Prioritizing the people: Small-cap lessons from large-cap firms
When entrepreneur Peter Thiel invested $150 mn in Airbnb, his biggest piece of advice to the team was ‘don’t f*ck up the culture’. Trying to follow the guidance of its substantial investor, Airbnb did something counterintuitive for many companies: it made sure to put its employees and customers ahead of investors.
More specifically, Airbnb went so far as to hire a hotelier named Chip Conley as head of global hospitality and strategy in 2013. Airbnb CEO Brian Chesky had read Conley’s book, Peak: How great companies get their mojo from Maslow, and then recruited him to ensure the company kept its priorities straight as it attempted to scale around the world.
Here’s a summary of how the book described the appropriate prioritization:
1. The leaders set the culture of the company
2. The big leap is getting talented employees aligned with that culture
3. When aligned, employees take care of customers
4. Happy customers support the company, which rewards its shareholders.
Sounds simple enough, right? But especially for small-cap companies, it’s easy to be pulled in all sorts of directions. Beyond mandatory filings and regular reporting, there are existing investors, both institutional and retail, clamoring for updates or even offering opinions. There is also a bevy of prospective investors hoping to build rapport with management. To a certain extent, the scrutiny comes with the territory, but the requests on your time can be wildly counterproductive.
Keep in mind that if you really want to help investors generate great returns, this stakeholder group needs to be put last.
Airbnb isn’t the first company to take this sometimes polarizing position. Another is Union Square Restaurant Group, founded by Danny Meyer. In fact, Meyer was a strong influence on Conley when he was building his hotel business. In restaurants, like hotels, it’s obvious that no single person can do all of the work, and you must rely on your talented employees to serve your customers. In the end, this is the only way to generate strong returns for shareholders.
In his book, Setting the table, Meyer says: ‘There are five primary stakeholders to whom we express our most caring hospitality, and in whom we take the greatest interest. Prioritizing those people in the following order is the guiding principle for practically every decision we make, and it has made the single greatest contribution to the ongoing success of our company:
1. Our employees
2. Our guests
3. Our community
4. Our suppliers
5. Our investors.
‘Why do we care for our stakeholders in this particular order? The interests of our own employees must be placed directly ahead of those of our guests because the only way we can consistently earn raves, win repeat business and develop bonds of loyalty with our guests is first to ensure that our own team members feel jazzed about coming to work. Being jazzed is a combination of feeling motivated, enthusiastic, confident, proud and at peace with the choice to work on our team.
‘I place the interests of our investors fifth, but not because I don’t want to earn a lot of money. On the contrary, I staunchly believe that standing conventional business priorities on their head ultimately leads to even greater, more enduring financial success. And, just as important, it’s the kind of success that adds tangible value to the lives of a wide range of stakeholders. As business or organizational logic, enlightened hospitality can be applied far beyond the restaurant industry.’
OK, you might be thinking, Of course, that applies to hospitality businesses but not to ours because we’re manufacturing, or real estate. But Charles Koch, whose Koch Industries is among the most diverse conglomerates in the world, also speaks extensively about this prioritization in his books: employees take care of customers who take care of shareholders.
As expressed in Believe in people: Bottom-up solutions for a top-down world, Koch writes: ‘Our employees’ success has always been the source of our success. And what a success it has been. As I mentioned in the introduction, Koch Industries has grown 7,000-fold since 1961: 43 times the growth of the stock market, an increase of up to four orders of magnitude. An investment of $1,000 in the company when I came back to Wichita would be worth $10 mn today. Where then we had revenues of $12 mn, we now have annual revenues of around $120 bn – a 1 mn percent increase.
‘To recap: as an institution, at its best, business does three things. First, it empowers employees to self-actualize. Second – and as a result of the first – it develops and supplies the products and services that others use to improve their lives. Third, it helps create a culture of mutual benefit, in which people learn that success comes from contributing.’
Need to see an example of a small public company doing the same thing, en route to becoming the most valuable business in history? Jeff Bezos’ prophetic 1997 letter to shareholders is also consistent with this approach, even at a time when Amazon’s market cap was well under $500 mn.
He wrote at the time: ‘Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently from some companies. Accordingly, we want to share with you our fundamental management and decision-making approach so that you, our shareholders, may confirm that it is consistent with your investment philosophy.
‘We will continue to focus relentlessly on our customers. We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner.
‘We aren’t so bold as to claim that the above is the ‘right’ investment philosophy, but it’s ours, and we would be remiss if we weren’t clear in the approach we have taken and will continue to take.’
Now, this isn’t to say that investors aren’t important. We all know that investors can be absolutely vital to your company. They can give you the capital you need to get started. They can keep you alive when times are tough. They can give you the rocket fuel you need to reach new heights. But while many businesses have investors, no business can succeed without customers, and their happiness is dictated by employees.
If you have a strong culture, led by great employees who delight customers, the investors will be handsomely rewarded.
Kai Sato is founder of venture capital advisory firm Kaizen Reserve