Culture

▶ Watch the original lecture

Now culture, the one thing you want consistent throughout your venture. This is more challenging because we don’t want it changing all along the line like a pivot. This is the bedrock of the company.

Why is culture important? Think about how many decisions get made outside your operating framework as a startup. Hundreds. Even three or five engineers make dozens of decisions a day without the clarity of years of customer data, because you don’t have any customers yet. Vision and mission help, and culture is the other critical piece. And imagine everybody has a different culture; do you think that brings them together? Of course not.

Let me use a crass analogy: the Red Sox. Imagine you started following the Red Sox and they decided they were bored with baseball and were all going to go play basketball. Bizarre, right? The cult following, Red Sox Nation, is a huge part of why the franchise is so valuable. It’s a culture; it brings the entire nation together and has people doing crazy things in the streets at night. Imagine that same energy in your business, everybody rallying with the same passion and intent to achieve your vision and mission. My own analogy: imagine everybody has a thread, and they could each take it in any direction they wanted. Dangerous; you’d end up with a mess. But if you’re clear about the vision and mission and how you want people to twine those threads together, they turn it into a rope everybody can pull on, in the same direction. That’s what culture can do.

Does it really work that way? Since 1998, companies in the Fortune 100 considered the best to work for have overachieved other companies by nearly triple, averaging over 10% returns per annum versus about 3.3% for the S&P 500. The hundred best companies to work for consistently outperform the market indices by about 300%. So yes, it’s soft, and yes, it’s hard, but it translates to the top line, the bottom line, and the fundamental worth of your business. As Merck’s CEO Richard Clark said, culture eats strategy for lunch. You can have a great strategy with everybody focused on it, but if nobody works together effectively and there’s no harmony to execute it, it’s meaningless.

So what is culture? One entrepreneur, after my first lecture, came up and said, “I loved it, but what is culture again?” A great question. It’s very hard to define, but I’ve decided it’s simple: culture is your operating system to run your apps on; or, another way, it’s the platform to empower your people. You can’t write apps without an operating system, and you can’t run a company without a platform of culture to build on. If you have a crappy operating system, no apps run on it. If you have a crappy culture that nobody understands, that isn’t authentic and that you don’t live, you’re not going to empower your people effectively.

It’s certainly multifaceted, and you can’t just put your arms around it and declare you have one. There’s a famous story: a pharma CEO heard another CEO praise culture and said to his HR director, “Could you get me a culture?” It doesn’t work like that; you can’t go buy one. Simply put, culture is how you do business, not what business you’re in. It’s the way you treat customers, work with your team, engage with partners, even deal with suppliers. If you constantly squeeze every margin out of a supplier, the day your supply chain dries up because you’ve got huge demand, don’t expect them to increase production for you. These things have real impact. So from day one, ask: what is the personality I want in my startup, and how will I embody it?

I ran a workshop in East Germany where people genuinely don’t have the resources we’re lucky to have at places like Harvard and MIT. I heard all the “can’t dos”: can’t get to customers the way you do in the US, can’t find talent. So I asked, what do you believe you can do? It turned out most of those companies had done what they considered a Series A on less than a quarter of a million dollars; what we’d call a seed. One of their clear convictions was that they could do more with less, and that frugal, tough situation was a cultural value they were embodying and using as a basis to compete. It won’t be right for everybody, but it was authentic to them.

Here’s a framework for developing your culture. Start with one thing: a shared value system. As a team, what set of values do you most believe in? Openness and honesty? Empowering the customer? Doing more with less? Whatever those shared beliefs are, turn them into guiding principles. But culture is not something you write out and stick on the wall and declare you have one, even if you developed it yourself. It’s about how you live it, lead it and model it every day, and how you turn it into execution. Two words matter here. Responsibility: culture only works if you get people to take responsibility for living it every day. If you decide it’s important to deliver value every day, you probably won’t fly first class and stay at expensive hotels, because that’s incongruous with delivering value to customers. And accountability: lots of people can be responsible for something, but only one person can be accountable. For the culture in a company, the CEO is the one person accountable, because culture comes from the top. The biggest problem in small companies is everybody feeling like they should do everything; that works for a while, but as you grow you must find the single accountable owner for each function. And then: when people are accountable, how do you celebrate success and deal with failure?

If you get your values right, you empower people to make decisions. If you’ve said “we deliver the best value,” people making trade-offs won’t spend all their time producing the highest possible quality; they’ll figure out the least quality needed to meet the need at the lowest possible price, and keep evolving that as they choose products and partners. They don’t have to keep coming back to ask how to price or who to pick as channels, because it’s in your values. Take honesty: it’s a basic value, but how will you show it? If one of your teams screws up, do you tell them? If you’re proactively honest, you find a way to tell them so they don’t do it again; that’s the proactive part. If your values include respect and integrity, people always know feedback isn’t personal. Because you respect individuals and everyone has integrity, anybody (the CEO or the receptionist) can raise anything.

