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Entrepreneurs who scale February 8, 2008

Posted by jeremyliew in Entrepreneur, management.

Furqan Nazeeri recently pointed to an old Harvard Business Review article by John Hamm that claims to explain why entrepreneurs don’t scale. Furqan summarizes:

…the traits that help an entrepreneur succeed in the early days actually work against them as the business grows. And worse yet, by the time the entrepreneur figures it out, they’ve either run their company into the ground or gotten themselves ejected by the board. The article gives some examples that will seem familiar to most of us.

The four traits are:

* Loyalty to team mates. A great trait while recruiting the early team, but as Hamm points out, “a potential liability when managing a large, complex organization.” Someone told me a few years ago that first time CEOs are quick to hire and slow to fire while seasoned CEOs are the opposite. There’s some truth to that.

* Task orientation. Getting things done is important in the early days, particularly when you are CEO and janitor at the same time. But as the company grows, it can lose its way without a focus on strategy and vision.

* Single mindedness. Think about how much stick-to-it-iveness is required in the early days but how that can turn into tunnel vision as the company grows.

* Working in isolation. Building a large organization is a team sport, however in the early days there may not be much of a team.

The article goes into much more detail about each trait. With respect to both John and Furqan, I deeply disagree with the premise that the successful traits in entrepreneurs turn into failure modes as their companies scale. Rather, I’d suggest that often good entrepreneurs turn into great CEOs as their companies grow. The traits listed above lead to failure modes at any stage of a company.

1. Founders need to be able to make hard decisions about when people are not working out. This is even more important in a small company than at a big company. There is no room for error in a small company. If someone isn’t pulling their weight, everyone knows about it. If poor performance is tolerated by the CEO and founders, it is demoralizing to the whole company. Founders need to be willing and able to let employees go when necessary.

2. Founders need to be able to focus. Sure, it is important that everyone rolls up their sleeves to get things done at a startup. But a startup is always resource constrained. A startup has to pick the small number of things that it can execute well on, and make sure that those are the things that move the needle for the company. Trying to do to much is a recipe for disaster at a startup, just as it is for a larger company.

3. Founders need to learn the whole business.
Perhaps in a systems company or an infrastructure company where there is real and deep technology to be built, founders can focus on the technology for a couple of years before surfacing again. But in the internet industry, where the technology is just one driver of success, and product, distribution, sales and marketing are also critical, a founder can’t focus on one area and ignore the others. As companies scale up they can afford to bring in experts, but early on the founders need to be able to address all the success factors for the company as there is no one else to pick up the slack.

4. Founders need to build a team. This is perhaps the most obvious failure model of all at any stage of an organization. There is a limit to how much any one person can do.

Many of the most successful companies that the partners at Lightspeed have funded have had founders that went “all the way”, including Jerry Kennelly of Riverbed, Mark Vadon of Blue Nile, Alain Rossmann of Phone.com (now part of Openwave), Jasvir Gill of Virsa (now part of SAP), Tom Riordan of QED (now part of PMC Sierra), Mike Turner of Waveset (now part of Sun) and Zaki Rakib of Terayon (now part of Motorola) to name just a few. Lightspeed believes in finding and funding entrepreneurs like these who have the capability to scale with their companies.


1. Alex - February 8, 2008

Great post Jeremy.

I agree 100%.

2. preetam mukherjee - February 9, 2008

excellent stuff, Jeremy.

i actually find myself agreeing with both you and John+Furqan.

i think what J&H are saying is that:
– loyalty to a team member at an early stage can bring in a few years of value from that member, but as the company progresses, that loyalty cannot be equated for performance.
so it’s important, early on, to understand the expected outcome for loyalty(support), but if at any point down the road, that loyalty is unrequited(through choice or circumstance), then the ceo needs to “let go”

– i got the feeling that “stick-to-it-iveness” was more a reference to company focus areas, than the scope of ceo responsibilities.
so i think you’re right in that founders need to learn the whole business, and grow it to a point where they can hire the right people to help certain areas scale.
but i also think J&H are making their point as: “this is what we do today” shouldn’t constrain our vision of what we could do tomorrow.

– team and focus: mutually inclusive, i agree that the combination of these two could make or break a startup. or a large company, for that matter. nothing to add here….gotta know how to prioritize all the million things you want to do, and gotta find the right people to help you get through the top 10 things on your priority lists.

3. Roger Gins - March 23, 2008

For those who are running businesses all to well know that cash flow is the life force. The number one condition that saps this strength is for a business to have slow payers.

That is why it is of the utmost importance to manage ones accounts receivables. The importance of timely payments can not be over emphasized. Research has shown that not only do slow payments drain cash but the likelihood of being paid at all is significantly reduced as time goes on. For example, on average, when a receivable goes 90 days 27% are not collectable and if they go 180 days 43% are not collectable.

Best practices suggests that reminders and demand for payment should happen early, systemically, and alternating between calling, e-mailing, faxing, and mail.

Fortunately, with current technology all businesses can access the same collection tools as the large corporations. A good example of this is A/R Connection which offers a service where by a company uploads their Aging Report and the service automatically Calls, E-mails, Faxes, or Writes those customers who are late in their payments.

If any one is interested they can be found at http://www.arconnection.com

4. clicknode - December 22, 2009

[…] who know that it is at the founding of a business that equity is divvied up, I recommend a post by Jeremy Liew at Lightspeed Venture Partners, to give a balanced view of the skills a business founder needs. For corporate executives looking […]

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