The founder’s dilemma often stems from the ‘why’:
“What was the motivation behind your startup?”
“What is the end goal?”
“What made you do X, and why did you choose Y?”
Now, whilst founder motivations tend to differ massively across the board, Noam Wasserman, the author of The Founder’s Dilemmas, examines early-stage decisions by entrepreneurs that can make or break a startup and its team.
Wasserman argues that in the majority of cases, most entrepreneurs have to make a deliberate choice between either optimising financial returns (Rich) or optimising for control of their company (King). If the founder wants money, then investors will eventually push them out – if they want to control, then they won’t get the money. Successful Founder-cum-CEOs are a rare breed, and Wasserman added in The Founder’s Dilemma that:
“By the time the ventures were three years old, 50% of founders were no longer the CEO; in year four, only 40% were still in the corner office; and fewer than 25% led their companies’ initial public offerings. Other researchers have subsequently found similar trends in various industries and in other time periods. We remember the handful of founder-CEOs in corporate America, but they’re the exceptions to the rule.” (Wasserman, 2013)
This article will examine examples of both Rich and King, as well as the motivations behind both, ultimately shedding light on some further key statistics from Wasserman’s The Founder’s Dilemma to help examine these two polarizing decisions that ultimately make or break a startup.
A founder who gives up more equity to attract investors build a more valuable company than one who parts with less, and could end up with a more valuable slice too (HBR). The ‘rich’ options enable the company to become more valuable, but ultimately sideline the founder by taking away the CEO position and control over major decisions An example of what ‘rich’ looks like is Ockham Technologies’ cofounder and CEO Jim Triandiflou, who realised that he would have to attract investors to stay in business. He ended up roping in a well-known venture capital firm and sold an equity stake to them. He gave up board control, but in return, he gained resources and expertise that helped increase Ockham’s value manifold (HBR).
A founder who is motivated by control tends to be more prone to making decisions that enable them to lead a business at the expense of increasing its value (HBR). This involves a more steadfast desire to remain as a sole founder, often bootstrapping their ventures in order to stay in control. For instance, John Gabbert, the founder of Room & Board, is a successful Minneapolis-based furniture retailer known for repeatedly rejecting offers of funding that would enable the company to frow faster. The reasoning behind these rejections of funding is due to a trade-off between money and control – Gabbert is clearly willing to live with the choices he has made as long as he can still run the company himself (HBR).
Which is better?
In “CEO Evolution: Knowing When and How to Transition a Startup from Founder Leadership to Growth Leadership,” Suren Dutia, a Senior Fellow at the Kauffman Foundation, America’s entrepreneurship think-tank, calls on research and his own experiences replacing a founder-CEO and serving as an investor, advisor and board member to many startups. Dutia suggests that few founder-CEOs have the skills and experience needed to ensure company growth and shareholder value beyond a startup’s early stages. While a founder’s vision and passion are vital for getting a new venture off the ground, companies require different leadership capabilities as they grow:
“As startups mature, founder-CEOs need to ask themselves hard questions about whether someone else might be better equipped to take the company into the next stage of growth,” said Dutia. “Founder-CEOs who are able to conduct this personal skills analysis and let go of their leadership roles when needed give their companies the greatest chance at long-term success.” (Dutia, 2015)
Ultimately, sometimes the founding CEO is not necessarily the best person to run their company – Wasserman’s research of hundreds of American startups revealed that within three years of founding the startup, 50% of founders were no longer the CEO, and fewer than 25% were in the top seat when their companies went public. Furthermore, four out of the five founders from Wasserman’s study were actually pushed from their positions as CEO, which is a direct challenge to the role of being a King. This is strong evidence to suggest that Rich is often times the best route towards growth, provided founders are willing to relinquish control to increase their wealth.