Founders of born-digital firms are typically brilliant, but too many of them make a common mistake: hiring people early on who are friends, who have backgrounds similar to their own, and who look and think like them. Result? The business lacks the diverse talent needed to respond creatively and swiftly to tough challenges that arise in the future—whether it's fast-changing customer demands (at best) or a global pandemic (at worst).
This article is part of our Born-Digital study, where AlixPartners set out to research born-digital companies' unique blend of strengths and challenges and identify the most pressing needs and areas of focus needed to sustain their success. See all the articles in our series here.
“You have companies that have left certain areas of their organization on the side for a period of time—whether it’s the finance department or compliance or the tech stack—depending on whatever that second- or third most-important thing was that they just didn’t focus on.”
We’ve all read the headlines about high profile born-digital companies that run into walls that could have been avoided; all too common are data security, privacy, corporate governance, and communications missteps—in addition to the issue of disillusioned and angry customers. The COVID-19 pandemic escalated business challenges far beyond those common scenarios. If the firms had brought in board members and operating executives who had had risk management and corporate governance experience sooner, could the firms have avoided the costly mistakes that destroy value, that damage brand images, and that cause customer defections?
We think the answer is almost certainly yes. Indeed, many of the born-digital executives and investors we interviewed for our study expressed concern about whether they were introducing the right mix of experience and capability early enough to avoid the kinds of mistakes that can hurt companies’ reputations, slow or even arrest their growth, and destroy shareholder value—whether during normal times or during times of crisis. And though stories about high profile, large-cap enterprises are more well-known, small-cap and mid-cap born-digital companies often fall into the same talent trap as they grow.
It may seem obvious that bringing in the right mix of corporate governance and larger-scale operating experience early on in the process is smart business, but too many born-digital companies fail to meet that imperative. Why? Multiple reasons, ranging from the founder’s mindset to the speed at which these companies scale, to culture fit considerations.
“Founder mentality exists everywhere. Early-stage investors want to scale to exit. Not many entrepreneurs can scale from idea/control guy to enabling others to run it. Then, many times, the experienced players coming in are unable to adjust and adapt to the new world.”
—Senior private equity executive
FOUNDERS’ MIND SET: IF YOU’RE LIKE ME, AND I LIKE YOU—YOU’RE IN
Founders of born-digital enterprises are often brilliant, driven, and focused. Those attributes clearly contribute not only to a founder’s personal success but also to the success of the founder’s company. But they can also blind founders to the importance of adding people with extensive operating experience to their boards and management teams.
In fact, we’ve seen that many founders have a set of go-to people they put on their boards and executive teams: individuals they know, like, trust, and can easily communicate with. Human nature being what it is, the people in a founder’s inner circle usually think, act, and look like the founder. They may even have the same strengths and weaknesses the founder has. Result? A leadership team that lacks diversity on many fronts—not only gender and race but also, and perhaps even more important, business experience. In our view, lack of experiential diversity at the top makes a management team vulnerable to missteps that have dangerous consequences.
“Companies must ask themselves, ‘Do we have the right person in this role for what we have to achieve at this time?’”
—Software company Chief Marketing Officer
What do born-digital boards emphasize in hiring? Our survey response to the question, "The dimensions of diversity that our board actively seeks to acquire/build/retain/nurture," are below.
BORN-DIGITAL BOARDS EMPHASIZE GENDER DIVERSITY MORE THAN ANY OTHER FORM
Age & Other
SCALING SPEED: SO BIG BUT OH, SO YOUNG
Many of the investors we interviewed pointed out that the speed at which born-digital companies scale can create a mismatch between their size (quite large) and their age (quite young). But even though the company may become sophisticated and complex as it grows—for example, in how it uses and sells customer data, or with regard to the multiple jurisdictions and therefore regulatory environments it operates in, or in the multiplicity of products and services it offers—the company is chronologically young and therefore falls prey to common pitfalls like not providing the right levels of customer service, not anticipating the unintended consequences of customer data usage, not building out reliable and robust supply chains, and myriad other challenges that come with scale.
When asked to identify their top challenges, most born-digital respondents cited operational excellence and talent management.
“It is very rare to see a management team that understands how and whom to hire when the company becomes much larger and more complicated. Companies are almost always behind on that topic, and we almost always strongly encourage them to hire a worldclass chief talent officer to quickly get on the journey. If a company gets off to a good start, it can point to its success to say it doesn’t have to do this stuff. Which is of course wrong, but it’s hard to convince them of that.”
—Successful tech investor
We spoke with many born-digital executives and some investors, who described how difficult it is to bring in people with strong experience in operating a company that’s growing fast. Such people must be able to assimilate quickly into the distinct culture of a born-digital business that’s rapidly scaling up. If they come from traditional companies—ones that are risk averse and utilize a centralized-authority model with a command-and-control organizational structure—their philosophy may emphasize security of data, redundancy of technology, and control of business processes. But the born-digital business they get hired into philosophizes decidedly differently by instead emphasizing growth, innovation, and risk taking.
That cultural mismatch could lead to the inability of the new executive to be successful in the job’s tasks. The organization sometimes rejects them, and as a result, the born-digital company may become wary of bringing in people with extensive experience in traditional companies. That’s understandable—but it also means the company misses out on the diverse capabilities and knowledge it will need in order to excel as it grows. Dealing with that challenge requires both strong sponsorship from the board and CEO and the recruitment of experienced executives who have the personal flexibility and style to adjust to the new culture while remaining focused on their mission. That puts real emphasis on understanding the personality profile and demonstrated ability to deal with ambiguity during the recruiting process for outside and experienced executives.
BORN-DIGITAL COMPANIES FOCUS ON FOSTERING A CULTURE OF INNOVATION AND CREATIVITY; BORN-TRADITIONAL COMPANIES PLACE GREATER VALUE ON ACCOUNTABILITY
Survey response: What are your company’s top three values/desired behaviors?
BORN-DIGITAL COMPANIES EXPERIENCE STAFF TURNOVER RATES THAT ARE AT OR ABOVE INDUSTRY NORMS—HIGHER THAN THOSE AT BORN-TRADITIONAL COMPANIES
Survey response: Our staff turnover rates are well below peer/industry norms