Next Level Planning
Many startups struggle to adapt to the changing circumstances they face once they start to gain some traction and begin growing. Conceptually it makes sense that the skills required when the company is struggling, underfunded, and understaffed might be very different from when the company has investors, a strong leadership team, and is starting to pick up serious steam. The question for the founders is if they were the right leaders for the startup stage only or if they can also adapt and continue to play a valuable role as the company’s needs change. Embedded in that question is whether the founders can yield some of the control they enjoyed to access the funding and leverage the human capital available to shift into growth phase.
It is not unheard up for a self-aware founder to recognize that it is time to make a transition and turn over the reigns to the professional team. More likely, however, is that the board will initiate the transition and the founder will resist. This can put the whole organization at risk, distract the leadership team, and deflate some of the growth that the company is enjoying. A better approach to the selection process is to identify what this stage of the company’s life requires in a leader and carefully avoiding the tendency to either choose someone very similar to the founder or someone who is diametrically opposite.
Open conversations and planning for succession is a best practice. This allows everyone involved to have time to process the change, rather than it coming as a complete shock. Even still, it is likely that it was either misunderstood, not taken seriously, or completely missed by the founder. Ideally, the founder can get ahead of the board and initiate the succession themselves on their terms.
Next Level Thinking
Glenn Soloman’s Fortune article Transitioning from a Startup to a Growth-Stage Company gives some sage advice for startups that are on the brink of transition.
- Hidden Gems – Identify who your stars are and what they are doing differently to see if it can be taught to others. Carefully consider if this star is someone who needs/wants to advance or if they are happy being rewarded well for playing their starring role. Doing more of what is working really well can help take things to the next level.
- Find your flywheel – Cultivate and nurture sources of rapid growth that you can unleash when needed to propel expansion. Pressure to grow and continuously hit financial targets means you need to have some aces in the hole.
- Stay focused – Don’t get distracted from your core business. Stay tuned into the market for growth opportunities, but don’t bet the farm on whatever is new and shiny at the peril of your main business activity .
- Professionalize your process – It may be contrary to your startup culture, but finding ways to improve processes and add structure will position the organization for success in the longer term.
When all of the financial investment comes from the founders, things are less complex. Although the founders have assumed all of the financial risks by self-funding their venture, they will also maintain control including how the financial rewards are dispersed. Each of the other types of investment have varying levels of funding accessibility, value to the company, and risks to the founder as pointed out by Wasserman in The Founder’s Dilemmas as outlined below.
Friends and family – Although the size of these investments are small, they are the easiest to secure. Usually these investments don’t add a lot of other value beyond the funding. The risks to the founder are significant. Asking friends and family to invest can send an unprofessional signal. These investments don’t usually come with a lot of formal strings attached, so the possibility that founders might pursue less fruitful ideas is real. The most significant risk is the one to the relationships with each investor. It is good advice to refuse these investments if there is a significant risk of loss, as the risk to the relationship is probably not worth it at that point.
Angel investors – The size of these investments are usually medium to large, as the angel investor is looking to invest his or her personal wealth with a goal of profitability. This type of funding is often more available than you might think (and almost certainly more than friends and family can invest) through networking and angel forums. It is possible that these investors could bring significant business experience and want to be directly involved on the board. Additionally, most angel investors have strong social capital, which you can leverage as needed. Risks associated with angel investors include the potential that oversight and assistance may not be as strong. It is also possible that your angel investor may be difficult to manage. Having angel investors in the mix can make things more challenging later on when looking to add additional investors.
Venture capitalists – Venture capitalists will be looking to invest much larger sums of money, but will expect to be brought in as partners, take an active role on the board, and be in regular communication with the founders. This is the hardest source of funding to access, but sometimes angel investors can facilitate an introduction. This funding is greater and more predictable than that of angel investors. Venture capitalists bring significant social capital to the table. It is a very good sign for the business when it receive VC funding, so the reputation and brand could get a bump as a result. There are risks to the founder related to both wealth and control:
- Wealth risks – Venture capitalists demand equity stakes in the company. The effect is a diluted stake for the founder. Arrangements regarding liquidation can impact exits from the organization. Typically, founder equity is going to be vested outright, which means that allocation among the teams will also be impacted.
- Control risks – Venture capitalists may expect additional board seats, which can make the founder’s control of the board weaker. If the VC receives preferred stock, supermajority voting might be a reality and cause conflict related to a differing financial risks from founders.
The lessons from The Founder’s Dilemmas continue to point to the complexity of the decisions a founder faces. On the surface, especially in a cash strapped startup, it would be tempting to accept funding from ANYONE who is willing to invest in your dream. Recognizing the risks and trade-offs associated with each source of investment can really help a founder make careful decisions and negotiate the best possible position for the founders and the team.
It is a reality that a false move with an investor can result in the founders ending up with nothing to compensate them for the hard work they have put into starting and building their company. It is also a reality that control can be completely lost if consideration for decision-making power and balanced representation for voting are not taken into account. Ultimately, it comes back to the lessons at the beginning of the book about consciously choosing between wealth and control.
The decisions of who to hire, from what pool, and when are more tricky than they appear. Unfortunately, there is no “magic formula” for which strategy works best when approaching these decisions, so Wasserman’s Founder’s Dilemmas offer some useful considerations.
Hiring friends and family can be great…or terrible. The fact that you know and trust these folks is great and your comfort level will likely be very high working with them. Mixing business and personal can make communicating bad news more difficult on both sides. It is also possible that you could be blind to mistakes or lower productivity that would have been much more obvious if it were someone else.
Bplans’ Scott Huntington suggested the following in his article 5 Things to Consider when Hiring Friends and Family.
- Is he or she qualified for the job?
- Did you hire the person for the right reasons?
- Will they disrupt your place of business?
- Is the person trustworthy?
- Will you be able to handle firing them?
Wasserman and Huntington agree that if someone isn’t qualified or capable of doing the job, then hiring them is a bad idea no matter how much you believe in them (or how badly you know they need the job). Your first responsibility is to ensure that your business is positioned for success, so avoid spending money on people that aren’t going to add enough value to advance the company towards its goals. It will only hurt the relationship further if you have to let them later on.
That said, you may have extremely qualified people in your network or the networks of your leadership team. If you’ve had the opportunity to work with someone and know they are a rock star at what they do and great fit for the culture of the company, it seems silly to hire a stranger from an ad. As you cast a wider net using search firms and job postings, it will get increasingly hard to ensure that the people you hire are great fits.
Herrenkohl’s How to Hire A-Players gives some practical advice for thoughtfully retaining your best employees. These include:
- Invest time with your A-players first. These A-players are the solutions to current and future challenges.
- Ensure role clarity.
- Give plenty of responsibility.
- Schedule regular meetings.
- Provide your B-players with coaching and accountability.Often, with a little effort, they can move to the A team.
- Turn some borderline performers into A-players by scaling down their roles.Recognize when focusing their efforts in areas they have strengths will help them move to the A team.
- Replace C-players and below with people from your farm team. After you’ve tried to lead and coach them and you haven’t seen them make the necessary progress, have the courage to move on to give someone else a chance.
The bottom line of this advice is that it is tempting to spend a lot of time on the low performers, but this sometimes is at the expense of your best. Some believe that if they are performing well they need less time, but this is a dangerous assumption. In reality, they need a very different kind of time from you: recognizing, encouraging, thanking, challenging, and exchanging ideas. They should see opportunity to continue to grow and recognize that a runway toward advancement exists in your company. Know what their goals are, how their current role fits, and have a plan to help them get there.