The True Cost and Impact of People-Debt For Startups
Startups and scale-ups are legendary for their innovative culture and rapid growth. However, amidst the rush to achieve product-market fit and meet investors’ expectations, one critical aspect that often gets overlooked is building the people foundations the business needs to scale.
Creator: fizkes | Credit: Shutterstock. Copyright (c) 2021
I have seen this countless times: The business starts. Everyone is passionate about the mission, with a great culture. We’re excited because our customer base is growing, and we are starting to scale. The team grows. Then, when a bunch of new people start, suddenly everything slows down. Everyone wonders who is accountable for what. Teams are working in silos. Progress grinds to a halt. Everything is off, but nothing is obviously wrong.
Why is that, you might ask? The answer is People-Debt.
What is People-Debt?
Neglecting the way your people work together is known as “People Debt.” Similar to Technical Debt, which we are more familiar with, People Debt is the accumulation of unresolved People Operations and culture issues that slow a company’s growth and cause inefficiencies that put the business at risk in the long term. People-debt, as tech-debt will eventually require "repayment" and impede growth if not addressed.
This blog post explores the concept of People Debt, its risks, costs, and practical solutions to avoid it, ensuring a solid foundation for future growth.
How does People-Debt accumulate?
People-Debt accrues when the team starts growing and we prioritise rapid growth, favouring immediate results at the expense of setting the foundations of how people will interact, communicate and work. This chronic under-investment in the cultural foundations of the business results in accumulating People-Debt, as the necessary structures for sustainable growth are neglected.
People-Debt also builds up when new joiners are asked to jump in right away without being given the context and background needed so that they can be effective and successful. Not doing so means that they will struggle to integrate and reach their full potential, or at least it will take them longer.
Another way People-Debt accumulates is when the organisation’s strategy and goals are not clearly communicated. When the leadership and the team members are not aligned on goals, and expectations, confusion spreads across the organisation and this gets worse as the organisation grows.
In short, People-Debt gathers when a business does not pay attention to the foundations of its culture or the way people work together.
What Are the Risks and Costs Associated with People-Debt
The main impact of People-Debt is the fact that it will slow the startup’s growth. It manifests as inefficiencies that prevent departments from working well together. If departments are not aligned with the wider company goals and purpose, it’s nearly impossible to achieve great results. You might have a talented team that achieves good results, yet you will be leaving out collaboration and innovation, which has a direct impact on the success of your organisation.
A direct consequence of poor team alignment is reduced employee engagement. Imagine the chaos that happens when responsibilities and goals are unclear, when team members don’t understand what good looks like, or when rumours abound and trust is in short supply. We’ve all experienced it, and we know that it affects employee morale and discretionary effort. Both of these have a direct impact on productivity, which shortens your runway.
The lack of structure creates uncertainty and reduces trust levels, which impacts employee satisfaction and turnover. Hiring a replacement team member costs the business at least 1.5 times the salary of the person being hired (Gallup). Therefore, spending time setting the right foundations for your team is a wise investment, especially when it increases your team’s output in addition to helping you retain those A players.
A startup relies on speed, speed of innovation, speed of growth, speed of change. Startup veterans pride themselves in the fact that they can ‘drink from the firehose’, ‘hit the ground running’ and be effective in days rather than weeks. But expecting or even allowing new hires to move too fast can lead to costly mistakes. A new eye will spot plenty of things to fix, yet there is a good chance that they will lack background knowledge and relational capital to fix it well early on, especially if they operate at manager or leadership level.
Last, but not least, accumulating People-Debt can also have legal consequences if the business is not aware of the local requirements and compliance needs. The cost there is twofold: it can be financial and reputational. A negative employer brand will affect your talent acquisition efforts for years to come.
How to Avoid People-Debt
Be deliberate about your culture. Whether you invest in your culture or not, your business has one. The advantage of investing in a positive culture is that you get to guide how people behave and work together. We have an innate need to belong, and we will naturally adjust our behaviour to reflect that of the group we are in. For this reason, define the four pillars of your culture as you start hiring your first team members: Purpose, Vision, Mission and Value. They will guide your team’s behaviours and decision-making.
Develop systems that enable feedback. Regular feedback has two main benefits. The first is that it helps your team members learn, which increases their motivation. The second is that it builds trust. Being honest with team members and showing that you care about their development builds trust and psychological safety, which also makes people more effective. Bonus point if you also have systems for upward feedback, so that you can learn as well.
Invest in People-Operations early. It doesn’t need to break the bank. You can hire a Fractional People-Ops person who will help you set your foundations. A lot of the People admin can now be automated, so your People-Ops can focus on what matters: your people. (We know some great Fractional People Ops leaders if you’re interested.)
Train your team members: Take the time to give all your team members context about the business, your strategy and goals as they start. This will help them be effective faster. I’ve done it most effectively by spending a couple of hours with them on the first day to take them through the history of the business, how we do things, and the big bets that we’re working on right now and give them a virtual tour of each team. As you scale, you can develop that into an onboarding programme. (Check out Steph’s handy Onboarding Cheat Sheet.)
Help them grow their career: Each person hired is an expert in what they do. For starters, just ask them what their personal goals are, and make sure that what they are working on stretches them forward on that career path. As you scale, this will develop into a few paths for growth that have often been used, and you can build a levelling framework based on that. Think about it as investing in your business's future as your team members grow with you.
Plan with your People Team: Use your people’s team experience and insights as you build your business strategy so that they can best support you in establishing the foundations and systems that will be needed as you scale
Conclusion
People Debt can be a silent killer for startups, leading to significant operational and strategic challenges. By recognizing its risks early on and implementing robust People practices, startups can build a resilient foundation that supports sustainable growth. Investing in people operations is about empowering your team to drive the company forward for the long term.
Refactoring code is painful and time-consuming. Now imagine the challenges of ‘refactoring’ people and their habits… Investing in your People team early ensures that your business has the right systems without causing chaos as you scale.