Startup Leadership

How Savvy Entrepreneurs Turn Their Ideas Into Successful Enterprises

Derek Lidow

• Publisher: Jossey-Bass
• Year: 2014
• ISBN:
  9781118845653
• Edition: 1
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

Anyone can start a business. But only leaders can succeed.

Most entrepreneurs know the long odds: only a fraction of them will lead their enterprises through the rocky stages of growth to launch self-sustaining companies. Very few know how to outflank the failures that await them at every turn, including the most painful—being abandoned by key members of their team or getting pushed out by their board just as their business starts to generate real value.

Derek Lidow is on a mission to improve these odds and change these outcomes. Throughout his long career—as CEO, innovator, and entrepreneur—he has tested virtually every aspect of launching a business. Lidow now argues that success is far less dependent upon a firm's idea or any grand strategy than it is upon something more personal: leadership. Emerging companies have specific leadership requirements, stage by fast-moving stage. Few founders have been able to leverage the tremendous power of this underrecognized reality—until now.

Startup Leadership demonstrates how founders can adopt the skills that are required at each stage of their journey. Whether you are at the idea stage or managing a more mature enterprise, you can start to recognize the fundamental conflict: how to balance your selfish drives with the more selfless leadership required by the organization at any given time. The book shows you how to achieve this balance by:

• Assessing your unique motivations, traits, and skills
• Creating a personal leadership strategy that leverages your strengths and mitigates your weaknesses
• Mastering how to lead teams, including boards
• Understanding the five prerequisites for driving change
• Taking control of your inevitable crises, thereby strengthening your team and your leadership

With Lidow's help, you will learn how to become the startup leader your business needs, and you'll move forward with your plans with greater confidence and success.

1

Success Requires More Than Entrepreneurship

Success, defined in whatever monetary and emotional terms you choose, requires more than being able to form a company around your idea. Ideas, and the companies formed around them, come and go. Very few create any tangible lasting value or emotional fulfillment. Even more heartbreaking is the all-too-common situation in which an entrepreneur succeeds in starting a new enterprise only for the enterprise to stagnate and slowly die. Entrepreneurs are commonly removed when outside investors are part of a startup. The following true story of Adam is an excellent example of an entrepreneur that started a great company only to be forced out because he could not deal with the competitive and organizational pressures that entrepreneurial leaders must face. As we shall see over the next twelve chapters, entrepreneurs like Adam¹ can succeed in seeing their ideas become value producing and self-sustaining enterprises once they are armed with a basic set of startup leadership skills.

Adam passionately wanted to be an entrepreneur from the time he was in high school. He taught himself to program computers, and by age fourteen he was already earning money making websites for local small businesses. He went to an excellent university and majored in economics while taking all the classes on entrepreneurship that were offered. Upon graduation, Adam sought more hands-on experience, accepting a job at a major computer company. He did well at the company but did not feel satisfied being “a cog in a big machine,” and after two years he accepted a job at a software startup. Although he wasn't part of the startup's founding team, he was given responsibility for a small group of programmers developing a new feature for the startup's existing product, which improved the management of market research companies. Adam's team delivered its product enhancement on time—a significant accomplishment in software development, a field in which almost all projects run behind schedule. When Adam felt his accomplishments were not properly acknowledged by the startup's founders, he decided that he needed to start his own firm.

The opportunity was practically at hand—the startup, which had struggled to find new customers and to keep its existing customers satisfied, shut its doors within six months. Adam was elated to be out of a job; he felt he knew how to better address the software needs of the market research community, and now he had a chance to prove it. Just four years out of college, Adam launched his company, Gale Solutions (named after his mother). He raised money from two wealthy former classmates and a few family friends. He hired three people from the defunct startup: two former classmates and another person from the large software company that had first employed him.

Capturing the first few customers proved to be much harder than Adam had expected. Market research firms were interested, but he could not get them to actually commit to buying his software. He got a break when Josh, a top executive of a customer Adam had been courting, was hired to be the CEO of another market research firm. Josh, already familiar with Gale's software, called and said he wanted to use it. The enterprise finally had its first customer. Adam and his team delivered the software, and after six months of working closely with Josh on some critical modifications, the software finally produced meaningful efficiencies. After two years Adam finally had a real example of how well his software worked. Armed with an excellent customer reference, Adam made six more sales in the next thirteen weeks.

Gale Solutions survived those first two years on family loans and Adam's maxed-out credit cards. Fortune smiled on Adam again when Josh offered to introduce him to a well-known venture capitalist, Gerry. Josh gave Adam and his enterprise glowing recommendations, and Gerry soon offered to invest. Needing money and impressed with the reputation of such a successful venture capitalist, Adam gladly accepted a $3 million investment in return for 50.1 percent ownership of Gale. The investment enabled Adam to expand his enterprise and hire a sales force and a CFO.