Here’s an exact example. I asked a receptionist to check the calendar before greeting an interviewee and say, “Hello, it’s really nice to meet you,” so they’d be surprised we knew their name. The good news: that same receptionist said, “Michael, that’s nice, but by the way, you didn’t clear up the conference room yesterday that I had to take them into.” What a great bit of feedback, and I hadn’t. We were a small company; there weren’t three people to do that. So we made it a simple thing to clear up behind ourselves, and that created an openness where anybody could talk to anybody about what we could do better. Lots of little things like that add up to a big sense of community.

You have to figure out your own values; they have to be authentic enough to live every day. And you have to define what you’re not. As Jeremy from Salsify put it: if you define your culture in such a way that no one would ever self-select out of it, then you don’t really have a culture. There needs to be someone who walks in and says, “I like what you’re doing, but it’s just not for me.” They celebrated turning away phenomenal engineers and marketers who weren’t a cultural fit, even though they’re competitive and wanted to win that person, because to preserve the culture they couldn’t bring on, say, someone who needs their own office at that stage. What you’re not is as defining as what you are.

Culture also has a physical manifestation. As a VC, within five minutes of walking around a company I can tell you its culture. When Bezos started Amazon, he cut a door off its hinges and made it his desk to make the point that this is not a company that wastes money. What’s the impact? You already know: where do you go when you want something cheap? Amazon. Their trucks say two things: low prices, fast delivery. That’s a vision, mission, culture and value in a couple of words. Amazon powered its entire cloud business on the same principle: innovate faster, have the best cloud services, and constantly lower prices (at one point 60-plus percent market share). At my workshop with Andy Jassy, who runs Amazon’s cloud, we discussed how AWS started: they were trying to cut their own costs for developing products and realized, if we can do this for ourselves, why not enable it for others? That frugal culture didn’t just serve retail; it generated a whole new multi-billion-dollar business, and Amazon in the cloud is way ahead of everyone, constantly taking prices down. Look at the Kindle: near-razor-thin margins, lowest price, to get the market.

Another physical example is the founders’ wall. People used to ask how they could see how much I cared about people, so our team created something called the founders’ wall: everybody who joined and decided they wanted to make an impact physically signed the wall of the building. It took on a life of its own. Soon everybody who joined went through orientation, selected in (some selected out, which was fine too), and wanted to sign. It became a privilege. When we moved buildings, the number one question was, “Who’s moving the wall?” We had to remove our server room and other things to get the wall out, but we took it with us. Anybody who works at a company with these physical manifestations remembers it.

Culture is often defined by its absence. Compare Zappos and American Apparel. Zappos: the best thing was returns, so easy nobody cared how many shoes you ordered; one of the fastest companies ever to go from zero to a billion, with a clearly defined customer-centric culture that let them do costly-seeming things like easy returns. American Apparel, meanwhile, was going into bankruptcy: many policies people hated, well-documented internal bureaucracy, no customer-centric culture, so internally focused it became dysfunctional. This stuff really makes a difference. So decide early: do you want a barrier that dissipates, distracts, divides, and ultimately damns you; or an enabler that unifies people, clarifies your values, and empowers them the way Salsify let Emily flourish? One results in restarts; the other gets great results.

Startup Secret: Startup unculture is uncool. Culture is one of the most fundamental things that costs you nothing (there’s no dollar investment required to get it right) and can move you from being one of the restarts to being a results-oriented company. Yet it’s the hardest subject to get people to pay attention to. Don’t ignore it just because it’s easy to jump straight into building a product; in the long run this matters more than your first product.

Now, culture is not about creating rules; it’s about creating guiding principles, because a rule won’t even apply in some circumstances. Take a hard question that comes up all the time in startups: which comes first, your team or your customer? There is absolutely no right answer. Some say the customer, because without a customer there’s no team. Others say the internal customer, the employee, because if they’re unhappy the external customer will never be happy. Both are right; it’s a choice that defines your culture, and what matters is that you can explain it. I’ve seen companies that don’t care about employees be extremely successful because they’re maniacally focused on customer service and churn through staff. I’ve seen companies passionate about their team whose workforce become the natural evangelists of the company. My own view: I always said people and customers come “first equal,” two sides of the same coin, because I don’t think you can make customers happy unless your people are happy. When your team gets on the phone excited because they feel successful, that’s infectious and carries the day.

