Every entrepreneur wants to be the next big King. They idolize Steve Jobs, Warren Buffet, Jack Ma, Barbara Corcoran, each of whom founded a successful company and led it for many years. However, the successful CEO KINGS are hardly ever successful. It is rare.
Harvard University studied 212 American start-ups in the late 1990s – early 2000s and discovered that most KINGS surrendered their managerial control long before their companies went big. The start-up ventures that were only three years old, 50% were NO longer the CEO KING. During the four year marker, only 40% were still seated on their throne and fewer than 25% got to “go public” ( obtained an IPO ).
MANY researchers have found similar trends. There are only a handful of CEO KINGS in corporate America. They are a HUGE exception to the rule.
KINGS don’t let go of their castles easily. The fight to the death. Four out of five entrepreneurs, according to Harvard, are forced to step down as KING of their commanding posts. Most are shocked when investors INSIST that they step down, give up control or pushed out of their office unceremously. This almost always happens before they abdicate of their own volition.
The change in kingship can be particularly damaging when employees loyal to the highness oppose it. In fact, the manner in which KINGS tackle their first leadership transition often makes or breaks young enterprises.
The transitions take place relatively smoothly if, at the outset, KINGS are honest about their motives for getting into business. Isn’t that obvious? Don’t people start a business to make pots of money? They do. However, a 2000 paper in the Journal of Political Economy and another two years later in the American Economic Review showed that entrepreneurs as a class make only as much money as they could have if they had been employees. In fact, entrepreneurs make less, if you account for the higher risk and hours marketing their service or product. What’s more, entrepreneurs, had options and potential for generating higher financial gains but others, which KINGS often chose, conflicted with the desire for money.
The Trade-Off KING Entrepreneurs Make
The KINGS’ choices are straightforward: Do they want to be rich or king? Few have been both.
The reason isn’t hard to grasp: There is, of course, another factor motivating KINGS along with the desire to become wealthy: the drive to create and lead an organization. The surprising thing is that trying to maximize one imperils the achievement of the other. Entrepreneurs face a choice, at every step, between making money and managing their leadership ventures. Those who don’t figure out which is more important to them often end up neither wealthy nor powerful.
Inside the KING’s Mind
Kings are usually convinced that only they can lead their start-ups to success. “I’m the one with the vision and the desire to build a great company. I have to be the one running it,” several have said. There’s a great deal of truth to that view. At the start, the enterprise is only an idea in the mind of its emperor. They possess all the insight about the opportunity; about the innovative product, service, or business model that will capitalize on that opportunity; and about who(m) the potential customers are at their disposal. The KING hires people to build the business according to that vision and develops close relationships with the first employees. The KING creates the organizational culture, which is an extension of his or her ego style, personality, and personal preferences. From the get-go, employees, customers, and business partners identify start-ups with their fearless leaders, who take great pride in their CEO KING status.
New ventures are usually built on their labor of love, and they become emotionally attached to them, referring to the business as “my baby” and using similar parenting language without ever noticing. Their attachment is evident in the relatively low salaries they pay themselves. One study of compensation in 528 new ventures set up between 1996 and 2002 showed that 51% of entrepreneurs made the same money as—or made less than—at least one person who reported to them. Even though they had comparable backgrounds, they received 20% less in cash compensation than nonfounders who performed similar leading roles. That was so even after taking into account the value of the equity each person held.
Many entrepreneurs are overconfident about their prospects and naive about the problems they will face. a study conducted at Purdue University asked 3,000 entrepreneurs two simple questions: “What are the odds of your business succeeding?” and “What are the odds of any business like yours succeeding?” KINGS laid claim that there chances were 81%, on average, and that they would succeed but only a 59% probability of success for other ventures like their own. In fact, 80% of the respondents pronounced their chances of success at at least 70%—and one in three claimed their likelihood of success was 100%. KINGs’ attachments, overconfidence, and naïveté may be necessary to get new ventures up and running, but these emotions create problems later in the game.
Grow, Growth, Growing…
KINGS eventually realize that their financial resources, ability to inspire people, and passion aren’t enough to enable their ventures to capitalize fully on the opportunities before them. They becomes slaves and prisoners to their own failings. They invite family members and friends, angel investors, or venture capital firms to invest in their companies. In doing so, they pay heavy wages: They often have to give up absolute control over the enterprise. Angel investors may allow KINGs to retain control to a greater degree than venture capital firms do, but in both cases, outside directors will join the company’s board. They seep into the seams over time.
Once the KING is no longer in control of the Kingdom, his or her job as CEO is at risk. The board’s task is straight-forward money talking and if the KING underperforms as CEO, boards can have a hard time persuading them to step down or put their “Kingdom” up for sale. But, paradoxically, the need for a change at the top becomes even greater when a founder has delivered impressive results. Let me explain why.
