Start-ups, scale-ups and challenger banks: the pitfalls of scaling-up

Start-ups, scale-ups and challenger banks are gaining more prominence for good and bad reasons. As the number of companies increase, so too do the high-profile news stories of bullish CEOs and bad internal cultures infecting these businesses from the inside. Radar explores whether these hyper-growth companies are focusing too much on profit at the expense of good culture, and reveals how bad culture is fast becoming bad business.

2019 was a turbulent year for WeWork (that may be an understatement). In the summer, WeWork had a stunning putative valuation of $47bn. Not long after, its quest to complete an IPO failed and it lost its CEO, Adam Neumann, after tales of tequila, Run DMC and dwindling funds were revealed. While certainly the most high-profile and calamitous scale-up news story of 2019, it wasn’t the only scandal.

Start-ups, scale-ups and challenger banks, especially those rooted in tech, walk a tightrope between world domination or ignominy. They’re ambitious and want to scale fast in a scramble to be number one in the market (Silicon Valley refers to it as “land grab” – once you have the land, SV wants you to build a “moat” around it). Competition has never been fiercer and these small businesses are battling to gain a competitive advantage. Inevitably, there’s a danger that scaling too fast will jeopardize the longevity of a company. In the race for growth, notoriety and profitability, start-ups may fail to invest in a key asset: their foundational culture.

As a string of recent examples has shown, some start-up and scale-up businesses focus on the product and the profit, but are failing to check in on the behaviour of some of their most invested workers. Failing to foster a culture that will see their employees (and productivity in turn) thrive could prove fatal. Even where companies are implementing strict codes and values, what steps are they then taking to establish whether their senior execs and employees are developing, surviving or being left to run amok?

Away

Horror stories about toxic workplace culture aren’t limited to alleged tech unicorns – they exist across the full range of industries. Take popular direct-to-consumer luggage company Away as an example. In the past four years, Away has invested countless hours into building the ultimate sought-after brand and amassed a cult-like Instagram following. But behind the sleek, minimal cases and glossy Instagram feed, the company was stowing away a deeply toxic culture.

On 5 December 2019, The Verge published an exposé of former employees who revealed that Away was producing some new baggage, some of an “emotional” variety. The article set out that Away was founded (as with most start-ups) on a culture of growth and image. This “culture”, however, was merely a smokescreen through which senior managers, especially its then CEO Steph Korey, pushed employees to work long, unrelenting hours and to control their behaviours.

Away laid down strict internal communication guidelines: no emails – only Slack; Slack messages should very rarely be direct and instead should be hosted in public groups; private channels should only be utilised for work projects. This open-book communication enabled the emergence of a unique form of cyberbullying, one in which employees were openly berated digitally, in front of their colleagues. This bullying didn’t only take place on the lower rungs of the organisation, the more senior execs were also very much in on the action – which would occasionally see employees bursting into tears at their desks.

Korey also used Slack to communicate with employees that they should be working longer hours, taking less time off and should be responding to her Slack messages immediately – even at the weekends or late at night. Employees were encouraged to take photos of themselves “working” while in bed at night. The culture was framed in terms of the company’s “customer obsessed” values – if you wanted to meet the company values, you should be working tirelessly to please your customer (even if this meant giving up holidays or weekends – in some cases even New Year’s Day).

The way that Away appeared to its customers was vastly different from how it was operating within. Not long after the Verge article was published, Korey stepped down as CEO. In a tweet, she publicly apologized for her actions saying, “I can imagine how people felt reading those messages; I was appalled and embarrassed reading them myself…what you read in the article doesn’t reflect the company we want to be; and we will continue to work to improve.”

Korey was given free rein to conduct her business as she pleased, even though this proved harmful for her employees and the company’s image. The company scaled up on a foundation of over-working and under-valuing employees. Staff burned out or left the company and morale hit an all-time low. Korey’s practices weren’t kept secret – but the company lacked sufficient controls to curtail her actions. Without the right compliance system in place, unruly C-level staff are able to dominate culture, sometimes to the detriment of the business they’ve worked so hard to build.

