Fight the Firing at Start-ups

A recent article in Inc. notes that “start-ups fire nearly 25% of their employees during the company’s first year of existence,” compared with less than 7% “let go annually by larger, more-established companies.” The Inc. piece sites a Wall Street Journal article that provides four drivers of this trend:

“Startups’ needs change quickly. Often the skills sought in the beginning of the year aren’t needed six months later when the company’s strategic plan has changed.

First time founders lack hiring experience. When staffing a company for the first time, rookie founders might have no idea which qualities they should really be looking for in employees.

Employees from the corporate world can’t adjust. These hires don’t realize how quickly they’re expected to move on projects, since they might have been used to a slower pace at their corporate job.

Getting fired is viewed as not such a big deal. Since it’s well known that turnover at startups is high, getting fired from a startup is not perceived as a career-ruining moment. This might be how some startups morally justify letting lots of employees go.”

The first three are real challenges for start-ups, but each can be easily solved by outsourcing – while also avoiding the human, financial and societal cost associated with such rapid terminations:

Startups’ needs change quickly. Outsourcing provides scalable solutions that can keep pace with growth, and allows access to a breadth and depth of skills that can be added, deleted or substituted as the start-up’s needs evolve.

First time founders lack hiring experience. An outsourcing firm that provides a fully-managed outsourcing solution for a particular process or functional area – such as finance/accounting, human resources, logistics, or marketing – takes this issue off the table. The entrepreneur does not have to worry about hiring, managing, or firing for non-core functions, and does not have to endure the costs associated with recruiting or the lost productivity from bad hiring decisions.

Employees from the corporate world can’t adjust. Outsourcing providers that work with start-ups have professionals with the required skill sets and sense of urgency. Moreover, they can leverage additional resources when needed to accelerate projects.

These three factors are challenges to start-up entrepreneurs, and outsourcing can solve all of them. The fourth driver, “getting fired (from a start-up) is viewed as not such a big deal,” is not actually a challenge to the entrepreneur, and it is not a perception that outsourcing can eliminate. But it is most certainly a challenge to the people that are fired. I would venture to say that those terminated from start-ups do not agree that it is “not such a big deal,” especially if they are past a certain age… This is a case where outsourcing can help the workforce in addition to the start-up: Join an outsourcing firm, where you are a revenue-producing part of the provider’s core competency, and enjoy a career path that is more stable and progressive, not dependent upon the vagaries of one particular start-up.

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Don’t Allow the Credibility of Your Financial Information to be Questioned

Arleen Thomas yesterday posted “CPAs: The Startup Community Needs You” on the AICPA Insights blog. The post discusses the value a CPA can bring to startup companies. To illustrate her point, Ms. Thomas points to the accounting troubles encountered by Groupon when it tried to file for its IPO, noting that it wasn’t until recently that Groupon finally added accounting and finance expertise to the audit committee of its board of directors. If accounting issues could escape unnoticed at Groupon with, presumably, significant financial expertise both inside the company and among its advisors, as well as some corporate heavy-hitters on its board, then how much more at risk is the start-up or early-stage company that has NO accounting or finance resources whatsoever?

A start-up’s financial information – both historical and projected – is, by default, viewed with skepticism by the venture capitalists or angel investors that are being asked to fund the start-up. Having a CPA firm involved is invaluable in countering this perception and establishing credibility. This does not mean that the historical or prospective financial statements have to be audited, or even reviewed; it is a significant advantage just having a CPA firm involved in preparing the information and providing financial decision support to management. It also makes a good impression on potential lenders and investors to see that the start-up’s founders and management team have surrounded themselves with solid advisors, including accounting and financial professionals. A CPA firm with a financial management outsourcing practice – bringing CFO-type operational and transactional skills – is of even more value to a start-up than traditional CPA firms that are entirely audit and tax focused.

Ms. Thomas writes:

“Andrew Mason, CEO of Groupon, could have saved a lot of time and money though if he brought a CPA into his circle of advisers a lot earlier. The truth is that startups are focused on developing and launching their service or product, and rightly so. It’s not until someone, whether an investor or bank or stock exchange, requires a CPA to be involved that most startups pay attention to their financials. But that doesn’t have to be the case.”

I couldn’t agree more! Many startups fail to see the value of accounting and finance, and resist putting scarce resources toward the necessary expertise. Like going to a doctor only when sick, they wait until the pain of NOT having solid financial statements or projections becomes unbearable, typically due to some external impetus. By then, it may be too late to take advantage of an opportunity to raise capital, or to avoid a liquidity crisis. The ultimate cost – not only in real dollars to fix the accounting problems, but also in lost opportunities and lost credibility – is likely to be far greater than the earlier savings on accounting and financial expertise.