Category: Operational Excellence

The Ego Trap: How Founders Can Fail Their Startup

Have you ever considered starting your own company? And then growing it to be the next Facebook, buying a Tesla and attending the Met Ball? You are not alone. The number of people launching their own business was higher in 2017 than in the previous 4 years. With conventional wisdom declaring that 90% of startups will fail, many of these new entrepreneurs will end up back on their couches playing Fortnite and watching Friends’ re-runs in just a matter of time. Starting a company is hard and it is ultimately the founders who hold the key to the door to success or to the door to failure. The bottom line is: have they prepared to navigate the perils of growing a company from an idea to a large institution? Many decisions in a startup’s early existence are crucial, such as creating a promising business model, securing access to funding, and receiving intellectual property protection, yet nothing affects a startup’s success more than the hiring decisions founders make.

Many prominent industry leaders agree, when you are going from an organization of 40 to 140, hiring is the most important part of the job as a founder. Specifically, a bad hire has a cascading effect, especially in a small startup. “B players attract more B players who are comfortable with C players, who do not threaten their position” Sapphire Ventures, and Former Wildcat Venture Partners, Talent Partner Elizabeth Patterson explains. To find sustained business success founders need to hire the best talent for their firm’s culture and business goals at the correct time in the startup’s lifecycle.

Perfecting when to hire

A founder needs not only to understand whom to hire, but when to hire. The growth of a startup, which reaches Series B/C funding often takes the form of a curve with diminishing returns (see blue lines below). The company first experiences high growth, attracting a generous round of investment, but experiences diminishing returns in the growth of the firm over time.

TheEgoTrap.Graph

Early in the lifecycle of a startup, Patterson suggests founders hire employees who are, “goal oriented, able to go the distance, curious, and display hunger, grit, and persistence.” Whereas later, in a firm’s growth stage, generally after a Series B or C funding round, founders should aim to hire seasoned industry executives, who have demonstrated success in growing and leading a function in a venture-backed firm, a private equity portfolio firm, or a large corporate company.

The way an entrepreneur views their role as the leader, CEO and/or torchbearer for their startup will inform the type of hiring decisions they make. Those who fall prey to the ‘ego trap’ put their own priorities before the needs of their startup, leading to ineffective hires and the start of a failing venture.

The new entrepreneur in society

Being an entrepreneur is in vogue. Instagram, Twitter, and LinkedIn profiles read: ‘Bitcoin investor: founder’, ‘Founder, Stealth Company X’, or ‘Serial founder’, which is often the golden ticket to amassing followers and, thus, ‘success’ in the current social media economy. With the rise in entrepreneurs’ social capital, the role of a founder has been glorified. The grueling 20-hour work days and continuous ideation are not publicly seen, leading many to aspire to found companies for the boost in social capital and perceived perks (magazine covers, keynote speeches, VIP lines, etc.).

A greater emphasis on acquiring social capital and attaining material goals often leads entrepreneurs to ego-driven decision-making. Mark DeSantis, CEO of Roadbotics, and Co-founder of kWantix Trading LLC, which was acquired by Moody Aldrich Partners, emphasizes that to be true leaders, entrepreneurs need to remove their social capital-driven desires from decisions they make on behalf of their startup, “The moment [a founder] takes a dollar of investor money, it is no longer [his] company. It is an institution he created and asked other people to be a part of. A founder’s accomplishment is the architecting of the institution, which is now making other people’s lives better.”

Thus, ego can cloud hiring judgment in several ways, leading, generally, to a less optimal firm structure with low to mid-level talent and decreased growth.

theegotrapchart

 

Errors and tensions in hiring

Founders need to trust partners who can advance their startup ‘baby’. DeSantis stresses that once entrepreneurs lose sight of the main goal of founding an institution – to contribute something positive to the world, “the startup becomes a founder-centric company, where the founder’s ego becomes an emotional factor in all decision making, wrapped up in the status of being at the center of the company”. One Silicon Valley founder and CEO recounts, “At my second company, we took a ‘promote-from- within’ approach, where we wanted to see our talented hires develop with the brand into leaders. While this approach worked to a certain extent, it took more time than it should have for us to reach out to our network to hire an executive recruiter to bring in seasoned executives.”

He goes on to say, “The most important tension a founder will face arises when the company’s board is trying to push someone onto your executive team who is not a cultural fit with the founders. It can be a fit for needed skills but not a fit for having a working relationship that will be productive.” Founders have many things to think about, including relationships with board members and investors – juggling these relationships while maintaining a positive approach to leading the startup is critical. A recent CBInsights post-mortem study of 101 startups showed 23% of startups failed because they had hired the ‘wrong team’. Having a team that vibes together, to form a positive and unifying culture, can mean the difference between success and failure. This means founders need to be particularly focused when working with investors to hire employees with similar passions and goals.