Oyo

Hotel chain Oyo has lofty dreams of being the world’s biggest hotel chain by 2023. However, its future is precarious to say the least; a recent NY Times article has revealed yet another “toxic” culture and some deeply troubling incidents from within.

Oyo’s business model is clear-cut: to organise budget hotels and sell rooms online. Originating in India, where many hotels are traditionally family-run, Oyo taps into the hotels, gives them “Oyo” branding, and advertizes them in a consolidated online marketplace. It then takes a proportion of the profit from any rented rooms. The model is simple, but the inner workings of the company have grown progressively complex over the past few quarters.

It is alleged that, in a bid to appear more successful, Oyo has inflated the listings on its site by adding hotels that are unauthorised, illegal, or that no longer use the service. In screenshots obtained by the NY Times, it appears that employees have used bribery tactics to prevent local authorities from taking appropriate action. Using designated WhatsApp groups, Oyo staff have offered officials free hotel rooms in exchange for them looking the other way.

That’s not all. As Oyo has scaled, its ability to oversee and monitor its staff has dwindled. It is rumoured that staff have been working through the night to meet deadlines, with many suffering mental health issues or resorting to bad business practices – such as marketing hotels without electricity, aircon or heating – to meet its listing goals. In some instances, this lack of staff oversight has even allowed illicit and criminal activity to go undetected. It was recently reported that employees were stealing from the company and moonlighting by renting out rooms on the side. Oyo has since arranged swoops at properties and seized the phones of some employees to uncover various conduct breaches.

Many of the claims have been dismissed by executives within the company. They admit, however, that training and monitoring their staff has been a challenge due to the speed at which they are scaling. Oyo’s head of operations in India, Aditya Ghosh commented “we have just grown very, very fast.”

The scale of culture-based misdirection at Oyo will undoubtedly prove damaging for the company and its investors alike. What is frustrating is that the illicit conduct taking place is all action that could have been prevented if they had embedded a clear culture and signal-based compliance system from the outset. The use of ecomms to bribe local officials, emails showing employees plotting to take money from the company, employees working excessively and causing them to turn to harmful behaviour – all could have easily been identified with a technology-based compliance system.

Uber

Uber has seemingly never been free from some form of controversy: surge-pricing during Hurricane Sandy; sexist promotion techniques; a series of high-profile UK court cases challenging its self-employed worker status, to name but a few examples.

With that in mind, it came as little surprise when Uber’s former engineer and now bestselling author, Susan Fowler, published a blog post in February 2017 detailing a toxic culture of sexual harassment within the company. In the post, Fowler described how senior managers and employees had engaged in sustained, sexist practices and sexual harassment against female employees, all of which flew under the radar or was wilfully ignored. She further documented a culture of infighting, in which colleagues openly boasted about undercutting each other and withholding important information so that they were better equipped to take their colleagues’ jobs.

Weeks later, Uber CEO Travis Kalanick was caught on CCTV fighting with an Uber driver. In March 2017, five executives left the company – one amidst allegations of sexual harassment. Kalanick himself then stepped down in June that year following allegations that he enabled an aggressive and dysfunctional culture. This all came to a head in April 2019, when Uber filed its long-awaited IPO. The company admitted then, “our workplace culture and forward-leaning approach created significant operational and cultural challenges that have in the past harmed, and may in the future continue to harm, our business results and financial condition.”

As with many new businesses, Uber was up against fierce competition. Lyft, Kapten and Bolt were all racing to challenge for the top at this juncture. Kalanick’s motto while CEO was “always be hustling”. This led, it seems, to a push for cut-throat competition and growth at any cost. What Uber failed to realise was that the biggest cost of its cultural inadequacies was ultimately to its own business.

WeWork

The new poster-child and bad boy of the iconic, charismatic “unicorn” CEOs is none other than the former CEO of WeWork, Adam Neumann. Neumann founded the company in 2010 and it got acclaim as the vision of the future workplace, a story peddled by Neumann to great success. His quixotic twist on the new approach to renting a flexible, shared workspace fooled the crowd – many were so taken by the hype that “We-” moved beyond the realm of real estate to remodel other staples of society including WeGrow (a We-based school) and WeBank.

