The Founder’s Dilemma
When you think of entrepreneurship, the image that immediately rises to your mind is typically a startup in their early stages of growth, where the founder acts as the main character of the firm, fueling their venture with their passions and innovative visions. Yet, surprisingly, most founders are actually booted from the CEO position in later stages of growth. In fact, according to a study from Harvard Business Review, out of 212 US-based startups, 50% of the founders were no longer the CEO by the fourth year and fewer than 25% led their companies’ IPOs. The small number of founder-CEOs in America such as Jeff Bezos, Mark Zuckerberg or Larry Page are branded into our minds as success stories of entrepreneurship, but they are actually exceptions to the rule.
So how does this paradoxical situation come to be? After all, you would assume that the founders — the ones who built their ventures from the ground up, who steered their organization through the most turbulent and unstable times, who shed blood, sweat and tears for their vision — would stay in upper management for an extensive period of time to reap their rewards. However, what many founders fail to realize that with growth, an inevitable, fundamental trade-off comes into play: entrepreneurs face a choice, at every step, between making money and retaining control over managing their ventures. This is what is known as the Founder’s Dilemma.
Let’s assume a hypothetical situation to clarify: say there’s an eager, bright entrepreneur, Sarah Lee. The first major task of any new venture is the successful development of its new product or service. Sarah’s latest venture, an app that successfully integrates contact tracing with food delivery platforms, has been taking off due to the recent circumstances created by COVID-19. Sarah may believe that her recent success defines her management prowess and ability to handle a company.
However, she fails to realize that an unfamiliar different set of challenges has cropped up along with her success. Now, Sarah has to focus on effective marketing campaigns and providing customers with after-sales services. The financial operations gradually become more complex, and Sarah, having limited experience with finances on a larger scale, needs to depend on finance executives and accountants. Her firm size has grown from 10 employees to a startling number of 200 employees, so now the organization must become more structured, and Sarah has to solidify formal processes, develop specialized roles, and implement a managerial hierarchy. Having started out with a background in computer science, and adequate skills of bookkeeping and management, Sarah now needs proficient marketing, management skills, and financial strategies, which she does not possess. As a result, she must consider hiring external management, which would ultimately dilute her influence within the firm.
To add on to this, as her startup gains momentum, Sarah must realize that her financial resources, ability to inspire people, and passion isn’t enough to fuel the drive of her venture to capitalize fully on opportunities. She has to begin reaching out to family, friends, angel investors or venture capital firms for additional funds needed for growth. In doing so, she gradually must give up total control, allowing outside stakeholders to retain some control over the company.
As Sarah’s venture continues to grow, she faces the Founder’s Dilemma: on one hand, she must raise and acquire the resources needed in order to bolster the current growth of her company; on the other hand, she must also gradually relax her control over most decision making. This yields the ultimate trade-off between being “rich” and being “king”. The “rich” option allows the company to accrue value but also chip away at the founder’s influence. The “king” choice allows the founder to maintain control, but also results in a less-valued company. Neither decision is necessarily the right answer; in the end, what matters is how well the decision fits with the founder’s reason for starting their venture.
Choosing between money and power allows entrepreneurs to come to grips with what success means to them. Founders who want to manage empires will not believe they are successful if they lose control, even if they end up rich. Conversely, founders who understand that their goal is to amass wealth will not view themselves as failures when they step down. As an old Chinese proverb says, once individuals realize the purpose of their drive to entrepreneurship, they must “decide on three things at the start: the rules, the stakes, and the quitting time.”
Written by: Emily Jang | IQ Director
