Do startups need succession planning?

Are the high growth Indian start-ups looking at building businesses for posterity? Are the founders investing in succession planning? As more and more Indian start-ups get into the league of unicorns, a carefully planned succession strategy does become important. A recent Hunt Partners’ report says that almost 73% of Indian investors are not happy with the succession planning strategies of their investee companies.

“The investor perspective is risk mitigation. If the investee company doesn’t have a clear No. 2 or No. 3 in place and the leader quits, searches can take six-nine months to close. It is a lifetime in a high growth start-up, hence, investors are stressing the need for talent pipeline and risk mitigation,” elucidates Arjun Erry, Client Partner, Hunt Partners.

A large number of investors and industry professionals also believe that it is a little too premature for most start-ups to think about succession planning. “At their stage of the business succession planning is a bit early in the priority list, business continuity takes precedence. Usually, start-ups have more than one founder and the default succession planning is understood within the founding team. Beyond the founders, many start-ups are led by their boards which pretty much drive the strategy while execution is left to the founders and senior management. So, continuity of strategy is taken care of,” explains Rohit Sarin, Co-Founder, Client Associates.

Succession planning in a start-up doesn’t come easily, agrees Rohit Bhayana, Managing Partner, Lumis Partners. “The founders in most start-ups are irreplaceable and I as an investor can’t imagine the start-ups I have invested in, without their founders at the helm. If the entrepreneurial spark can be substituted, then the company has arrived.”

According to Anjali Bansal, Founder, Avaana Capital, some progressive start-up founders are already thinking about succession planning. “Early-stage start-ups don’t need to think about succession planning, at a later stage they must. A few have started talking about building redundancies, if some adverse event happens how will the company run. They are beginning to build boards which will help them do this.”

The worry that most start-up Founders have in passing on the baton is the wrong cultural fit. “The company they have built is like their family and welcoming someone new is comparable to a marriage proposal. To mitigate the wrong cultural fit, the profile of the potential future leader needs to be focused on the culture that he/she built in other companies, curiosity and desire to build a business, values and ability to build a team,” explains Tehsin Danawala, Principal, Hunt Partners.

Also, putting processes and systems in place many times is time-taking and for a high-growth startup, it could lead to missing opportunities. “For hyper-growth, one often has to be unreasonable and having too many processes can slow growth. Therefore, many investors don’t bother about succession planning unless the company has moved from a stage of hyper-growth to stable growth,” says, K. Sudarshan, Managing Partner, EMA-Partners.

The way founders’ brains are wired is different from the way that a corporate thinks and this puts off seasoned corporate leaders from joining even matured start-ups, says Erry. “A lot of corporate veterans are quitting start-ups due to incompatibility. The deadline to deliver in a start-up is yesterday, and people who come from larger organisations always have the luxury time,” adds Sudarshan.