Running his fast-growing company was a struggle for Adam, but he still relished it. He worked twelve-hour days dealing with customer issues, authorizing pricing for contracts with new customers, reviewing progress on new software updates, signing checks, working with his top engineers on new versions of the software, as well as dealing with employee issues. The more successful the company became, the more employee issues he had to deal with. One of these was of particular concern.

Adam respected his new VP of sales, who had run sales for a successful software supplier. Adam also respected his VP of product management, who was smart and fearless in negotiating final deal terms. But the two VPs hated one another, and Adam often had to stop their shouting matches. Adam felt they both made good points, but he was unable to get either of them to listen to what the other had to say.

Adam had another problem: his engineering team kept missing their deadlines for software updates. He sensed that the complexity of the software was getting beyond his engineers' ability to control it. He was sure he could help them if only he could spend more time with the team.

Adam was disappointed that Gerry was not available to give more advice. He saw Gerry every six weeks for exactly two hours at board meetings, where Gerry asked excellent questions and gave very pointed advice, such as “You need a more experienced head of accounting” or “You have got to step up to fix the problem between product management and sales; hire a counselor if you must.” Adam hired an experienced CFO to improve accounting and other financial tasks, but the CFO's son fell ill and she soon went on leave. When Adam spoke about hiring a counselor to the VP of sales, the VP responded, “We are doing just fine as we are!” and that he would quit if Adam inserted another person into the brew.

Although growing a company was exhausting, most nights Adam still fell asleep feeling very accomplished. So it was all the more devastating when Gerry took him to a rare lunch and, after congratulating him on some favorable customer reviews, told him that it was time for him to step aside as CEO. He needed to let a more experienced executive take over and build the company to the point where it could be sold for a hefty valuation.

“Where did I go wrong?” Adam asked, holding back his tears.

Gerry laid it out: “You have done a good job, but to make this company really valuable, we need to make changes. The sales force is good but not great. They argue way too much with the person you brought in for marketing. Invoices are sent out late, and you no longer deliver your latest software enhancements on time. Your success has finally brought competitors into the market, and they have more money to spend on sales and marketing than we can make in five years. They will blow us out of the water if we don't change quickly. We need a strong, experienced CEO to make sure the company keeps growing and becomes valuable.”

Adam was speechless, so that was that.

Stories like Adam's are repeated every day. Entrepreneurs that accept money from professional investors are more likely to be removed as CEO—as the leader—the more successful their enterprises become.² It's true that if Adam had not accepted money from Gerry, he wouldn't have been pushed aside—but Gerry was right in his contention that the major competitors Gale Solutions' success had attracted would have likely blown him out of the water. Adam was doomed to suffer major setbacks either way.

The real world is brutal, and most entrepreneurs do not understand what it takes to succeed with their dreams. Specifically, there is a big gap between getting a company to the starting blocks and getting the company to the point where it can stand on its own. This gap is where the entrepreneur and his enterprise are extremely vulnerable and where inadvertent mistakes can be economically fatal. When the enterprise is very immature and fragile, every new hire, every customer, project, strategy, crisis, or pivot has disproportionately large impacts on the future well-being of the enterprise—and on whether the founder can continue as its leader.

Books on entrepreneurship, many of them excellent, focus on how you start a company, and these books finish with their advice once a hypothetical stream of customers show up. This book is about building an enterprise from the initial idea to the point where the company has become profitable and is self-sustaining.

My standard for entrepreneurial success is a basic one: you have to get your enterprise to the point where it is self-sustainable. If you can do that, you have proven yourself to be a real entrepreneurial leader (EL). This goal is attainable, and not just for the lucky or the specially gifted entrepreneur; given the proper skills and insights, most entrepreneurs can ultimately become successful—they can become ELs.

Entrepreneur, or Entrepreneurial Leader?

Entrepreneurship is a calling that many aspire to. Almost half of the working population in the United States will try to become an entrepreneur during their working career. I am using the word entrepreneur in the classic sense of the word: someone who works to start a business as well as someone who leads a business they have started.³ Fewer than half the people who try to start a business get it to the point where they actually get a paying customer. Even after the entrepreneur has found a real customer, about half give up and shut down within five years. Fewer than one in four entrepreneurs who start out remain in business for more than five years.⁴

Almost all entrepreneurs with businesses that have lasted five years have succeeded in making enough profit to stay in business, but few of these entrepreneurs ever grow their firm to the point where it is self-sustaining. By self-sustaining, I mean that the enterprise meets two criteria:

• It can operate whether or not the founder is active in the firm.
• It is able to gain new customers with new innovations in its products or services; that is, customers lost through aging and shifts in the market can be replaced by other customers buying new products or services.

