B-school insider: Lessons from Silicon Valley Startups

Jim Baron’s students at the Yale School of Management often comment that creating a great company culture is easy when business is booming but can go by the wayside when conditions head south. Their skepticism prompted the widely published management professor to find examples of firms that use their culture to get though economic downturns. He recently caught us up on his research in an interview -- below are some of his insights.

Baron thinks the cases of companies that use their culture to get through downturns are rare. (That’s why we specifically asked the companies profiled in our forthcoming report, Employees Matter, how they have dealt with the worst economy since the Great Depression, and whether their culture was a significant factor in keeping them afloat. Many of them told us that it is.)

Although a great culture is not a guarantee that a firm will outlive downward cycles, these firms tell us that their culture, or what Baron calls “HR blueprints,” have made it much easier to weather the storm for a multitude of reasons.

Baron and his research team first published on the subject of HR blueprints in 2002. In the mid-1990s, Baron began studying several hundred start-ups in Silicon Valley, tracing the premises that guided firms’ development. He found that in this pool of small startups, firms differed more in the cognitive idiosyncrasies of their founders than in their human resources structures. When a company is small, HR isn’t that complicated, he said.

He was also interested in how long the “Sandhill Road” philosophy would prevail – i.e., the famous venture capital boulevard in Northern California that prized the Internet economy value of flipping firms. Interestingly, unlike fifteen years ago, Baron is convinced that building a sustainable organization with a distinctive culture is starting to become a more widespread corporate value.

Baron’s research was some of the first of its kind. And it showed that firms that tried to change their HR blueprint midstream were often harmed by it. On the other hand, firms that got their culture right the first time survived much better. He said that an approach to business that involves worrying about products now and then figuring out the culture later does not serve entrepreneurs well empirically.

The goal of his research was to get in very early in a firm’s evolution. Fortunately, the gene pool was ripe for this kind of study: there were literally thousands of companies that got started overnight in the rise of the Internet-driven boom of 1994 (and underwent the dotcom bust in 2001). The results of the study were used to predict how well firms did in the run up as well as survive the bubble.

Baron and his team identified five categories for the firms they studied: Commitment firms, those that emphasize long term relationships with employees, including shared ownership; Star firms, which prized only their top-most performers, did not pour resources into broad based employee development and had a reputation for 'churn and burn;' Engineering firms with a kind of 'skunk works' mentality; Bureaucracies that employ rigorous project management techniques; and Autocracies, which sum up as 'you work, you get paid.'

At first glance, it might seem that the Bureaucracies or even the Star-oriented firms would have the most staying power and long term profitability. But Baron found that the Commitment firms did best in the run-up...and the shakeout. None of the Commitment firms failed over the period, they had the lowest turnover, and were most likely to go public. Silicon Valley venture capitalists say that the Star model is best -- it locks in talent. But Baron told us that that model is prone to the “Reggie Jackson effect” -- the top ten all time home run hitter who was also number one in strike outs. The Star model can knock it out of the park, so to speak, but it is also the type of firm at highest risk for failure.

While Star firms had the potential to outpace the Commitment firms in profitability and overall success, it was only in some specific cases. For Baron, the key lesson is that the impacts of economic ownership seem to be much more about the effects of psychological ownership. While Commitment firms might provide broad based ownership in the form of equity in the company, their real competitive advantage is in fostering a broad sense of emotional investment and ownership.

--Christa Wagner