This post isn’t about venture capital. But let’s start with the dollars. Most founders – especially those in the climate tech sector – will have no choice but to endure the challenging task of raising other people’s capital to fund their business. If you navigate all the obstacles of fundraising and are fortunate enough to close an investment round, then your prize is an extraordinary new challenge: you must put that money to work.
Where does all the new investment capital go? In the largest line item on your pro forma income statement, of course: Personnel.
You are going to spend so much money and so much time building and managing a team. And rightly so, it is this group of intrepid souls that will take this company to new heights or crash it trying! In order to reach the former and avoid the latter, you need to meaningfully invest in your team. One of the best ways to do so is through the Annual Review Process.
I’ve been thinking about annual reviews (also referred to as performance reviews) because I’m writing this post at the beginning of the year, having just completed the annual review process for our team. I realized the process isn’t one that is naturally part of a young company. Like so many aspects of company building, annual reviews need to be integrated into a company’s workflows and become part of the company’s culture. You don’t institute an annual review process upon company formation, but it shouldn’t wait until you’re at 25 or more employees and hunting for your Series B. If done early and right, a comprehensive annual review process can provide an important professional development process for your employees and create a critical benefit for the company (more on that below) – and give those investors confidence that you’re an effective steward of their capital.
Let’s dig into the what, why, how and when of annual reviews. Here’s hoping I can earn a gold star. ;)
The annual review is a formal, collaborative process by which an employee’s performance for the previous year is reviewed and goals for the forthcoming year are defined.
More specifically, the annual review should be a standardized process by which all employees are reviewed, including:
Standardization is important for the efficiency of the process, the ability to compare performance across employees, and to ensure employees are being treated fairly.
We mentioned this above, but it bears repeating. Your people are your largest expense. Those same folks are also your biggest asset. You need to invest in them.
Of course, that investment should happen every day in the form of management, leadership and coaching. And if an employee’s performance is seriously lagging at any point throughout the year, then you should not wait until the annual review process to act. In fact, you can’t wait to take action. That runway isn’t getting any longer.
The annual review process is special because it is an opportunity to step back from your day-to-day management, look at your employee’s body of work over a long period, and find ways to make your employee a better, stronger, more indispensable part of the team. Moreover, it creates an opportunity for the employee to engage in self-reflection, evaluate their own performance, and identify areas for self-improvement and growth.
That last point is an important one. Growth is essential for employees in startup companies. If companies are going to scale 100x, then early-stage employees need to scale 10x – they need to dramatically grow as people, managers, leaders and evangelists for your company. Spoiler alert: you – the fearless founder – need to 10x, too.
Professional development is a critical to make that happen and should always be part of the annual review process. Explore how team members can grow, how they want to grow, and – most importantly – how they should grow to increase the value of the company.
And that brings us to why the annual review process is so important for the company. The company benefits in a variety of ways; the process promotes strong HR practices, reduces risk, creates an evaluation mechanism for compensation adjustments, and illustrates good management practices to the board and current and future investors. One very sneaky way, however, matters more than others. The annual review process gives founders the perfect opportunity to step back from the day-to-day grind and ask: Iis this person doing the job they should be doing to increase enterprise value? Making sure each team member is being employed every day in their highest and best use is so critical yet so tricky. Folks on your team can be great teammates doing great work. But – and I’m going capital B-U-T for this one – if each of your team members aren’t doing the exact job that you need them to do in order to hit your milestones and unlock your next round of funding, then what’s the point?
It’s so easy to get seduced by smiling people doing good work that it’s hard to ensure that dedicated people are doing the right work – and it’s the exercise of using the annual review to ensure each team member is doing the right work that is so essential to increasing enterprise value.
Provided that you utilize a standardized process, there are many different ways to conduct annual reviews. Here are twelve steps to make for a smooth process:
I’ll say it again, there’s no set way to do this. But the outline I set forth above does work, provided you and the team invest the time in it.
Annually.
Yes, that was obvious. But that’s why I call it an annual review process. There are three keys to the “when” of annual reviews:
Keeping those three keys in mind, most founders end up picking December or January for their annual reviews. Remember – this process takes time and doing it at year-end may be challenging if you’re trying to achieve audacious goals. Hence, count me in for January as the right time to conduct annual reviews, with a kick-off of the process in December.
One final note on the “when” of annual reviews and it is an important one: when an employee is not performing, the annual review is not the time to talk to the employee. You can’t wait. Because your investors sure aren’t.
Parting ways with underperforming employees isn’t easy. Conducting annual reviews with a high performing team isn’t easy. But the opportunity exists to build something extremely valuable precisely because none of this is easy.
Be decisive, be thoughtful and be empathetically ruthless about what it takes to build an enduring company. And most of all, be a leader your team will follow on the most challenging days. Accomplish all that and perhaps the investors who gave you their capital will give you a gold star on your next annual review.
