Why Entrepreneurs Don’t Scale

So I read this Harvard Business Review article by John Hamm, titled like this post, and I would like to share his and my opinions on the problems that entrepreneurs have when dealing with rapidly growing ventures.

According to the article, there are four main reasons why founders have problems when their firm enters the right part (literally and figuratively) of the ‘hockey stick curve’:

1. Loyalty to comrades
2. Task orientation
3. Single mindedness
4. Working in isolation

Loyalty to Comrades

This deals with the fact that you have to analyse everyone in your growing organization (including yourself!) and figure out if the person still is in line with the new company goals. Maybe you will find that your co-founder or your first 2 employees, who build the company from nothing to what it is right now, no longer fit into your long term vision. This basically means that you have to look at people’s performance and not at how much you like them. This can be a very, very difficult decision for any founder. The only way I think you can really make sure you don’t fall into this trap (except from being an emotionless bastard), is to do as I wrote in my previous posts. Step away from your company and look only at what is necessary for the next step. You have to be able to see your friend’s performance in the perspective of the company as a whole, and determine if he still fits in or not. If not, you have to face the difficult work. Simple as that, you have to, otherwise you will jeopardize the whole company.

Task Orientation

In the startup phase, founders often have to work on specific, very clearly defined tasks, on the product or service. Most of the deadlines and goals can clearly be seen, next week, next day or even in the next hour. However, as soon as the venture starts to rapidly grow, the founder/CEO has to switch to a long term vision, with less clear deadlines and goals way beyond the horizon. This switch often is difficult for founders, particularly coming from an operations, product development or finance background. Leaders have to be able to select a few, two, maybe three or four, major goals for the next quarter or even year. They have to be able to select, from the obviously long list of all important issues, only the most important ones and restrict himself from selecting the whole list again. Once he found, with his executive team, the 3 or 4 most important goals, he has to make sure everyone in the company adheres to these goals, even if they are contradictory to the previous goals.

Single Mindedness

Single mindedness is a very important ability of a founder to make his/her idea a success; however, it is also one of the most dangerous ones if the company grows. In an early stage it will help solve problems, get the product ready in time, and it can even impress investors, in a growth phase however, this will only limit the company’s growth, and increases the chance of missed opportunities. Founders need to broaden their perspective and attention when they want their company to succeed out in the big world. They cannot focus on one single part of the product or company anymore. The customers, investors but more importantly, the employees need a leader that cares for everyone equally.

Working in Isolation

I believe this forth point is very similar to the previous one, with one distinct difference. When founder is not able to work or present to the ‘general public’, it will influence the companies success dramatically. The founder has to be willing to give interviews, to be ready every time an outside or inside person needs his ‘personal’ attention. As soon as the company has success, the leader will become the public face for it, and he/she can no longer hide in his office or workspace. Even if the leader doesn’t want to be the public face, the media, customers and employees will make him the face of the company, so you better face up with it.

What to do about this?

The process of continuous learning

In conclusion of these four points, I think they all boil down to 2 important characteristics that are necessary for a founder to be a successful ‘growth leader’. The founder has to be able to step back from the company and judge objectively every single thing that occurs or has to occur. The second step is, that the founder has to be willing to keep learning every step of the way. Most people won’t make the transition from founder to CEO completely naturally, and they will need advice, help and schooling. So don’t be afraid to ask for help, hire a presentation or media coach, ask people to judge you and listen to them and try to become better every single day.

Why do most small businesses fail? #2

Today I had a very nice discussion with Robert Jan van Vugt about my previous post and I would like to mention at least one of his very good arguments: “Isn’t it the essence of and entrepreneur that he is walking new roads, going where no one has gone before, sees opportunities where no one else does? Doesn’t that make the entrepreneur indispensable?”. Well, I think Robert Jan is absolutely right, but luckily his standpoint doesn’t interfere with my opinion, it even strengthens the ways I think you should build a company.

So we have seen that you should make yourself replaceable in your company for it to at least have a chance to succeed. But if you are not doing the innovative, unique or special work that is required for your products, what should you be doing?
The entrepreneur should work on his company, not in his company. The entrepreneur/founder should work on the vision, the strategy and the long term goals of his venture. He should be looking at what his company needs at what stage to make it successful. That means that he shouldn’t have an actual job in the company but rather a job on the company, keeping track of how it is running, how everyone is doing and what the major issues are. This will ensure that he is working on creating a better, more efficient and more successful company. How can you work on long term goals, or hiring new talent when you are fiddling around with some small electronic part of your product? How will you be able to track changes in the market when you are out there with customers 24/7?

Without the every day or every minute guidance of the founder, it is necessary to have a special team working in your business, people that really believe in the product and dare to take responsibility. They have to be able to run the company, based on the goals they set by and/or with the founder, and trust the founder on guiding and leading the company in the right direction, without depending on him.

I think this is the way a successful company is build, and this also shows how you can make yourself replaceable in your company, and still be the entrepreneur that is necessary for innovation and the company in the first place!

I will write a bit more on this tomorrow, going deeper into how you should get this idea to work.

Why do most small businesses fail? #1

In the US alone, each year one million businesses are started. An enormous number; 40% however, won’t even make it until the end of the first year, and within 5 years, 80% of this million have failed. Even those who make it through the first 5 years are not safe, in the next 5 years, an additional 80% will be forced to stop. More than 960.000 businesses fail within 10 years. A staggering number; can we find a reason for this? I think we can!

