The Role of the Founder
Besides, often careers and lifes are built around companies in a way where companies are considered much more as projects for some time, not necessarily as a lifetime thing. And projects sometimes succeed and sometimes fail. And then people go to other projects and then start again. Failing or succeeding with a venture is often followed by starting another venture. People frequently see the company as distinct from themselves and their career. They think about the company in a professional manner and that effects how they structure the company.
Proposition: Build a business to create value, not for your ego. Do whatever it takes to increase the “value equation”.
This very professional view towards a venture in the sense that you do everything you can to increase the value of the company irrespective of all kinds of personal interests has important implications for the management and the ownership of the company.
Management of the Company
The most important implication of this professional way to look at a company is that you may let someone else be CEO. In fact, the majority of the successful startups are at some stage run by a CEO who the founders brought in to run the company.
You need to let go control. The point can come where you have to let somebody else be CEO.
Proposition: Let somebody else take your job, if he is better than you are. Thus you increase the end result of the value equation.
Most founders do not grow as fast as their companies grow. A very rapidly growing company usually grows faster than its founder can learn. You soon get to a certain size where you cannot manage the company anymore. If you start a business today, you probably could manage it when it has five employees. You could probably also manage it when it has 20 employees. But when it has 200 employees you would probably run out of your skills. At some point, may it be 2000 employees, the company will just outgrow you. The faster the company grows the sooner that will happen, because people’s ability to learn and absorb all the experiences and gain the necessary managerial skills is limited.
Companies in Silicon Valley shoot for very rapid growth, usually doubling in size every year for at least five or six years. What you are talking about is going from 20 to 40 to 80 to 160 to 320 employees in a five year period of time. Ordinarily somebody who has never run a company with 500 employees reaches his or her limitation in that kind of time frame. So what the founders do is they cash out, exit and start another one. That one they can then maybe grow to a 1000 employees and then they cash out, and exit, and start another one again.
Many companies grow faster than their founders can learn.
Bill-Gates-type of people start a company and run it for their life. That is extraordinary. But that is not what usually happens. Ordinarily somebody starts a company, grows it to a certain point and then gives up the CEO job, becomes chairman of the board and then exits and starts another company. It is very rare for people to stay on top and to grow it themselves into a large corporation. When SAP was started, the founders were all experienced people. They had had managerial responsibility and they knew what a big company looked like. Thus they were very well equipped to strategically guide and
manage the company until today. Also, sometimes the founder is able to grow fast enough. However, even then you should always ask yourself if there is not a better person out there to run the company. You constantly have to keep looking at yourself. And there might be people out there that are not only stronger than you in areas where your weaknesses are, but also in areas where your strengths are. To be successful, you should always try to hire people who are smarter than you. And if you really do that, it will in most cases happen automatically that at some point in the development of the company somebody will replace you in your role. Would you therefore rather hire less smart people?
Keep looking at yourself constantly and always ask if there is not a better person out there to run the company or to do what you do.
The question how long the founder should be running the company really depends on how fast the company grows and needs to grow (see Chapter 4 on Window of Opportunity), and what the knowledge base of the entrepreneur at day one is and how fast the entrepreneur can learn.
A way to manage that this does not become a growth restraining element or even a company killing failure is to bring in senior management with more experience than the entrepreneur has as early as possible and that usually means giving up substantial equity to an outsider. Venture capitalists will often advise or sometimes even force the entrepreneur to bring in an experienced management team. Bringing in experienced management does not mean, that you have to leave the company, it just means that you will take on a different role. You really have to know where your place is in the value equation. For instance, instead of being the CEO, you will become the Vice President of Business Development, or instead of being the Chief Technology Officer you will be a director of the engineering team which works on the second generation of the product. If after a few years you do not add any unique value anymore because you have hired people who have complemented you to a point where you are not necessary for the company to be successful, it might also be that you leave the company and do something else. Maybe start another company.
When we formed this company we were seven founders. Three months after we founded the company one of the founders who was Vice President of Marketing stood up and said: This company is getting way bigger than I ever thought. We are growing so fast already, I think I should step aside and we have to bring in a world-class Vice President of Marketing. Another founder had been with another startup before that failed and he said: If one guy had had the courage that you have to say something like that and to do
that, we would probably still be around today. That was a culture-defining moment.
Bring in experienced managers early.
One of the biggest problems is when the founder just cannot let go. The founder thinks he has to be the President, when in fact he is not the right person to be the President at some stage of the company’s development. It is therefore critical for the development of the company, that the founders realize when to turn it over to somebody else and to step aside for somebody who can grow the company bigger and faster. An entrepreneur however often does not believe that he has a problem until he has a crisis. And often then it is too late. When he needed to hire that person was six months earlier. Many companies die because the founders refuse to let go. It is like stifling your child. At a certain age, you have to let your child go and be free. To make its own decisions, and live its own life. Therefore you need to bring in professional management early enough. Also, because it takes usually at least six months until you have found talented management. Bringing on a good executive early is one of those decisions in the early stage which will help you to avoid many problems on the way.