At the other end of the spectrum, Sam Wilcoxon, founder of Lorem, who just raised a seed funding round in NYC, has not reached the stage of needing to make executive hires, yet he wonders whether he is prepared to do so, “I think hiring is somewhat intimidating… it is done fairly quickly and you can do all the vetting you want but when it comes down to giving a piece of the company to a new person it is like a leap of faith, which is always scary but a necessary affair.” Sam is confident when it comes to bringing in technical hires but will rely on mentor and investor guidance to make future senior hires.

What are investors doing to help founders lead their firms?

While a startup’s product, service, or market may be new, hiring is not new, and entrepreneurs should not discount the wealth of information and advisory services available to them. On one hand, Venture Capital firms are changing their operational structures to provide more resources to the founders in their portfolios. Early stage VC firms, such as Precursor Ventures, which Sydney Thomas helps lead, take a hands-on approach to guiding and mentoring their founders through the early perils of startup ventures. “We offer hiring screening as one of our core tenets of support, in addition to emotional and strategic coaching to help them structure their business plans and intake of new hires.” Thomas emphasizes how important it is for Precursor to provide hiring guidance because she has seen the detrimental effects that the “growth at all costs mentality” has on entrepreneurs. “I have also seen founders suffer from decision burnout where so many decisions need to be made to the point where they start questioning their decisions – this is where our value as a resource and partner come into play.”

Later stage firms, such as Sapphire Ventures, are organizing internal resources for entrepreneurs to access. These resources include industry experts as mentors, Talent Partners to help with hiring processes including bringing together Executive Search firms with founders for executive hires, and Marketing and Communications professionals to aid with startup campaigns and M&A. With these resources, venture firms are coaching founders through the startup growth process to best prepare
them to avoid the ‘ego trap’.

On the other hand, business services firms partner with growth stage Venture Capital and Private Equity firms and their portfolio companies to provide talent consulting and Executive Search services in crucial times. For instance, Executive Search firms provide a larger network of relationships to allow founders targeted access to the best leaders in an industry. While the investment up front can range $70-150k for an executive hire, the impact of new leadership and ideas can be the difference between accelerated growth and firm failure. Startup success is often dependent on entrepreneurs, who best understand their strengths and weaknesses, to position themselves to tackle the hardest decisions with the support of advisors and industry resources. Putting all the ingredients together to lead a high-growth startup is challenging, but founders have more resources than ever before to get the recipe right.


Contact Jesse Schwimmer to discuss or comment: jschwimmer@rainesinternational.com 

Jesse Schwimmer leads Raines International’s Venture Capital Practice in San Francisco. Prior to Executive Search, Jesse was in Operations leadership at a Series C startup. He also holds a Masters degree in International Development from Oxford University, as well as a Bachelors degree in International Relations from Brown University.

Considering a Turnaround Opportunity

A turnaround comes in all shapes and sizes, and there is no shortage of examples at any given point in the market: from J.C. Penney’s notorious strategy and leadership saga, to Best Buy’s recent rise under former McKinsey Partner Hubert Joy, to Charles Icahn’s self-professed final stab at Dell in Michael Dell’s fight to take the struggling company private. More often than not, these companies are stacked with well-documented challenges, loss of public support, a lack of stability, and doubtless behind-the-scenes complications. They also present the opportunity for incredible success on a personal, professional, and financial level. When considering joining a turnaround, the question you have to ask yourself is: can you stomach (and thrive on) its day-to-day battlegrounds in exchange for the potential upside?

Tough Stuff

Understanding the environment and challenges involved in turnarounds is key before signing on the dotted line to start fighting the good fight.  A turnaround does, after all, have its name for a reason.  As an executive at one of these companies, you have to be willing to make the tough choices that are necessary despite ruffling some feathers. Applying thoughts from Errol Morris’s documentary The Fog of War: Eleven Lessons from the Life of Robert S. McNamara, turnarounds are messy and highly complex, and people can make mistakes in the process – some of which can cost the jobs of hundreds or thousands of others. They present a challenging and occasionally negative environment in which you will have to work day in and day out (a turnaround does not fix itself overnight).

As an executive search firm, we watch decisions play out in the careers of countless professionals.

Some food for thought when entertaining a turnaround opportunity:

If you accept an offer at a turnaround knowing full well it will be a challenging environment, and then leave shortly after because…it was a challenging environment…what does that say about your decision-making and self-judgment?