One student pushed back: “How is it helpful to say both come first? How does that help someone decide when the two are in tension?” Concrete example. I had a phenomenal customer service rep, known to be above and beyond great with customers. One very big customer upset her, badly. If I’d taken the customer’s side, I probably should have demoted or let her go. I didn’t, because I’d seen for years how good she was with so many customers; in my “first equal” book it needed equal balance, not an automatic exit. She went on to win our President’s Award when we became quite a big company. So the principle does help decision-making: before you make a snap call, it makes you stop and think. The customer is not always right; you may hold that as a cultural value.

A team here, who couldn’t agree on their values, I told them (only half joking) that this tells me they’ll struggle working together, because that’s the real world. If you can’t agree on basic things like which values matter most, you’ll struggle when things get tough, arguing about whether you care more about honesty or boldness. That’s why this is such an important exercise to do early: attract people with completely different considerations and it will be a challenge.

Then I challenge culture with a live scenario, because this is why culture isn’t easy. Your customer says, “You promised me this feature on the road map and haven’t delivered. And because you haven’t, I’m going to uninstall hundreds of thousands of dollars of software.” Mark and I have been in exactly this situation. You could fire your VP of engineering, or you could decide you need that person to fix the next customer’s problem, and instead address it with the customer: “We’re really sorry, we can’t do that. If you don’t feel we’re a fit, then we probably shouldn’t have you as a customer,” which Mark was bold enough to do. We lived to serve another customer. This is why cultural values are the operating system that lets you operate successfully through difficult times as much as good times. The good times are easy; everyone looks good when the tide’s rising.

Startup Secret: A powerful culture makes your team do the right thing when you’re not looking. I hate remembering 9/11 for obvious reasons. In that moment, Enterprise Rent-A-Car had a very interesting decision. People didn’t want traditional two-way rentals; all they wanted was to get out of New York, and they didn’t even know where they were going. Their employees said, in effect, “Hell yes, you’re our customers, you need to get out of town, here’s a one-way rental, go for it,” breaking the rules. How did that make customers feel? And do people remember Enterprise for that day? Absolutely. That’s what you want as a culture: when something completely unexpected comes up, your team does the right thing.

Most of the time you don’t want to be looking; you’re trying to empower your team to know the right thing to do, to act with integrity, resilience and passion, and to care about the customer. And here’s the beautiful part of the Enterprise story: who made the call to switch to one-way contracts within a couple of hours? Not the CEO. It was made locally, on the spot, by people who knew it was the right thing. Good CEOs don’t want to do much; they give the best people the ability to do what they know best at the point where they can see the circumstances. So culture is really a touchstone when things go wrong or there’s no obvious answer: it gives people direction, helps them prioritize, and makes it easy to know the right thing to do, not necessarily the easy thing.

You can measure culture’s effect, and it shows up as retention. In the Fortune tech top five (Google, SAS Institute, NetApp, Zappos and others), voluntary turnover is down by about 50% for companies with great environments and great teaming. I asked Aquia their voluntary turnover rate: practically zero. When you hear that, something’s going right. It’s one of the first questions I ask as a board member: if I sense a bad vibe walking around, have you got high turnover? If you do, you’re probably not teaming well or developing your people. It’s a real red flag.

Finally, culture is not something you write down and put on a wall; it’s what you live and model. If you put “we respect people” on the wall and the next day people see you admonishing and unfairly firing someone, that culture lasts five seconds. So make it authentic, or it won’t stick. And a warning from experience: acquisitions are where cultures clash. We did seventeen at Symantec in three or four years, and they were always challenging, not because of execution or product, but because of merging cultures. When Symantec (not yet a big company, under 50 million dollars in revenue) acquired Peter Norton, the culture was a clash: Norton was dominant and the tech leader in their area, and we were effectively asking them to follow us when they felt they should lead. As Steve Abbott, the very first salesperson we hired, described it, they were first class and worked hard, but they weren’t us, and it was very difficult day to day. We eventually got over it by merging the vision: instead of talking about Norton Utilities maintaining your PC, we talked about data security, declared a war on a couple of competitors outside the company, and gave everybody a single driving force. The following year we blew through a hundred million dollars and went public, and never looked back. Even if your story isn’t at that scale, it’s exactly the same set of principles.

I’ll leave culture with the example I always come back to. Southwest Airlines went to the top of the US domestic airline industry, and co-founder Herb Kelleher was famous for saying: anybody could copy our playbook, but nobody can copy our culture. Lots of people looked at Southwest’s strategy, which is easy to read in a case study, and said it’s easy to copy, yet nobody ever beat them, because he’d built a cultural understanding right through the organization of how they’d be successful, ingrained into who they hired and how they operated every day. That’s what differentiates enduring companies, and it’s true whether you look at Nordstrom, Starbucks or Virgin.