In a study involving 212 US startups, 50% of the founders were no longer the CEO after 3 years of firm creation, less than 25% of the founders were occupying CEO positions during IPO, and four out of five founder-CEOs were forced to step down. So let’s look at the startup founders’ dilemma.
These are the facts. Most entrepreneurs are keen to make a lot of money and run the show. However, it can be difficult to do both. If you cannot set for yourself straight, which matters most to you, you could end up being neither rich nor in control.
To make a lot of money from a new venture, you need financial resources to make the most of the opportunities before you which you probably already have learned through international collaboration in college.
That inevitably means attracting new and keeping the old investors, this in its turn forces you to surrender control as you give away equity and as investors change your board’s membership. In order to remain in charge of your business, you have to keep more equity. But that means fewer financial resources to keep your venture going.
The choice is between money and power. It all begins by sharpening your primary motivation for starting a business. One must understand the trade-offs that come along with your goal. As your venture grows, you’ll make choices that support—rather than jeopardize—your dreams.
Entrepreneurs are dealing at every step of their venture’s life with a choice between making money and controlling their businesses. To every choice, there is a trade-off. Fortunately, today we see so many new ways to get your company’s growth and ambitions financed. Just look at what crowdfunding and crowdsourcing have brought about!
Startup founders build more valuable companies if they give up more equity to attract co-founders, key executives, than those who keep more equity to themselves. At the end, the founder ends up with a more valuable share.
However, to attract investors and executives, you have to surrender control of most decision making. Which mean that your job as CEO might be at risk because, for instance:
• You will be obliged to have a broader set of skills—such as creating formal processes and developing specialized roles—to continue constructing your company as you did when you started it. This usually turns out to be difficult to achieve.
• Investors allocate money in several stages so get your business “Investor-Ready”. And at every step, they bring their own people along to your board, which will steadily impede your control.
• Worst case: investors may push you to leave the company.
If you are driven more by wealth than power:
• Admit it if you are incapable of performing the top job, and hire a new CEO yourself.
• Think with your board of post-succession roles for yourself.
• Stay open to following ideas that require external financing.
RUN THE COMPANY
In order for control for you to sustain control of your new business, you may need to use your own capital instead of taking money from investors. This may imply that you will have less financial resources to get your venture off the ground and constantly increase its value. But at the same time, you will be still in a position of running the company yourself.
If power is your motivator rather than wealth:
• Limit yourself to businesses where you already possess the skills and have contacts you need.
• Direct your attention to a business in which huge financing is not needed to start up your venture and maintain it growing through various marketing strategies, particularly in social media.
• You might also contemplate on waiting until late in your career before setting up shop for a new venture. That will give you time to develop the broader skills you’ll need as your business grows and to accumulate some savings for bootstrapping. See also this post about crowdfunding now and in the future.
Reference: Wasserman, N. (2008) The founder’s dilemma. Harvard Business Review. Co-author: Yulia Bondarouk, a student of Master Applied Mathematics, specialization Financial Engineering.