As well as its unique vision, WeWork had an eccentric attitude to culture, primarily inspired by Neumann and his other co-founders. In 2016, Neumann, who is well known for being barefoot, fired seven percent of the company’s workforce. Days later he went on to host a company-wide meeting, in which tequila was reportedly passed around on trays and Run DMC performed a rendition of “It’s Tricky”. Employees struggled to understand the relevance of the meeting and how it related to the firings. On another occasion, Neumann was reported to have chartered a private jet on which he smoked marijuana with a group of friends, leading to the jet being grounded.

Neumann and other founders appeared messianic to their employees. They encouraged the consumption of alcohol, with one former employee describing the company as having a “frat-boy culture”. This is perhaps best exemplified by WeWork’s annual event, the “summer camp”. During this, employees were flown to a location to take part in a “team bonding exercise” that resembled a festival. While the event was fun for many, others worried about the financial viability of such an activity. Inevitably, the drinking culture within WeWork (one WeWork candidate was even offered tequila during her interview) came to a head when the company faced a lawsuit from an employee alleging that she had faced instances of sexual harassment. The company has since faced allegations of discrimination on the basis of both gender and age.

In August 2019, WeWork filed for its IPO but once opened up to public scrutiny, WeWork’s cultural issues came instantly to light. As well as some financial failings and oversights, the company was being run off the back of the founder’s whims and fancies – on some occasions employees had been fired because Neumann’s wife had said she didn’t like their “energy” or “vibe”. Unsurprisingly, this proved an unattractive proposition to investors. Neumann eventually stepped down from the company, it lost 19 percent of its workforce in November 2019 and its valuation plummeted to around $10-$12bn. Bad culture was very bad business.

What is most surprising about WeWork’s unravelling is that Neumann was well known for his eccentric practices and had been relatively blasé about his approach, yet it wasn’t until the IPO listing that the company took action. WeWork lacked a cultural foundation based on longevity and employee wellbeing. It further lacked the systems to monitor and prevent wrongdoing, such as sexual harassment, that was facilitated by its bad culture. There is a chance too that WeWork likely ignored its evolving culture, instead buoyed by its apparent success and seemingly easy access to capital. Whether through ignorance or turning a blind eye, WeWork’s cultural inadequacies contributed to its decline. While there is still hope for WeWork, it cannot move forward without a culture-change and a system in place to monitor, detect and prevent cultural issues from reappearing.

Investing in culture, remedying complacency

In all the examples above, culture has been an afterthought. A culture bred from the top-down, with too much focus on growth, profit and external image, makes way for toxic, and very damaging environments. As start-up and scale-up businesses take flight, they may appear to be thriving – they employ more and more people, but have less time to manage them properly. Many of the businesses detailed above were doing well on paper, but the real story inside their office walls was very different.

They had all adopted a business model steeped in investment: seeking investors, investing in products, investing in property etc. It is time that such businesses see culture as an investment too, rather than a cost. Investing in culture is investing in a company’s longevity, performance and ultimately its chances of succeeding. Without a thoughtful founding culture, start-ups and scale-ups run the risk of damaging themselves and all their investments.

Culture should be at the forefront of any budding company, with clear principles, values and expectations. It should run through the corporate veins and be top of mind for every employee, from the C-level down. Everyone should be held to account consistently.

The solution is a simple one: employ a rigorous system that monitors culture across the board, from the hours employees are working to the way in which they communicate with each other: are people engaging in sexual harassment via email? Are people stressed at work, working late hours and employing dangerous tactics? Are there unusual references to personal or encrypted chats that could imply something sinister? Who is performing well, but getting no recognition? What is the general state of corporate mental health?

An end-to-end platform that aggregates employee data, analyses it, and allows firms to act in real-time may just be the best investment start-up companies and beyond ever make. Investors are going to start insisting on it.