers set him straight.

F. Don't set a fixed budget for raises (raise pool). You have to look at what the market is for a particular role every year. For example, if the salaries for senior design engineers go up 15% in a year, we would increase the pay of senior design engineers in a manner commensurate with the market. We quickly gained a reputation for fairness by working this way. Employees knew we rectified any pay inequities, and it helped build employee loyalty and employee retention.

Hiring Insanely Great People: The Key to Building and Sustaining a Great Culture

We were armed with a great idea of how to build a great company and a great culture, thanks to the things we'd learned. The key is always in the implementation.

Now we had to hire insanely great people in order to build our great company with a great culture. We looked for these four traits in every person we added to the team:

  1. Integrity. Need we go any further? Why would you ever hire someone if they don't have integrity? Everyone - everyone - is occasionally faced with the dilemma that arises when you're interviewing a clearly talented individual who seems a bit ethically iffy. Don't hire anyone that seems to be lacking in integrity, ever. No amount of ability makes up for a lack of integrity.
  2. Smart. You want people who are very smart. Who doesn't, right? Well, it's surprising how often I see people who only hire those who clearly aren't as smart as they are. Don't be intimidated by those who might have something you don't. Be grateful you can add them to your team.
  3. Passion. I don't care how smart he or she is, or how much integrity that employee has. Employees will not work out if they are not passionate about what they do. They also won't work out if they're not passionate about what you do. When I interview, I always look for people who are committed enough to my cause to have done their research and found out as much as possible about my company.
  4. Company fit. People frequently overlook the importance of cultural fit. Desiring cultural fit does not mean that we want people who are clones of one other. Diversity is vital, but those diverse employees need to mesh well with each other. Throw a bunch of diverse ingredients that don't mix well into a pot, and you have a horrible meal. Throw the right stuff into that pot, and you've got gourmet cuisine. Aim for a five-star group of employees.

Never, Ever Compromise Your Values

Let's say you've built a company with a Netflix-ish culture. You've maintained your standards by hiring great people every step of the way. You can lose everything you've worked so hard for in an instant by compromising on your values.

I witnessed this happen years ago in a very successful company that I worked at. The CEO, after years of success, began hiring people at senior levels who didn't fit the company's culture.

It was obvious to the management team that the CEO was making a mistake with these hires. No matter how hard we tried, the CEO would not change his mind. Hubris had set in: he was right and we were wrong. It took several years, but eventually the CEO paid the price for his mistakes.

It's tough to stay true to what you believe in. There's a lot of money at stake. You have powerful people pushing you in directions you may not want to go. That's why it's so important to start building your culture before you start building your company. A strong culture makes it a lot easier to stay the course and build a great company.

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Published on: Oct 4, 2016