The dynamics underlying the everyday business situations of companies in early stages of development is a particular focus of the Bonar Institute for Purposeful Leadership. We are currently working on developing an effective and practical customized Leadership Risk Mitigation Program to help investors identify and mitigate the leadership risk component of their investments.
In today’s highly complex, volatile and uncertain economy, risk and expected ROI are very much on the minds of investors. While risk is unavoidable, it can be significantly reduced. The most serious and difficult risk factor facing potential investors in start-ups and businesses in early stages of development deals with the founder-CEO. Investors’ expectations for the business prove over time to be significantly different than those of the founder. In the case of ROI, entrepreneurs often make decisions that conflict with the wealth-maximization principle of the investors (Noam Wasserman, The Founder’s Dilemma, HBR, February 2008).
The following statistics are stark: Within three years of a venture’s founding, only 50% of founders are still the CEOs of their companies ; in year four, the percentage is 40%, and by the time of the companies’ initial public offerings, the percentage falls to less than 25%. Most entrepreneurs are forced to step down. Change in leadership is often stormy and damaging for the prospects of young companies. A caveat: As founder-run companies grow and become mature, they have proven to be very successful at maintaining profitable growth (Chris Zock, Founder-Led Companies Outperform the Rest – Here’s Why, HBR, March 2016). But they are the minority. 90% of all start-ups fail.
The need to have the right leadership in place is the cornerstone of the success of young ventures. However, the attributes of the right leader change as a company grows from early stage start-up to a more mature and complex organization; from founder, to manager to strategic leader. The ROI depends on how well the CEO manages risk, while creating sustainable growth and wealth creation.
According to a recent study, there are four factors that predict start-up success when assessing the strengths and potential of the founder-CEO in the IT sector (See Tucker. J. Marion, HBR, May 3, 2016).
- Age: Technology favours the young: Younger entrepreneurs in technolog c ompanies are a key success factor.
- Diverse teams, including gender diversity: High-performing investments have at least one female founder; female-founded IT start-ups outperform all-male teams by 63%.
- Education: A top education is a significant ingredient for start-up success. Companies with at least one founder from top school perform 220% better than other companies.
- Experience: Prior work and start-up experience in top tech companies predict success of founder.
- Investors view this experience highly as a form of pre-screening
- Acquired hard skills (e.g., project management)
- Acquired soft skills (e.g., politics and networking)
Other key factors that predict success include alignment among members of the investment group on risk tolerance, their understanding of the complexities of the sector they’re investing in, their expectations regarding the ROI and their expectations of the founder-CEO; and, finally, there needs to be alignment between the expectations of the investors and those of the founder-CEO on the type of leadership required at both the investors and CEO’s tables.
Identifying, assessing and evaluating the areas of alignment and misalignment between the investor group and the founder-CEO, and creating tailored-made coaching and mentoring programs where appropriate, is a crucial element in the work we are doing to mitigate leadership risk for investors in companies in the early stages of development.