How to decide whether to keep the initial absolute control over your business and run the show or to relinquish it and get professional management to focus on wealth?
As an entrepreneur, you’ll have to choose between money and running the show.
You likely won’t be able to do both successfully as chances are you’re not the next Bill Gates or Elon Musk. If you believe you can pull it off — get rich and keep control of your business — the stats are not on your side. A Harvard Business Review study showed that less than ¼ of founders remain CEOs by the time the business gets to a liquidity event.
Less than ¼ of founders remain CEOs by the time the business gets to a liquidity event.
The dilemma is quite complex for founders and requires a lot of introspection. But, you’ll have to decide or you’ll soon be displaying the dreaded, and many times fatal, Founder’s Syndrome — which I’ll discuss in my next post.
So, what’s the difference between the Founder’s Dilemma and the Founder’s Syndrome?
The Founder’s Syndrome is when the founder (or founders) is equally important for the initial success of the startup as they are important for the later stunted growth or even failure.
The Founder’s Dilemma is, therefore, the decision to either pursue power or wealth and focus on one or another to keep the deadly Syndrome away.
The Founder’s Dilemma is the decision to either pursue power or wealth.
So, you’ll have to decide whether to keep the initial absolute control over your business to stay in control or to relinquish it and get professional management to focus on wealth.
The Reality of Startup Management
I’ve met many entrepreneurs in my business career who wanted to pull off the impossible. After many years, in some cases over a decade, they are still struggling to get their startup off the ground. For one reason or another (there are many complex and emotional reasons) they simply cannot let go.
Many times it’s quite obvious their businesses would be much more successful had they relinquish control of the venture and get professional management or relinquish wealth and run a lifestyle “family” business.
It goes without saying once you have any kind of external funding (angel, seed, VC, etc) your option of running a lifestyle business without focusing on fast growth and working hard to get to an exit is not an option anymore. Any investor will want a liquidity event and get their money back — hopefully 10x.
If you don’t want to have someone run the show, don’t get external funding. Like it or not, if you have an investor and don’t want to relinquish control, the board will replace you as CEO. There are no two ways about it.
Initially, the Founder’s Dilemma is hard to see. When I set out to found my first startup it was because I loved making video games. The control-or-money dilemma was not on my radar.
Not because there’s very little money in making video games (it’s Hollywood for geeks, and by Hollywood, I mean actors who are temporarily waiting tables, not wealthy producers) and with the industry’s studio system, there’s really no power to be had.
It was not on my radar because I simply wanted to make a business out of a hobby — a rather common and dangerous dream among entrepreneurs.
Remember: the definition of a hobby is something that you spend money on, while the definition of a business is something you make money with. These are two totally different concepts, never to be confused.
I’ve put together a business plan and went fundraising. Eventually, after many ordeals during the fallout of the dot-com crash, I raised some venture capital and we started off with over ten employees on day one.
I’ve certainly made more than a fair share of mistakes in my business career and one of the biggest ones was not relinquish control and get professional management. Not because the VC would be against it, or we wouldn’t have the funds. It was my baby! How could I possibly have let someone take away my baby? Unfathomable.
Plus, there was the fear of appearing incompetent as CEO. As someone who can’t handle growth. The fear of failure — as a parent (of my baby). There’s a great article on the topic over at Tech Crunch by Dale Stephens.
Had I understood the Founder’s Dilemma and the Founder’s Syndrome (of which symptoms I obviously displayed) back then, I’d certainly decide on relinquishing control and focus on making great games and, consequently, more money.
Instead, I tried to do both: run the show and get rich. Neither worked very well. I know, without doubt, we’d be much more successful had I swallowed the pride and got a professional manager to run the show.
Instead, I tried to do both: run the show and get rich. Neither worked very well.
We did manage to sell the studio successfully, but the exit would have been much sweeter had I let a pro handle the business and management aspect of the studio and me focusing on games.
Decide Early and Stick to it
If you don’t figure out which matters most to you early on, you will most likely wind up being neither rich nor in control.
The logic is really simple. You need financial resources to capitalize on the growth opportunities to make a lot of money out of a new venture. For that, you need investors — which will require you to give up control as you give out equity and as investors start putting their people on the company’s board. Alternatively, you want to keep more equity to stay in charge of your business, which in turn means less money to grow your business. Bootstrapping is hard.
So, you have to take some time for introspection and choose between wealth and doing things your own way. Take some time off your busy day-to-day firefight and think about why you started the company in the first place: what’s your main motive to get out of bed every morning. Then analyze the trade-offs of this objective.
The Stats
As I mentioned at the start, the stats are not on your side if you fancy yourself a Renaissance man, able to both run the show and get filthy rich.
Noam Wasserman’s research shows four out of five entrepreneurs are forced to step down from the CEO’s post. Most are shocked when investors insist that they relinquish control, and they’re pushed out of office in ways they don’t like and well before they want to abdicate.
Four out of five entrepreneurs are forced to step down from the CEO’s post.
So, why is it so important you decide what’s important to you?
Because the transitions take place relatively smoothly if, at the outset, founders are honest about their motives for getting into the business.
But don’t people start a business to make lots of money? They do. However, a 2000 paper in the Journal of Political Economy and another two years later in the American Economic Review showed that entrepreneurs as a class make only as much money as they could have if they had been employees.
In fact, entrepreneurs make less, if you account for the higher risk. What’s more, founders often make decisions that conflict with the wealth-maximization principle. Wasserman found that by studying the choices before entrepreneurs, he noticed that some options had the potential for generating higher financial gains but others, which founders often chose, conflicted with the desire for money.
More sobering stats: Wasserman’s research shows 51% of entrepreneurs made the same money as (or made less than) at least one person who reported to them. Even though they had comparable backgrounds, they received 20% less in cash compensation than non-founders who performed similar roles. That was so even after taking into account the value of the equity each person held.
51% of entrepreneurs made the same money or less than people who reported to them.
There is, of course, another factor motivating entrepreneurs along with the desire to become wealthy: the drive to create and lead. And, as the stats show, trying to build one, usually slows the achievement of the other.
Therefore you face a choice between making money and managing your venture. If you can’t figure out which is more important to you, chances are you’ll end up neither wealthy nor powerful.
A sad, but very common outcome among entrepreneurs.