The biggest investment mistake Sameer Brij Verma, an early-stage investor in Bengaluru, has made is not paying enough attention to the culture of a startup. “I have gotten carried away with execution capability of the founder, a bold vision, and not given due consideration to their attitude towards building a strong culture and team," says Verma, managing director of Nexus Venture Partners, which has invested in startups like Unacademy, Zolo, and Roadrunnr.

Verma has learnt that a founder might be able to get the job done best but if they are the kind of leaders who cannot delegate, trust or retain talent, scaling and competing are going to be a constant challenge for the company.

“There have been numerous recent incidents when I have refused to fund gifted individuals who have been successful executives but are known to build a toxic culture in their previous corporate career," says Verma.

Twelve years in the job has taught him that there are three core ingredients when it comes to success for a startup: a solid vision, exceptional execution and an exemplary culture.

CULTURE COUNTS

Work culture in a startup is an often used but seldom understood term. It can easily be shrugged off as a couple of foosball tables, a pretty cafe and some back-wrenching beanbags.

However, recent developments in the startup space, including cases of sexual harassment, flouting of laws, labour abuse, high attrition rates, distrust among founders and mindless pressure on employees, have brought the importance of work culture back into the limelight.

The right culture has also become important to a prospective investor at all stages of funding, as it can be a differentiator between successful and failed startups, says Gurugram-based Snehil Khanor, co-founder and CEO of dating app TrulyMadly. “Achieving goals within tight deadlines is only possible if there is lower attrition, high productivity and excellent quality of work, all parameters that are affected by work culture," he adds.

Team dynamics, for instance, is an important early indicator of how the startup’s future culture is going to be. As an early-stage investor, Bengaluru’s Shripati Acharya, managing partner, Prime Venture Partners, spends a lot of time getting to know the founders and observing their interdependencies.

“A startup succeeds because of its people, and the best people will always be attracted to a healthy culture, which has the ability to retain them," he says. Acharya observes how strong the communication is between the founders, if there is mutual respect for ideas, and whether people can express dissenting opinions openly.

If he notices any signs of the team not getting along, he doesn’t invest, even if the idea and the product are strong. “We often look for indicators like founders using the ‘we’ word much more frequently instead of the ‘I’ word and how they delegate responsibilities," he says.

A team with a good culture, open communication and flat hierarchy is better equipped to tackle day-to-day issues versus teams where employees have to wait for approval or are busy with politics, says Khanor. “A startup with good team dynamics can achieve its goal with less internal roadblocks."

A TRANSPARENT TRADE

Investors have always focused on the founders, but now they are judged not only by their functioning knowledge, ability to execute, or passion, but also on values like integrity and business ethics, says Janavi Papriwal, investment manager, Aavishkaar, a social venture firm that funded Soulfull in 2018. “We closely review how an organization deals with all its stakeholders, if they are fair and transparent in their dealings and compliant with local laws. These are non-negotiables," she says.

Ethics also transport to questions of transparency with all stakeholders. In some instances, management teams move their focus away from customers and employees, to investors.

“As an investor, we like a company that considers customers first, then its employees and lastly investors, as it’s the best way to grow," says Delhi-based Varun Sethi, founder of Lyte Investment Bank.

Sethi shares an example of a recent proposal, where a startup team that claimed to have a former Miss India as a founder was trying to attract capital inflow based on her name and Facebook followers. Upon verification, Sethi found that the former Miss India only had an advisory equity, and the deal fell through. Mismatched claims reveal a lot about the startup’s top management ethics, says Sethi.

Another roadblock to funding is if the investor sees that a founder is unwilling to give up ownership and control, or is reluctant about it, says C.S. Murali, chair of entrepreneurship cell, Indian Institute of Science, Bengaluru. “Investors like to see founders who recognize their strengths and weaknesses and are willing to give up titles," he adds.

Another question which becomes important at a later stage of a startup’s growth is if the culture and the values shared by the founders trickle down to all employees within the company.

“While scaling potential is definitely high on an investor’s list, they also want to see if the belief of the leaders and management reaches all the way down to their employees and communication model," says Prashant Parameswaran, chief executive and managing director of Soulfull, a 150-employee foodtech startup in Bengaluru.

Each time Parameswaran has gone to investors looking for funding, he has been asked questions about his organization’s culture. To ensure the values of his company remain the same across the board, Parameswaran has a checklist for new hires, which includes being a team player, strong on integrity, ethics and passion.

WHERE VALUES MATTER

Culture is implicit and relatively easy to build and evangelize when the organization is small, since the team is very tight and everyone knows everyone,

Once a startup scales, it’s important to formalize and document your startup’s culture, says Sachin Gupta, chief executive officer, HackerEarth, a technical recruitment platform. “You have to define what’s acceptable and what’s not in your organization, document it and make internal policies around it as it can be an extremely powerful driving force for right behaviours," says Gupta.

Solid foundational policies is one thing that Sethi and his team check in a mid-sized startup before they accept them as clients. “We come across many such deals where founders do not have mandatory policies like prevention of sexual harassment," says Sethi. “It makes business sense."

A startup work culture is not just about fun. It’s about the values that a startup holds dear to itself from the beginning till the end, and follows them at every stage.

Write to us at businessoflife@livemint.com

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