This article was originally published in Marketwatch at: https://www.marketwatch.com/story/learning-from-big-techs-missteps-is-putting-these-startups-on-a-stronger-growth-path-11610951617?mod=investing
Over the past several decades, Silicon Valley has produced some of the most innovative and successful companies, investors, products and entrepreneurs. Yet this wild success has not come without its share of well-publicized problems.
As investors in startups in the Midwestern U.S., we tell our entrepreneurs to learn from the mistakes of others. Doing so will help Midwestern startups and entrepreneurial communities grow faster and more efficiently. Here are three ways that Midwestern startups are building upon lessons learned from Silicon Valley:
Be deliberate about diversity and inclusion
For every story you read about a tech company’s explosive growth, it seems that there is another about a company’s culture of discrimination, abuse, negligence, or all of the above.
In order to promote a culture of diversity and inclusion within a startup, it has to be ingrained. This starts with the founders establishing clear cultural values and direction. For example, Ann Arbor, Mich.-based Duo Security has been successful in its employee-first culture. From the company’s website: “We hire for cultural contribution –– not cultural fit — recognizing that diversity of background and thought are essential for achieving our goals.” Indeed, studies have shown that more diverse companies outperform more homogenous companies.
Building out an HR function early in a company’s journey is key to reinforcing a company’s intended culture. Some startups, like Detroit’s StockX, have taken it a step further and hired a Global Diversity and Inclusion Officer. This is a move normally reserved for Fortune 500 companies, but for startups that are serious about making culture, diversity and inclusion a priority, it is becoming increasingly more common.
While not all startups have the budget for executives dedicated to culture, there are other steps that startups can take to put diversity and inclusion front-and-center. Chief among these is establishing a diverse board of directors that can help founders implement practices and oversight on HR policies, hiring and compensation.
Emphasize mental health and support systems
Mental health statistics among entrepreneurs are frightening. According to a study conducted in collaboration with universities in and around Silicon Valley, entrepreneurs are:
Add these statistics to a culture that rewards sacrificing one’s needs and health for the “greater good of the company” as well as 18-hour workdays, and you can see why company success and employee happiness haven’t gone hand-in-hand in Silicon Valley. Building a company can be lonely and isolating; having a support network of other entrepreneurs and peers, who can directly and uniquely relate to struggles that come along with success, can go a long way.
Startup incubators around the Midwest have taken notice of this. Traditionally known for their entrepreneurial programming and networking, co-working spaces such as Bamboo Detroit have begun incorporating interactive mental health workshops, content and support networks within their offerings. VC’s are chipping in as well. Chicago-based Starting Line, offers mental health services to their portfolio companies.
It is also incumbent on companies themselves to make self-care and mental health a corporate value. This means destigmatizing conversations around mental health; ensuring that all employees have access to mental health resources and coverage and, above all, caring for employees and their families. A focus on the mental well-being has shown to lead to increased loyalty to their companies and enhanced productivity.
Focus on profitability and cash-flow generation rather than hyperscaling
‘Growth-at-all-costs’ is a model may have led to some significant successes, like Amazon.com, but also significant casualties, such as WeWork and Theranos. The reality is that this model assumes that the capital faucet will always be on, and that you can figure out how to turn a profit and generate cash “some day.”
Companies in the Midwest typically employ a capital-efficient, measured growth approach. One of the most successful Midwest startups in the past decade, Chicago-based Grubhub GRUB, -5.39%, experimented with different revenue models before finding one that actually made money. The Company raised $14 million from 2007 through early 2011 during a time when it was refining its business model, and before taking on growth capital. Grubhub raised only an additional $60 million prior to going public. Compare this to Palo Alto-based DoorDash DASH, -9.69%, which raised $2.5 billion prior to its recent IPO.
One portfolio company of ours, originally a seed investment, raised a modest $2.5 million over six years, but managed to grow revenue from $151,000 to $5.5 million over that time ahead of a Series A financing round. This has allowed the company to weather ups and downs both within its industry and within local capital markets.
To date this model has been a Darwinian approach, as venture funding in the Midwest has not been as plentiful as in other regions. In fact, 78% of venture funding in 2019 went to 3 states — California, Massachusetts and New York.
Yet capital flows are changing; more VC funds are investing in the Midwest. As new money comes in, it will be tempting to employ the growth-at-all-costs model that has led some companies in Silicon Valley to great success, and others to massive failures.
It’s important then that Midwestern startups continue the measured growth vs. hyperscale-growth model. Companies that drive towards self-sustainability are more likely to survive in the long-term, as their destiny becomes self-controlled and not reliant on investment from others. In any economic downturn or pullback in investing, these will be the companies that make it.