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November 23, 2023 - January 5, 2024
One recent study supports the notion that entrepreneurs want to build personal wealth by owning equity in a valuable startup,19 finding that many founders of high-technology startups believe they stand a much greater chance of becoming wealthy by launching a startup than by ordinary employment.20 If many founders really do believe this, it appears they are largely wrong. On average, entrepreneurs earn no more by founding startups than they would have earned by investing in public equity—less, in fact, from a risk-return perspective.21
All told, entrepreneurs earned 35% less over a 10-year period than they could have earned in a “paid job.”24
like many other founders, he had a hard time delegating and giving up control of decisions. After presenting a real estate report at one board meeting, one of his board members said, “We need you to do other things. If you ever come back in here knowing so many details, we’re going to fire you!”
While people are building relevant human capital, they are often also building the social capital they hope to leverage as founders. In this context, social capital is the durable network of social and professional relationships through which founders can identify and access resources.
people who accumulate more social capital before founding are able to attract more human capital (such as cofounders) and financial capital (such as seed capital) with which to launch the startup,35 and to do so more quickly.36
a founder is the antithesis of the experienced executive and the transition to founderhood is made harder by the habits and mindsets that the experienced executive has developed.
“We were all young and if, for any reason, it didn’t work out, we each had lots of other options. . . . At the same time, as you get older, you start getting a lot more cautious, prudent, maybe gun-shy. With the amount of energy it takes, you cannot do more than a few startups well. It just tires you. The amount of energy it takes from you, once you have a family and everything else, you don’t want to deal with it.”
“You can divide your 24-hour day into three parts: eight hours work, eight hours personal, eight hours sleep. If your eight personal is not in sync with your eight work, then your eight sleep will suffer.”
When an entrepreneur says he or she will make $50 million in four years, explained Guy, “I add one year to delivery time and multiply [the revenue] by .1.”
startups go through dramatic changes, first needing people who can find their way through a wild jungle, then people who can create and traverse a dirt road, then people who can pave and drive down a highway.
As we will see, startups can have major problems when early “jungle stage” employees later prove ineffective on dirt roads or highways and have to be sidelined or fired. When that person carries the founder title, these problems have even deeper, sometimes unanticipated, impacts on the startup’s culture and employees.
Paul McManus, a member of a Boston venture capital firm, reflected on his experiences with founding teams of friends: “In my opinion, those who found companies with friends will (a) lose the company, (b) lose their friends, or (c) lose both. I strongly advise against it and shy away from deals where the teams are too tightly knit on the personal side. Blood [family relationships] is almost always a show-stopper.”
How much do titles matter? Founders often insist, “I don’t care about my official title.”
“We’ve had very few issues where we’ve had differences. Where we did, the one who’s been most passionate about his position has carried the day.”*
I found that founders received $25,000 less in salary than equivalent non-founders did—clear evidence of a “founder discount.”*
During the earliest stages of growth, investors are the source of few hires, but by the second round of financing, the founder-CEO is finding fewer members of the team and investors account for 19% of executive hires.
Hires found through investors often have no tie to the CEO but a strong tie to the investor. Such hires may, in fact, be more aligned with the investor than with the CEO for whom they are supposed to be working, introducing potential agency issues and loyalty challenges that the founder-CEO has to manage.
the fit between personalities was so much more important than just finding people who [were very good comedians in their own rights].”
most young startups have little need for a COO/president beyond giving one of the founders a C-level title or backing up an operationally deficient CEO. Bill Holodnak, head of executive-search firm J. Robert Scott, says, “If a startup has a COO, it’s a red flag: Either the COO doesn’t belong or the CEO doesn’t.”