The commenly accepted reason for people to start a business, is their entrepreneurial spirit, their ingenious thoughts, magnificent ideas or their fundamental believe that they can do it better than the rest. I doubt it. One of the main reasons for people to start their own business, I believe, is the fact that they hate to do the work they do for other people. They work hard, 50/60/70 hours a week, for an average salary, they perform better than the people around them but they do not feel they get the credits for their work. “So what the hell, I’m the best in my business, I’m gonna start my own company and show these guys how it is done. I want to have the freedom to determine my own work schedule, my own sytems and I will show them that I will do better. And even better, I will be the one collecting the rewards this time!”

I believe that this is the wrong reason to start your own company. Deep down, the main reason why a lot of these people start their own company is because they want to be free, they want to be doing the things they like. There is off course nothing wrong with that, however, this usually results in a company where the founder is the main employee. Without him nothing works. Without him, nobody knows how to make the product, how to pack it, how to ship it. Without him, nobody is designing a new part, is treating customers the way they are used to. This will not create a company which gives the founder freedom or an exit strategy to buy a beach house and drink cocktails all day, this simply creates a new, even more demanding job. You basically created the same job you had, but now everyone around you, including your family and employees are completely depending on your ability to do your job. Doesn’t sound like freedom to me.

So how should you do it? I believe you should build a company that is sustainable without the founder, where the founder is not the main employee and is just as replaceable as everyone else. More about this in my next post!

History Tells Us… #1

Nice views on the way back to the foundation after a night of heavy snow

So, since there is a gap of around 8 weeks in my blog history, it is time to bridge it. I will do that with a few posts on these weeks and the things I did and learned. Today part one:

Looking back at what we did at the Kauffman foundation in the weeks we where in KCMO, I have to mention a few things specifically. Ted Zoller came back to the foundation to subject us to his 2 and a half day ‘Venture Bootcamp’. And he did! Ted worked with us from 8:30 in the morning to 16:30 in the afternoon, non stop touching on the most important aspects of startups, only to dive into every detail a moment later. The picture here shows one of his explainatory sheets, which look like complete and utter chaos, but is very useful and logic with his explanation (ok, I can’t find the sheet… In return I did find a very nice video of Ted @ the Kauffman Foundation)
This session ended with a short session from Nathan Gold, a presentation coach from The Demo Coach (www.democoach.com). Nathan started his presentation with some very nice magic tricks to get our attention and to clear our minds, and then, in as little as 45 min he reveiled all the secrets of a good investor pitch to us. Amazing how simple this stuff can be, yet so many people keep making the same mistakes (not to say that I’m not, but I’m now at least prepared to spot them).

Bill posing with the gang

The last thing I want to mention here, is the presentation from Bill Aulet. Bill is a professor at MIT Sloan, and worked with us on perfecting your value proposition and the determination of your customer. He showed the importance of being able to exactly, in complete detail (yes, even the type of underwear he/she wears), dertermine your customer. This is absolutely vital for determining how to approach your market, position your products or services and even for finding investors. Bill is one of those guys who can present in a convincing, yet very funny way, and still keep his full credibility. Amazing and great sense of humor, so if you ever have a chance to attend one of his speeches, make sure to be there!

There is life after silence!

I’m back! After almost 10 weeks I am finaly ready (as in, I have a good coffee and a nice cake in front of me ;)) to share a bit more about the America experience, so here we go!

Around 3 weeks ago I started my internship at Rhythm Engineering, a very fast growing company, delivering real time adaptive traffic light control systems. They are planning to tripple there revenues this year and they have hired around 25 people in the last 9 months. Currently they have 5 new employees in the interview or training phase, and they also find time to learn me a little bit about the company and the product.

Nice ride for the first day in Silicon Valley

My responsibilities will be mainly divided amongst 3 different sections of the company, Sales, Operations and Administration. I will do the weekly sales forecast, I work on the P&L, cashflow and balance statements and I’m working on re-inventing their inventory system. Oh and I help with preparing quotes, increasing the efficiency of the sales team and I help with some miscellanious tasks (like making coffee), it is to say that I am pretty busy.

The CEO of the company is Reggie Chandra, a traffic engineer, double master and phd, with 3 previous startups. He will be my mentor in the entrepreneurship field during my internship, and he is constantly challenging me to increase my knowledge and think about the decisions founders have to make. Very inspiring and helpfull for me, although it also amounts to a lot of work; he has me read around 1 business book a week and listen to audio tapes in my car. A bit an overkill I thought in the beginning, but I have to say that is works out really well.

So the next 2 and a half months I am staying in the Marriott Execustay on 909 Walnut street in downtown Kansas City, 17th floor. Very nice apartment, I’ll upload some picuteres on facebook and the picasa that I’m setting up. My buddy here in KCMO is Dilip Parasi, he is from India, and in the weekends we are totally owning the Irish pub in the Country Club Plaza area. Very nice to have some company while drinking beers and socializing with the locals.

Ok, that’s it for now, a very short update, I’ll be posting more here in the comming week, so that I have some room to tell you about the past 8 weeks which where absolutely fantastic!

God Bless America! (ahum…)

Treats:

What a view!

Who is that dude!?