How Should Founders Change as Their Companies Grow and Evolve? | 5Y View

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Kai Liu, Partner at 5Y Capital

Source: Growing Pains: Building Sustainably Successful Organizations by Eric G. Flamholtz and Yvonne Randle, published by CITIC Press Group

Why can some companies sustain growth for the long term (at least ten years) while others cannot? Why do some founders and leaders grow alongside their companies?

When an organization grows and changes, those in management and leadership roles must also grow in skills and personal capabilities, adapting how they fulfill their responsibilities. For example, the time allocation of a startup CEO looks very different from that of a CEO at a $1 billion company.

Generally, CEOs at large organizations like the Fortune 500 have climbed the ladder over many years, while startup CEOs are typically either the company's founder, a member of the founding team, or the founder's spouse or child. To understand the transformations founders or entrepreneurs undergo as they drive their company's growth, it helps to first consider who they are and how they became CEO.

Characteristics of Entrepreneurs

While there are no precise demographic or psychographic profiles, our experience shows that startup CEOs share certain commonalities. About 90% of them fit one of three backgrounds:

1. Marketing background;
2. Technical background in a specific field, such as engineering or computer science;
3. Industry-specific background.

For instance, someone might have sold computer-related equipment at a large company, then decided to start their own business focused on developing and producing similar products. Or someone might have been an engineer or other technical specialist skilled at product development, then decided to build a new company. Alternatively, someone might have worked in a specific industry — travel, executive search, construction, real estate, apparel manufacturing, or various technology fields including software development, computer chips, and telecommunications.

Most startup CEOs are passionate about markets and products but not particularly interested in the nitty-gritty of day-to-day operations. Many find accounting tedious, caring about accounting systems no more than a homeowner cares about the plumbing inside their walls. They want it to work effectively but have little desire to understand how the system actually functions. Many look at financial statements simply to check "the bottom line."

Entrepreneurs typically have above-average intelligence, are willing to take risks, dislike environments where others tell them what to do, want things resolved quickly, and want to see things done their way. Many of them — though not all — lack listening skills or have attention deficit disorder. Like butterflies, they flit rapidly from one thing to the next. Anyone who has spent serious time with multiple entrepreneurs will notice behavioral issues: inability to focus on one thing for long, impatience, and desire for immediate results.

Most CEOs have no ceiling on what they contribute to their companies, meaning that company affairs not only occupy a large portion of their lives but, in most cases, are their lives. The pejorative term "workaholic" may be somewhat misleading. More precisely, they view work as an extraordinarily complex, infinitely enjoyable game. It is a deep source of personal pleasure.

Entrepreneurs are accustomed to dominating their companies. First, they possess a strong inner desire to avoid having their actions controlled by others. They love the feeling of being in charge. Startup CEOs typically view control — consciously or unconsciously — as an end in itself or as a means to achieve other goals. This personal preference is likely reinforced over considerable time through various methods.

How the Need for Control Affects Sustained, Successful Growth

In the early stages of organizational growth, the typical attributes of an entrepreneurial CEO are advantageous and even essential for the company. A fledgling enterprise needs a CEO with a strong sense of direction and unlimited dedication to keep everything running smoothly. At this point, a forceful CEO who understands every moving part and notices the smallest details can have a tremendously positive impact on operations.

However, as organizational scale expands, the entrepreneurial CEO's typical approach (and personality) may begin to have adverse effects on organizational success. In particular, everyone in the company — including the CEO — may have grown accustomed to submitting nearly everything, big or small, to the CEO for decision or final approval. In other words, the CEO may have unwittingly become a bottleneck for organizational development. The greater danger is that if the CEO isn't careful, the entire organization will inadvertently become populated with people less capable than the CEO. Despite increased company size and the addition of many managers and professionals, the CEO remains the most capable person in the company, if not in all departments then at least in certain areas. This means the CEO cannot elevate the company's capabilities beyond the scope of their own personal skills, thereby limiting the organization's growth and development.

The CEO's desire for personal control over everything within the organization is a considerable strength during the entrepreneurial phase but becomes a constraint or obstacle in later growth stages. This need to control everything can lead to dysfunctional consequences for the company, slowing organizational pace and bogging it down in red tape — outcomes no one wants.

