I read this article this morning in the Atlantic. It suggested the importance of a founder to a company’s success. It analogizes the success of Steve Jobs and Apple, as a jumping off point for a stronger correlation. The underlying argument is that founders worry about the company’s best interest, while “professional” CEOs worry about the interests of the financial investors. This is not a new trope, and very much plays into worn out saw that VCs grab the company and steal it from the founder. In my experience, this dynamic is much more nuanced and deserves a clearer approach.
The relationship between the founder and the investor (particularly the lead investor) goes a long way to defining the ultimate success of an investment and the company. There is not much debate about that – the challenge is around how you define success. I have known investors who have trumpeted their prowess at pushing out founders, and I have known investors who see it as a failure if they push a founder out. I have known founders who measured their success by being CEO at the end, and I have known founders that measured success by whether there business idea found a market (even if they were no longer involved). As is the case for many things, it takes all kinds to make a world.
In my role as a Professor who teaches entrepreneurship, I often encounter the academic viewpoint that when a founder seeks capital, it creates a choice – take money and lose control, or don’t take money and keep control. One of my favorite examples of this is a HBS case called “The Founder’s Dilemma” where a well-respected professor suggests that high returns require a trade off against control – you can’t have one without the other.
I have been working with start up entrepreneurs for more than 20 years, and the perceived tradeoff between money and autonomy colors everything. For many founders it creates an expectation – either a paranoia that by taking money they will “get fired” or a more “mature” expectation that their replacement is inevitable. Actually, what I have found is that where the investor/founder relationship is tinged with the sense of inevitable replacement, the company is less likely to be successful. In other words, the more energy and time spent on the issue of founder replacement, the less time spent on what is really important – how to grow the business.
The best way to think about the issue of founder/investor is around control – shared control. There is no doubt that by taking money a founder loses autonomy. The reason is very simple – once a company raises money it becomes by law a financial asset. Decisions regarding the business have to be taken with the best interests of the shareholders in mind. It’s just the way that the law works, and directors and officers who ignore this principle can find themselves in significant hot water. However, losing autonomy is different from losing control completely.
Many studies of successful businesses show that the values of the founding members – their personality attributes – defines the organization long after the founders are gone. In other words, businesses tend to grow best when they keep close to their cultural roots. Additionally, my colleagues who teach organizational development know that as a company faces scaling challenges, the most successful businesses are the ones that use compensation, hiring criteria and management structure to reinforce and communicate the founders’ entrepreneurial values.
The issue for a founder, therefore, is not control – it is whether his business can be grown in a way that is consistent with his values. And, for the investor, the issue is not whether or not the founder can be pushed aside – it is whether the founder has values that the investor supports. A founder doesn’t need to decide between control and money – she has to decide whether she can find investors that will help to grow a business that is consistent with the founder’s values. An investor has to decide whether the founder’s values can be the basis for a successful business.
The choice for a founder and investor is not around control. Neither “controls” a company once it takes money. The stockholders control the company (and in a customary venture deal, that largely means the new investors). However, the founder controls the culture through ongoing and lasting influence. This balancing results therefore in a much more nuanced relationship.
For the investor this means understanding the founder, and being willing to build a business that is consistent with the founder’s values. That means explicitly that the investor must really understand that the founder and the opportunity are intertwined. You can’t have one without the other. It also means that sometimes an investor should pass on an investment, even if he likes the opportunity but doesn’t like the founder.
For the founder the important point is not taking money. It is whether by taking money the founder is willing to enter into a new phase of his businesses, where his ability to influence and shape its history will occur through organizational structure and management done by others. Will the loss of direct influence – knowing everything and everyone – be balanced through other satisfaction coming from the growth of the business. This is a very personal question – it is not about control. It is about what will make the founder happy.
The most successful businesses remain and retain the uniqueness of the founder or founding teams, and find ways to reinforce these values. Therefore, founders and investors should appreciate that the adding of capital, and acceleration of business growth, will amplify the strengths or weaknesses of a founder. The founder cannot be pushed aside.