A self-sustaining firm is a valuable tangible asset. A firm that is not self-sustaining will go out of business. This is the unfortunate fate of the vast majority of all the profitable enterprises ever founded. It is estimated that less than 2 percent of all entrepreneurs get to the point where their enterprise has created tangible value and is self-sustaining.

Leading an enterprise all the way from conception to the point where it is producing value and is self-sustaining—which means you are succeeding as an EL—is much more challenging than starting a company. If you want to see your idea reach its full potential, if you want to enjoy the fulfillment that comes from having made a tangible difference in the world, if you want to achieve financial success, then you must aspire to be an entrepreneurial leader.

Adam was an excellent entrepreneur, but he was not an entrepreneurial leader. He didn't have to lose both his job and the control over his idea and his company. But he just didn't understand what he needed to know—that what he had done (and done very well) to establish his company as a viable enterprise in a potentially competitive field was not all that he needed to do to lead his enterprise successfully to self-sustainability. What had worked so well even weeks before now no longer worked. Adam's business had moved into a different stage of maturity, with a different set of challenges and needs, requiring a different deployment of leadership skills.

Stages, Skills, and Selfish Selflessness

Like infants becoming children, then adolescents, and then teenagers, enterprises go through stages of maturity. I will describe four stages that entrepreneurial leaders must understand and manage; these stages define times when changes in leadership skills are required. Without understanding these four stages, an entrepreneur cannot completely understand what changes are required in their leadership to move the enterprise closer to being self-sustaining. Sometimes entrepreneurs figure out that they need to change before it is too late, but often only after bad things have happened to the enterprise and to the trust the team would otherwise have had in its leader. I will describe these four stages and the leadership expectations of each in Chapter 3.

Becoming an entrepreneurial leader requires that you develop specific skills; fortunately, these skills do not require extreme abilities of any sort. You do not have to be born with any special traits. Indeed, you can even have major weaknesses, but you must understand what they are and be willing to mitigate them to the point where they do not interfere. Self-awareness and self-knowledge are the foundation of the EL skill set.

Adam was not very self-aware. He knew he was smart and a nice person, and he thought that was all he needed to be able to figure out how to solve any problem. He did not realize that his strengths that derived from his personal set of motivations, traits, and skills had corresponding weaknesses. He had no clue that his affability was related to his aversion to conflict, which actually fostered the relationship problems he had spent so much time solving. Being a nice guy had its dark side. Similarly, he couldn't see that his perfectionism resulted in his inability to delegate, which in turn meant he was prioritizing his time ineffectively. As we'll see, he wasn't skilled at understanding relationships, motivating others, or the nuances of leading through change. He just kept on applying his logic and his natural charm to implement only temporary solutions to each new problem he inadvertently caused for himself.

The first half of this book explores the required EL skill set in depth, including:

• Self-awareness: How to work with your own motivations, traits, and skills—your capability mix.
• Relationship building: How relationships form and how you make them stronger.
• Motivation: How you motivate others to want to help you be successful.
• Leading change: How to make people willingly change what they have been doing successfully.
• Enterprise basics: Understanding the leadership needs of all enterprises as they mature.

These skills are not difficult to master if you are motivated to do so. What makes becoming an entrepreneurial leader most challenging is learning how to be selfish and selfless at the same time. Properly using these straightforward skills requires the EL to find a personal balance between these otherwise conflicting characteristics. Entrepreneurs have to be selfish: the very fact of their starting an enterprise means they want others to change their habits or even their lives to accommodate how the entrepreneur thinks the world should work. As we'll see in Chapter 2, genuine selfishness is at the root of entrepreneurial success. On the other hand, leadership requires that you make those who follow you feel that they will be successful in achieving their own personal desires. Balancing selfishness with selflessness—understanding how, when, and why each of these serves enterprise success—is tricky when you are unaware what you need to do it. Finding that balance through the practice of these fundamental skills of startup leadership will be a recurring theme of this book.

The startup leadership skills we explore here apply broadly to any enterprise and any entrepreneur. That is, they give almost any motivated entrepreneur the ability to transform ideas into a tangible and self-sustaining reality. This tangible reality could be a for-profit company, a non-profit philanthropy, an all-volunteer organization, a new division within a larger existing enterprise, a new political group, or even a rock band. Startup leadership applies equally to leading a tribe or an extended family. Because these skills apply so broadly, I tend to refer to the EL as leading an enterprise, the m...