Additionally, some CEOs deliberately want to maintain control over all costs and therefore are unwilling to hire people who are better than them at completing certain specific tasks. Other CEOs fear that if they hire someone to do what they cannot do themselves, they will become overly dependent on that person.

For example, the CEO of a $5 million revenue service company did most of the company's computer programming himself. When asked why he spent his own time on such matters, he replied: "If I let someone else do it, I'll get hurt when that person leaves."

Some CEOs are able to recognize their limitations as company needs change. The founder and CEO of one startup aptly put it: "I'm an entrepreneur, very good at controlling things — making decisions, and if necessary, watching things get done according to my personal absolute will. But my company has grown beyond that style. I don't feel uncomfortable about the company, but my role is indeed less significant."

This CEO realized that for the good of the business, he needed to transform from a manager accustomed to controlling everything, around whom all things revolved, into someone still important but not omnipresent and omnipotent.

Despite this recognition, such change is stressful. For some CEOs, their identity is tightly bound to their company. This change represents a threat — a potential loss of power. Many CEOs simply cannot bring themselves to relinquish some control and stop obstructing their organization's development.

Some CEOs know that a certain degree of delegation is necessary, so they go through the motions; but emotionally, they cannot follow through.

For example, one entrepreneur built an organization that reached $1 billion in revenue in less than ten years. He recognized that the company's current scale could no longer be managed according to his old playbook, so he brought in two heavy hitters — experienced professional managers — at considerable salary expense. One was a marketing manager, the other a financial manager, to handle day-to-day operations. He was promoted to chairman. Unfortunately, when organizational performance began to decline, he announced that he had tried the professional management approach but had to reluctantly retake control. A similar situation occurred with Steve Jobs — this was the root of his conflict with John Sculley during his first tenure at Apple (which ended in 1985).

The Tendency to Stick with Successful Patterns

Another obstacle to sustained, successful growth is people's tendency to repeat what has worked in the past. If a successful pattern worked before and was reinforced by positive results, it gets used repeatedly — even after the conditions that made it successful have changed.

For founder-CEOs, many factors reinforce this once-successful behavioral pattern, and conventional wisdom says "if it ain't broke, don't fix it." The problem is that organizational success leads to change, and this change is a potential determinant of future success — namely, scale. Scale matters in business as much as it does in other areas of life. The larger an organization becomes, the more complex it is. This in turn means that managing and leading the company becomes more complex. Like a rubber band stretched to its breaking point, an organization will inevitably expand to a point where its previously successful patterns no longer work and change is needed. These previous patterns include how the CEO manages and leads the company's growth.

The Core Dilemma Facing CEOs or Founders

The key characteristics of startup founders or CEOs, taken together, create a core dilemma that must be resolved if an organization is to achieve long-term, sustained, successful growth: once a company reaches a certain scale, the mindsets, skills, and entrepreneurial leadership capabilities that brought early success become inappropriate or insufficient for future success. In particular, at a certain inflection point, devoting massive attention to markets and products while remaining uninterested in and neglecting the details of day-to-day operations turns a strength into a limitation.

Similarly, the personal willingness and desire to "do whatever it takes" (thereby controlling everything) also turns strength into limitation. In short, this means that to achieve sustained success, the entrepreneurial success model must change — there is no avoiding it.

1. Adjusting the Entrepreneurial Mindset to Support Sustained, Successful Growth

As organizations grow, leaders must embrace three key philosophies.

First, a key philosophy that must be embraced is that past success does not guarantee future success. That is, both the company's operating model and the way it is run must inevitably change. This usually also means that the founder or CEO and their team need to develop new skills and change how they fulfill their roles.

The second philosophy that must be willingly accepted is that foundations matter. When a company is founded and begins to grow, the most important questions are: "Do we have a market?" "Do we have products and services the market needs?" and "Can we profit by providing products or services to the market?" If the answers to these questions are yes, the company will succeed and grow — at least for a time.

However, when a company grows to a certain point, substantial attention must shift to building the infrastructure necessary for development, sustained growth, and successful ongoing operations. Here, "infrastructure" refers to the resources, systems, processes, structures, and organizational culture that support effective day-to-day operations and continued growth. Just as a city or country needs infrastructure to promote growth, economic organizations like companies also need infrastructure.

