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Can Founders Really Scale…or Not?

October 10, 2015

Back in May of 2014 Forbes’ Entrepreneurs Blog addressed an interesting question: “Founders Can’t Scale: Fact or Fiction?”

Forbes opened this article with the statement “There is a belief in the business world that founders can’t scale. Put another way, a company’s growth curve will eventually outstrip the capabilities of its founder’s ability to remain CEO.”

The article went on to cite statistics that seem to bear this theory out: “Only 50% of founders remain CEOs after being in business for three years, 40% after four, and a sadly low 25% of founders actually make it through their company’s IPO as CEO.”

Forbes pointed out that the key attribute that empowers longevity for founders in the CEO role is adaptability. The founders who remain CEOs the longest are best at evolving and growing with the needs of their business. Forbes goes on to observe: “A very large range of skills may need to be developed at a rapid pace in high-growth situations.”

They provided the following graph to explain the stages of a startup’s evolution, and the skill-sets a founder CEO will need to have to succeed in the long-term:

Founders ScaleThe very title of this blog underscores our belief that founders can in fact scale. Our premise is simple: Founders who are often tech-savvy and/or proponents of disruptive approaches to business simply need to acknowledge their strengths and leverage them, and seek help from competent professionals in areas where they don’t have expertise.

For example in order for an emerging growth startup to grow, it will need to go beyond product / service validation to repeatability and scalability. These are often process-driven tasks, best handled by seasoned business managers. This can dictate the need to bring in a chief operating officer from the outside.

Tech savvy founders may be whip-smart developers but have little to no experience in finance and accounting matters. Unfortunately venture capital and private equity firms often do not view a start-up’s financial picture through the lens of an experienced CFO. Nor do the law firms that help facilitate the deals.

Founders ScaleThis lack of finance and tax knowledge can bring potentially dire outcomes, especially when it comes to the short-term and long-term tax implications of everything from organizational structure to compensation, revenue and expense recognition and ownership arrangements. Smart founders will need an excellent CPA.

Another issue is span-of-control: how many subordinates can a founder effectively manage? How can founders best manage the entire organization: strategically, culturally, organizationally and from an operational standpoint?

There is no magic number for the optimal number direct reports, and “best practices” range from 5-10. The number is not really important, the issues are about getting what the founder needs, regardless of the number of direct reports they have.

Founders ScaleCreating and maintaining the right team dynamics often determines success or failure when it comes to scaling a startup. Founders need to focus on the team they need to scale from an ability/skill-set standpoint.

Smart founders also seek to be challenged and foster different opinions from their leadership team, seeking personal development in the process. Founders who fail to either grow professionally or opt not to hire the right skill-sets – and then manage for accountability against business objectives – are replaced by executive who do.

David Klein of CommonBondDavid Klein

One asset that does not show up on the company balance sheet is passion. David Klein is the CEO & Co-Founder of CommonBond in NYC – a millennial-lead marketplace lender addressing student loans – which has raised in excess of $ 130 million in venture capital. He recently noted: “Passion is the fuel that helps drive founders” at an Orrick Total Access event on FinTech. Founders need to stay passionate about their business to help scale it.

Finally trust is an important yet intangible element in the success mix. The founder will need to be confident enough to hire the right people or outside resources, and then trust them to do their jobs. And trust their instincts when need to pivot their business model, or hire / fire key team members.

This material has been prepared for general informational and educational purposes only and is not intended, and should not be relied upon, as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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