Working in one of the fastest growing business and startup ecosystems in America, I spend a lot of time listening to leaders and entrepreneurs discuss their day-to-day business pain points, challenges and successes.
Lately, I’ve noticed that entrepreneurs spend a lot of energy wrestling with improving the process side of their startup but little energy developing the people on their team. If founders want to move their startup from survive mode to thrive mode, they need to begin focusing on a people development strategy.
In this article, I am going to share three reasons why I believe founders should focus on people development to increase the enterprise value of their startup.
1. Leadership Quality Matters To Investors
Over time, investors have realized that financials alone only tell about 50% of the startup valuation story. Since the 90s, financials have represented a decreasing role in the valuation process across industries. In fact, according to RBL Group, company market value was 50% earnings and 50% intangibles by 2005.
The elements beyond financials that give an investor confidence in the future cash flow of a business are referred to as intangibles. For example, having a clear strategy with integrated systems are intangibles that demonstrate to an investor that a startup is buckled up and ready to grow.
One intangible, in particular — leadership quality — has a 25%-30% impact on market valuation in the eyes of an investor. In fact, over half of private equity firms have established a new role, leadership capital partner, to focus on and audit the quality of a startup’s leadership quality before an investment is made. Founders need to be proactive when assembling a team and focus time and attention on developing their leadership skills to increase enterprise value.
2. People Development Drives Engagement
One of the most important aspects of owning a business and driving value is ensuring your people are engaged in their work. But Gallup estimates that 13% of employees are actively disengaged and 53% are not engaged. This means they are showing up to do the minimum requirement to earn a paycheck. A startup cannot continue to thrive if half of the team, statistically speaking, doesn’t care about their work. So, how do startup founders address this?
From a startup’s inception, founders should be focused on developing managers on how to build and maintain an engagement culture. Managers account for 70% of the variance in employee engagement, according to the aforementioned Gallup research. Simply put, great managers create the right environment for engagement.
Developing managers to understand the skills necessary to keep their direct reports engaged pays for itself in spades. A founder who understands how to nurture and develop their managers will create an engagement ripple effect across the organization that drives results. In fact, Gallup also found companies with highly engaged employees outperform their peers by 147% in earnings per share. Without a doubt, a founder focus on increased engagement will begin to surge the value of the organization because more people are fully committed to their work. Productivity always wins!
3. Millennials Crave Development
It’s no secret that millennials are attracted to the startup life of casual dress, rapid-fire change and dreams of hyper-speed growth. There’s something magical about being part of something from the ground level and seeing it grow. For a millennial, a job at any size organization is an opportunity to learn new skills and grow as a leader. In fact, Gallup reports that 59% of millennials rate learning and growing as extremely important to them when applying for a job.
This is why founders need to deliver on this hunger for learning by listening, mentoring and especially coaching millennials to learn, grow and achieve. Founders who fail to coach and develop their team will experience a turnover nightmare, a brutally hidden cost that secretly burns through cash and erodes value. By simply shifting founder focus to developing millennials, they’ll get what they want and founders will get what they need.
Increasing startup value is a topic riddled with opinions, methods and myriad case studies. In this article, I’ve taken this topic back to basics and forward with people-centric leadership. The good ol’ art of investing in your team’s development is sometimes forgotten in the life of a resource-strapped founder. However, founders who build a foundation of an engagement culture from the beginning where learning and growth is woven into the fabric of the organization undoubtedly skyrocket the value of their organization into the future.
While process is important, it takes amazing people to improve process. That is a truth we forget about when starting a business. It’s time for founders to reevaluate where they allocate their resources because their greatest asset is the people they have along on the journey to startup stardom.
Read more: Forbes