The challenge of focusing on developing organizational infrastructure is twofold. While generally not a goal that excites entrepreneurial leaders, infrastructure is no less important to a business than to a house. In a house, when you turn on a light or faucet, you expect these facilities to work properly, but you don't really care what type of wiring or copper piping is used — you probably care more about the house's decoration and furniture. You know the wiring and pipes matter, but have little interest in those details themselves. Organizational infrastructure is the same: entrepreneurs may know it's important, but have little interest in the details themselves.

The third philosophy that must be changed and managed is that developing infrastructure (systems, processes, etc.) means bureaucratization. Infrastructure refers to processes and systems; and processes and systems mean bureaucracy to many entrepreneurs. Bureaucracy is the mortal enemy of innovation and entrepreneurship. When confronted with seemingly bureaucratic things, an entrepreneurial leader may recoil as if asked to embrace a venomous snake! Thus, another challenge entrepreneurial leaders face is that infrastructure is not only important but does not necessarily lead to bureaucratization.

We use this concept as the foundation for the required reform vision: the transformation from an early entrepreneurial state to an entrepreneurship-oriented, professionally managed organization. This means the organization must develop processes, systems, and functions to manage itself as the more complex enterprise it has become (or soon will become). Many entrepreneurs equate professional management with bureaucratization and reject it as a matter of attitude.

For example, Steve Jobs once called professional managers "bozos" and said: "Why would anyone respect professional managers? They can't do anything." This is a misunderstanding of the role and function of professional managers. It also explains why Jobs was fired from his own company. When Jobs returned to Apple, he changed his views and approach, hiring an elite professional manager, Tim Cook, who became Apple's CEO in 2011.

2. CEO Succession as Organizations Grow

What can founders or CEOs do when facing these difficulties?

When CEOs recognize that old playbooks no longer suit their organization's current operations, they have four basic options:

1. Do nothing and hope for the best;
2. Sell the company and start over;
3. Transition to chairman and bring in professional managers to run the organization;
4. Make systematic efforts to change personal behavior to meet the needs of the organization's new developmental stage.

Let's examine each option more closely.

Business as Usual

First, the CEO can do nothing — or rather, "business as usual" — and hope for the best. This might be called the "ostrich strategy." The strongest argument for this approach is that the company has always operated this way and has consistently been successful, and "if it ain't broke, don't fix it." Unfortunately, the corporate graveyard is filled with the remains of companies that started beautifully but could not sustain development due to this strategy.

Sell the Company and Start Over

The second strategy for entrepreneurial CEOs is to sell a company that has grown too large for the entrepreneurial style to sustain, then build a new one. A variation of this approach is to merge with another company and bring in new senior managers. This was the strategy Steve Jobs adopted. After leaving Apple, he went on to build his next new company. This means the founder must become a serial entrepreneur. Some founders lack the ability to do this repeatedly, while for others, their business was merely a one-time opportunity that cannot be replicated.

Bring in Professional Managers

The third strategy for CEOs is to become chairman and bring in professional managers to run the company. This is an attractive option when a founder has sufficient self-awareness to realize they are actually an entrepreneur or "creator," not a true president. The founder can become CCO (Chief Creative Officer, or whatever title is appropriate), handing operational matters over to others capable of running the organization.

The best example is Mark Zuckerberg, founder of Facebook. Zuckerberg has stated: "I'm not an operator." Some of our clients have also pursued this alternative, including a package delivery company whose founder, upon realizing he was "not CEO material," hired a CEO and himself served as COO (Chief Operating Officer), reporting to the hired CEO at the operational level. Of course, this founder was the company owner and approved the CEO's proposed strategic plans and capital expenditure budgets. He was also remarkably disciplined, not abusing his power or influence over the CEO's management decisions and actions, even when longtime employees came to complain. He never did anything to undermine his CEO.

A variation on this theme is the entrepreneur handing the CEO position to someone else in the company better suited for the role. Howard Schultz of Starbucks did this quite successfully, handing the company over to Orin Smith. However, after Smith retired from Starbucks, the next successor was Jim Donald, brought in from outside the organization, who was later fired. Schultz returned to the CEO position. He later stated that Starbucks would never again hire a CEO from outside the organization, as externally hired CEOs could not deeply understand the company's unique culture.