And when you bring in experienced management, you really will have to give up control. It will not be simply that they are running it, and you tell them what to do. You have to give up control because they are never going to accept a job if you are always looking over their shoulder. The new CEO is going to manage a lot of the people, you used to manage. He will make a lot of decisions you used to make. You will have to accept decisions you do not agree with. It will be hard.
You, therefore, need to prepare yourself for the moment when you let somebody else take control of the company. When you are used to have control over everything in the company, including every nickel, to move that over to the Chief Financial Officer or to move it over to a new CEO or to let the board take control of the company, feels like letting go of a child. It can be difficult and you need to prepare yourself for that. There will be some emotion in it, but it is a natural evolution of the company. Just as you picked your partners in the beginning, you need to prepare for this transition of the company. And you have to make sure that the vision and the values are sustained.
We knew, that over a period of time we would lose control. We knew that right from the beginning. That’s something every entrepreneur should think about when they are starting a company. You want to assure yourself of the people in place, that you feel
good about the board members and the new CEO, and that it is the type of environment and the people that can sustain that early vision. (Jay Eisenlohr, Rendition)
Prepare yourself for the moment of transition and choose people to follow you who can sustain the vision and culture.
Ownership of the Company
The second important implication of this professional way of looking at a company is that the founders will need to give up equity and are unlikely to end up with 51% of the company. You are going to end up with a few percentage points. But at the end if it works out, it will come back not only in terms of more dollars but also in terms of a sustainable company. There is almost no way that you are going to be successful with venture capital or other value adding investors and keep 50% of the company. Ultimately you will get diluted below that. You will get diluted every financing round. But as you take that money and have the value of the company go up by more than the amount that you got diluted, you will be better off from a net worth perspective. By taking in outside capital, you really work on making the pie bigger, not your slice bigger. In the end you will have a smaller share of a much bigger pie.
The smart entrepreneur realizes that if he gives a reasonable percentage of the company to a venture capitalist for instance, that this has tremendous benefits, because they help to build a bigger business. You should think about how big the pie is. And not how many pieces of the pie to give up, because building a company is really a team effort. The investors themselves are motivated by the desire to make the company grow and to make money. And when the venture will make money for the investors it is going to make money for the founders. Besides, as an entrepreneur you will realize quickly that cash is more important than equity because cash is what allows the company to grow. Therefore you will give equity instead of cash whenever you can. Managers, employees, the directors of the board, the advisory board members, the consultants, and the lawyers all get stock, because you will not have enough cash to attract these great people to your venture.
Control is not how many shares you have, but how important you are to the venture. Control depends on how much value you bring to the business, to the value equation. Percentages are meaningless. You can sell 90% of the venture but if you are the brilliant person that forms the core of the company you are in control. Because if the investors lose you they throw away their money. As an entrepreneur you are worth what you
deliver. Investors do not have an incentive that your ownership goes to zero. As a good entrepreneur you would start another one. Therefore they want you to be motivated. If you are good they will back you and want you to have an incentive to succeed. The best guarantee you have therefore is performance. No one is going to keep you just because you had the initial idea or founded the company.
Control depends on how much value you bring to the business, it is not the number of shares you have.
Building a Sustainable Business
The reward of sharing management and ownership of the company is having built and being part of a large, successful and sustainable company. To get there you have to share ownership and let go control. The founder should never be a limiting factor to the growth of the company. Instead, he should be willing to sacrifice his own ego gratification for the greater good of making the company successful. Entrepreneurs have to clearly understand where they bring value to the equation. That means that if you hit a point of time where as the founder your skills do not match up with what the company needs, you are not only willing to step aside but to help in the transition process to bring in somebody who is a better manager to run the company. You must have the attitude that you have started the company, but that the company is something which has its own right to live and grow, and you must let others take it over who can grow it more. You must be an egoless entrepreneur. Only then the company will sustain itself when you are gone. Then you will have built something that lasts.
I think the important thing is realizing that my satisfaction comes from growing this business. If things change tomorrow the company may have to decide what are the best ways to grow. The decision will be made that way. I think anybody does not really own that business. It is not a family owned business. You have investors in the company who own a big chunk of the company, the employees own a chunk of the company, so in a sense I am a steward of the company. My job is to make the company grow, my job is stewardship, my job is not ownership in the sense that I own it and go around making sure that people salute when I go by. That’s ownership. And ownership is about micromanaging things. It is a different thing than stewardship. And I am a steward of the company. I founded it and I started it, but we have multiple people involved in making this company successful and multiple people who own a piece of the company.