This week on the startup to scaleup journey:
Founders must 'replace' themselves
The biggest multiplier for growth is building out the team. Every addition provides the founder with greater bandwidth to focus on the things that only they can undertake. In the very earliest stages the founder has to turn their hand to almost anything. Until the business is growing organically, funding is the enabler that allows the founder to gradually 'outsource' this work to new hires. But unlike large companies, where the model is to build new functions from the top down, i.e. hire the executive leader first, then the managers, then the staff, the opposite is true in the startup. Experienced founders first outsource 'tasks' to people that are great at doing the work. These people aren't deciding what needs to be done, but they know exactly how to deliver it. In a sense, they are an extra pair of hands for the founder. They include architects, designers, coders, application engineers, channel experts and business development specialists. The next phase is to hire managers to manage the increasing cohort of doers and the rising complexity of deliverables. Finally, the founder hires other decision-makers. This creates a quantum change in providing the founder with more bandwidth. These new executives - some of whom proved themselves as managers - are leaders. They own key business functions, create goals, hire people, and relieve the founder of big chunks of responsibility. They enable the business to truly scale.
This all sounds obvious and easy, but it's not. As Taylor A. Welch points out in his book, The Wealthy Consultant, there are big emotional forces at play that quietly act against this logic. The first step is easy enough. You 'replace' yourself with things you're not good at and don't enjoy. Everyone starts here and the reason is simple: If you're not brilliant at something you must find someone who is. Speed of execution is everything in the startup. The next step is to replace yourself with things you're good at but don't enjoy. The rationale is simple: We rarely master what we don't enjoy. It can still be hard to let go as it's an area of personal competency but as we don't particularly enjoy this activity, we can usually convince ourselves to outsource this next. But it's the final step where things often go awry. You must replace yourself with what you're both good at and enjoy. Emotionally, this is always the hardest transition. When you're both good at something and enjoy it, you feel like you are most productive, the most energised. It quickly becomes obvious to anyone around you that this is your 'zone'. But trying to stay in this zone too long can be of great detriment to the organisation. Instead, as CEO, you must get to the place where most of your time is spent doing the things that only you can do. Where you cannot be replaced. High on this list is fundraising.
Raising capital is unique for multiple reasons. It is not only the founder/CEO’s responsibility but it is one of the most labour-intensive tasks a founder can undertake. In teams where there are other co-founders, experienced founder/CEOs offload most of their day-to-day responsibilities to their co-founder(s) so they can focus heavily on the campaign. But sole-founders don't enjoy the same luxury. They don't have trusted decision makers to outsource to - especially for the early funding rounds. That's why it's so vital for sole founders to hire managers that have real potential for leadership. Managers that can step up quickly when asked. Handing off to them - before their 'time' - may be a big test but it is also a big opportunity. For single-founder startups, often the top priority is to hire a Business Development manager as early as possible to help offload the commercial and customer-facing duties of the startup CEO. Whatever the scenario, the founder/CEO must move quickly to focus on the things that only they can take responsibility for. This does not suit all founders and is thus a key consideration when building the founding team.
VCs seek control when the trust breaks down
Founder/investor relationships are based on trust. But this trust is often misunderstood. Founders typically believe it is forged from an alignment of interests. But investors believe it is forged from an alignment of expectations. A subtle but critical difference. This means that when problems occur, the divergence can be rapid. At the point of investment such a breakdown seems so unlikely; there is a mutual understanding of how value will be created, what constitutes progress, how this progress is measured, and what it's worth along the way. This is especially important for VCs that place huge bets on founders that have sold a compelling vision of high growth and category leadership. When progress is made and expectations become reality, trust is then developed. This works well - until it doesn't. When (rarely 'if') the company begins to deviate from the agreed pathway of value creation, tension rises. Unless resolved, the selfish interests of investors will quickly take over. As VC Jerry Neumann points out, this divergence can occur in fundraising, in board meetings, in growth mode, when facing problems, and when selling the company. Those are the moments that can break everything.
To establish and preserve a mutually understood trust, we need a better definition. Our own take: 'Investors trust that founders will ultimately deliver a return and founders trust that investors will let them get on with the job (and support them when asked), even when circumstances change.' And circumstances will always change. If we adopt this definition, it means that founders must not succumb to the illusion that VCs care about them, their team, or their vision. They ultimately only care about one thing; returns. That's their job, so let's just say it like it is. When returns look likely, all is well. Care is often very forthcoming. When returns look unlikely, this all changes. VCs, especially those that have board seats, begin moving in ways to control the outcome. The degree of intervention will depend on how much confidence the founder retains during difficult times and the mechanisms open to the VC to use. Many of these will have been noted in the original Term Sheet and captured in the investment agreement. Experienced founders understand this and move proactively to mitigate these mechanisms by negotiating the most equitable terms at the outset.
Inexperienced founders are typically not as proactive in building in the same control levers and may only realise this when it's too late. These levers are embedded in the investor relationships formed during the fundraising process; in the investment terms agreed; in the constitution of the Board; in the growth plan itself; and even in the exit strategy. Why are these areas so crucial? Because there is a natural mismatch in the power dynamic between investors (who focus huge amounts of their time on such matters) and founders (who often don't, given the demands of their operational focus). This is why serial founders, who have seen this all play out before, pay significant attention to these areas. In particular, they become masters of investment terms (that first appear in the Term Sheet and often seem boringly arcane and unimportant). These terms shouldn't dictate the day-to-day investor relationship. But, when the chips are down, they will dictate how and under what circumstances investors can exert control over the company. And they will not hesitate to do so if they feel their return expectations are in jeopardy