Transforming Behavior, Skills, and Roles

Finally, the CEO can choose to make the necessary changes to their personal and management style to carry organizational success into its next growth stage. This also involves redefining the CEO role.

A key factor in attempting to succeed is the CEO's willingness to reduce control over the organization and its behavior. Our experience in coaching CEOs through this transformation: it is possible, but not easy.

Cultural factors play a role in the CEO's willingness to relinquish a certain degree of control. In many Asian countries, founder-CEOs are expected to be "strong men," and they typically are. This cultural expectation leads to CEOs making all major decisions, and likely many small (or all small) decisions as well. The CEO becomes the only strong person in the company, surrounded by "helpers" or people capable of executing tasks and decisions but not making them. This makes the company completely dependent on the CEO, leading to self-righteousness, as the CEO doesn't want others to be capable of making decisions — only to do their assigned tasks well. Similar expectations and behaviors can be found in various Latin American countries, including Mexico.

This situation is not limited to Asian and Latin American countries; there are many such examples in the United States and Europe as well. For instance, we consulted for a medium-sized bank whose founder was an extremely dominant person who had "trained" other managers not to challenge his authority. They simply waited for him to make decisions, then executed. After he retired, the next president took over with different expectations, wanting a true management team. It took about two years to change this "compliance culture" where people simply followed orders.

Another factor that may limit a CEO's willingness to reduce operational control is personal experience. Some CEOs have tried reducing control with disappointing results. Others haven't tried themselves but have seen others' failed attempts. These are significant obstacles to changing leadership practices. For example, the CEO of a residential real estate development company (for which we worked many years) had only noticed negative results from operational decentralization and was therefore unwilling to implement the same organizational strategy in his own company. Eventually he became convinced that his company needed to make such changes to promote growth, and subsequently achieved positive results.

The CEO's Existential Dilemma

What Should I Do Now?

CEOs who choose to stay with the company and delegate management authority to managers now face another problem. More than one CEO has asked us: "What should I do now?" For someone who was once extremely active and involved in nearly every phase of an organization's activities, it can be quite uncomfortable to discover that all tangible responsibilities have been delegated, leaving only intangible ones. These intangible responsibilities include ultimate accountability for company vision, organizational development, and culture management.

The entrepreneurial CEO has been accustomed to being the most versatile person in the "band": able to play violin, bass guitar, trombone, drums, or harp. They could even be the entire band themselves. But now, the CEO's role is more like the conductor of the band. The CEO cannot be fully certain whether they like or value this unfamiliar new role. It seems to produce no concrete results.

In reality, this new role or redefined role is necessary. The CEO needs to focus on ensuring the company has a clearly communicated, well-defined vision. People need to know which direction the company is heading; in this sense, the CEO is responsible for drawing the blueprint and working with their senior management team to keep the organization on track. The CEO is responsible for supporting the big picture of the company's physical development, ensuring focus on creating strengths, overcoming limitations, and identifying areas for improvement. This function is called "strategic organizational development." The CEO is not responsible for specific organizational development plans but rather for orchestrating the entire process.

Finally, the CEO needs to focus on ensuring a clearly defined company culture and finding ways to manage it. In all these areas, the CEO is only responsible for articulating the what, not the how.

CEOs may not be prepared to adapt to this new role because they may not fully understand it, or may not possess the skills needed to execute it effectively, or both.

Furthermore, many CEOs will not admit or let on that they neither know what to do next nor how to do it. Some CEOs try to deceive themselves, putting on presidential airs and issuing imperious commands. Others try to cope through hyperactive behavior, burying themselves in work. But this often merely creates work or busyness, trying to convince themselves they are still doing something valuable. A CEO who doesn't know what to do next, afraid to admit this fact and afraid to seek help, creates a crisis for the organization's future.

At this stage of company development, the CEO's role requires becoming a strategic leader, shifting focus to the company's future direction and long-term development goals rather than doing specific work or managing daily operations. They need to focus on managing organizational culture and modeling behavior for others. Every aspect of the CEO's new role requires the capacity for abstract or conceptual thinking about the company, not just within the realm of specific products.

5Y Capital seeks out, supports, and inspires lone entrepreneurs, providing support from the spiritual to all operational aspects. We believe that if the "crazy" you in others' eyes begins to be believed in, the world will become a different place.

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