Founders often ask me when the right time to bring the HR function into the company is. Over the years, having worked with over 75 startups, I am yet to find a formula or equation which answers that. What shines through very clearly acrossthe diverse set of founders and businesses is that the founder who starts thinking about HR and people matters right at the beginning is more likely to find success. Yes, that early! Two scenarios come to my mind —one, my first meeting with Yogesh Mahansuria, Founder of Alliance Tire Group (www.atgtire.com) and second, with Neeraj Gupta, Founder of Meru Cabs (www.merucabs.com )
In 2006, when I first met Yogesh, it was in an industrial shed in Thane–Belapur industrial area near Mumbai. Yogesh, at that time, was putting together his plans to acquire a global tyre business and wanted to talk to me about how companies drive productivity in people. In 2007, Yogesh, with over $100 million funded by Warburg Pincus, acquired ATG, a company headquartered in Israel. In 2013, the Warburg Pincus investment yielded four times return when they sold their stake to KKR at an enterprise value of $650 million. In 2016, Yokohama bought the KKR stake for $1.2 billion. Quite a success story — ATG has done a lot of things right and one of them was thinking about talent management right from Day 0.
My first meeting with Neeraj was in a small mezzanine room above a ramshackle garage in a Mumbai suburb. Neeraj was working on the plans for introducing a taxi service model totally new to India. Radio taxi businesses were being researched, the offering was not firmed up, the logo was WIP, and we were discussing talent management. Even though there was no team in place, the founder was thinking about the people aspect! He was wearing the cap of the HR leader while building his plans!
The first HR leader in the company
In all startups, it is the founder who is the first HR leader of the company. At this point, the headcount is in single digits, the team is close-knit, and every single person interacts closely with the founder/s. The only HR priority at this point is payroll. As the company moves post the proof-of-concept stage, and the team grows, HR professionals are inducted.
A thumb rule I have found to be effective in determining the right time to get a formal HR team in place (beyond recruiters) is when the ratio of founders to employees goes beyond 20. If there are threefounders, a headcount of over 60 would require a formal HR function. In other words, once the team grows to a size where the founder is not closely working with all members, demonstrating values and stances in person, an HR team — onethat cantake ownership of translating the vision, values, andbeliefs into operating practices, policies, and ways of working — becomes essential.
Talent capability and company valuations
Also, a company’s HR capability influences company valuations significantly. Valuations are influenced by the strength and stability of the team, clear, defined roles and responsibilities, transparent goal setting, and the systemic capability to meet targets. For the founders to take advantage of these aspects, they need to go beyond operational HR and ensure they have an owner for HR value building among their core team too.
Looking at it from another dimension, in the pre-seed and seed stages, the priority is survival, the environment chaotic,and the future uncertain.Having reached the road towards Series A funding, it’s time to do a deep dive into the intangible aspects of organisation building and ensure thatthe organisation you are creating resonates with the stated values and beliefs. Going ahead from here you will need strategic, tactical, and operational HR. This is when a formal HR function, going beyond hiring and payroll, becomes essential.
Strengthening talent capability
By and large, the HR team available to the company even in the Series A stage mostly includes recruiters and HR administrators, not HR professionals who can take on the responsibility of capability building and organisational growth. Often, the HR leader is among the last functional heads to be inducted. The trap founders fall into is retaining the HR portfolio with them. Given the business pressures and priorities on their table, they are unable to devote the right mindspace to HR matters. As a result, the organisational culture evolves on its own, unguided and unsupported by formal frameworks.
So here are the parameters I would use to help assess the timetable of HR capabilities in your organisation— whether outsourced or staffed internally.
- Headcount-to-founder ratio beyond 1:20, HR administrator required
- Planned growth in headcount >100 percent, recruiter required
- > 50 percent of team in feet on street/frontline/production roles and workforce in multiple locations, HR business partner required
- High labour mobility in sector or wage bill >60 percent of total costs, HR manager required
- For better valuation impact, HR leader or strategic HR support required
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)