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the decision to replace an underperformer is not always as obvious as it might seem. In a startup, the shock to a small, tight-knit team could be considerable. In many cases, even when the damage an underperformer is doing to the company’s value is clear, the founder-CEO or other founders simply can’t bring themselves to throw one of their own overboard. Particularly when the division of labor is not very clear, the lack of individual accountability can be a trap. It can be too hard for the founder-CEO to justify an underperformer’s dismissal to others on the team, or it can be too easy for
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keeping the underperformer may also have real advantages, allowing the startup to retain valuable knowledge, connections, and relationships and showing other employees that loyalty is reciprocated. Upgrading can leave other team members disillusioned with the costs of growth; startups are often populated by people who value the mission and the camaraderie more than maximum profit.
People in mid-management and upper-management in large companies, when they have to go back five or six years to find a project they were proud of contributing to, that’s a red flag.”
James Milmo wanted his technology startup, Lynx, to be a home for creative “Renaissance” people; that is, people with high intelligence, creativity, and wide-ranging interests, but not necessarily with formal training in computer programming. James explained, “We hired a lot of Renaissance people who had backgrounds that were unrelated to what they would be doing for us. . . . Our culture was such that we got along with each other, spent a lot of time outside work together. We were a community. . . . People were more excited to be at Lynx because they loved who they worked with.”
before hiring young employees during the early days of the startup, the founders should already be planning for the day when they will have to either replace those young hires or else hire more experienced people to supervise them; before building a team of generalists, the founders should already be considering how they will adjust when the startup requires the quality that can be provided only by specialists;
“If you can’t convince someone more objective than your friends and family to invest in you, there’s probably a flaw with your business, which will result in them losing their money and you feeling terrible. Even if you have a dozen rich uncles, I would suggest you find someone outside that circle who believes in you and your idea.”
the most critical inflection points in the evolution of a startup: the “succession” from a founder-CEO to a “professional” (nonfounding) CEO.
One influential model of startup evolution emphasizes that each stage of startup development has a very different “dominant problem” that the startup must solve, but that the solution often causes the startup’s next crisis.5 For instance, solving the early “creativity” challenge in a startup leads to a crisis of leadership, which is solved in the next stage by an increase in direction, which in turn causes a crisis of autonomy. The skills and personal characteristics needed to solve one stage’s dominant problem often become obstacles to solving the next stage’s dominant problem. The radical
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Quantitative analyses confirm that the chances of founder-CEO succession rise with each new round of financing, the more so the more capital is raised in that round.
Indeed, a very experienced VC told me, “One of the toughest jobs I have is firing CEOs who have succeeded in rapidly growing their companies.”
Some hire new CEOs who have served on the startup’s board or served the startup as a consultant.
By keeping Lew around, Richard Williams gained the benefit of his insights, institutional knowledge, and customer relationships, as well as greater buy-in from the employees Lew had hired. Had Lew left before Richard came on board, the startup would have suffered a setback in employee morale and technical direction. As a VC observed, “You can replace a CEO, but you can’t replace a founder.”
“When I search for a CEO to replace the founder, I usually have to find two CEOs because the first one often fails.”
another investor compared the first nonfounding CEO to “a new organ being transplanted into a body that will try to reject it.”
Even if the founder is not primarily wealth-motivated, boards can point to other ways in which the transition is consistent with the founder’s motivations. If the founder loves to plot technical direction or lead scientific tasks, but has found the business aspects of the CEO position less enjoyable, boards can highlight the advantage of bringing in someone else to take those tasks off the founder’s hands so he or she can concentrate on more satisfying work.
What is entrepreneurship? A widely used definition is “a process by which individuals pursue opportunities without regard to the resources they currently control.”1 That sounds straightforward, even romantic, but it has a dark side: When a founder of a high-potential startup chooses to pursue an opportunity regardless of whether or not he or she has the necessary resources, a critical piece is usually missing—often several critical pieces. One study estimated that founders are 60 times more likely to be resource constrained than to have all of the resources they need.2 Yet, pursuing an
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many nonprofit founders are motivated by “impact” and the chance to improve things for the community or the world. Maximizing that impact calls for attracting the necessary resources, but that, in turn, may imperil the founder’s control of decision making.