The first major task in any new venture is the development of its product or service. Many founders believe that if they’ve successfully led the development of the organization’s first new offering, that’s ample proof of their management prowess. They think investors should have no cause for complaint and should continue to back their kingship. “Since I’ve gotten us to the stage where the product is ready, that should tell them that I can lead this company” is a common battle cry.
Their benchmark of success makes it harder for Kings to realize that when they celebrate the shipping of the first products, they’re marking the end of an era. At that point, leaders face a different set of business challenges. The founder has to build a company capable of marketing and selling large volumes of the product and of providing customers with after-sales service for fulfillment. The venture’s finances become far more complex, and the CEO needs to depend on finance executives and accountants. The organization has to become more structured, and the CEO has to create formal processes, develop specialized roles, and, yes, institute a managerial hierarchy. The dramatic broadening of the skills that the CEO needs at this stage stretches most founders’ abilities far beyond their limits.
A technology-oriented founder-CEO, for instance, may be the best person to lead a start-up during its early days, but as the company grows, it will need someone with different skills in certain sectors of the company. Indeed, in analyzing the boards of 450 privately held ventures, a Harvard professor found that outside investors control the board more often where the King/CEO is a founder, 1) where the CEO has a background in science or technology rather than in marketing or sales, and 2) where the CEO has on average 13 years of experience.
Thus, the faster that founder-King-CEOs lead their companies to the point where they need outside funds and new management skills, the quicker they will lose managerial control. Success makes KINGs less qualified to lead the company structurally and changes the power in the boardroom so they are more vulnerable. “Congrats, you’re a success! Sorry, you’re fired,” is the implicit message that many investors have to send King-CEOs.
Investors wield the most influence over entrepreneurs just before they invest in their companies, often using that moment to force King’s to abdicate their throne.
The King’s moment of truth sometimes comes quickly. One Silicon Valley based venture capital firm, for instance, insists on owning at least 50% of any start-up after the first round of financing. Other investors, to reduce their risk, dole money out in stages, and each round alters the board’s composition, gradually threatening the entrepreneur’s control over the company. Then it usually takes two or three rounds of financing before outsiders acquire more than 50% of a venture’s equity. In such cases, investors allow founder-CEOs to lead their enterprises longer, since the founder will have to come back for more capital, but at some point outsiders will gain control of the board.
Whether gradual or sudden, the transition is often stormy. Many investors impress that the company needs an executive experienced at managing the other executives who oversaw the firm’s existing functions. Good investors have deeper knowledge of the functions a venture would have to create, and had experience in instituting new processes to knit together the company’s day to day activities. The King may refuse to accept the need for a change, and it takes weeks, months and sometimes years of persuasion before a King would step down.
According again to Harvard, four out of five King/CEOs resist the idea, too. If the need for change is clear to the board or investors, why isn’t it clear to the King? Because the King’s emotional strengths become liabilities at some stage. Used to being the lion heart and soul of their ventures, King’s find it hard to accept lesser roles, and their resistance triggers traumatic leadership transitions within young companies.
Time to Choose
As start-ups grow, entrepreneurs face a dilemma—one that many aren’t aware of, initially. On the one hand, they have to raise resources in order to capitalize on the new opportunities before them. If they choose the right investors, their financial gains will soar. The KING ends up with a more valuable slice of the pie too. On the other hand, in order to attract investors and executives, entrepreneurs have to give up control over most decision making. Choosing to be RICH: A King who gives up more equity to attract investors builds a more valuable company than one who parts with less.
This fundamental tension yields “rich” versus “king” trade-offs. The “rich” options enable the company to become more valuable but sideline the founder by taking away the CEO position and control over major decisions. The “king” choices allow the founder to retain control of decision making by staying CEO and maintaining control over the board—but often only by building a far less valuable company. For founders, a “rich” choice isn’t necessarily better than a “king” choice, or vice versa; what matters is how well each decision fits with their reason for starting the company.
On the other side of the coin are founders who bootstrap their ventures in order to remain in control. Most founder-CEOs start out by wanting both wealth and power. However, once they grasp that they’ll probably have to maximize one or the other, they will be in a position to figure out which is more important to them. Past decisions regarding previous rulers, holding their court, and investors will usually tell them which they truly favor. Once they know, they will find it easier to wrangle transitions.
Kings who understand that they are motivated more by wealth than by control will themselves bring in a new chief manistrate/CEOs.
Keeping KINGs in the court
By contrast, KINGs who understand that they are motivated by control are more prone to making decisions that enable them to lead the business at the expense of increasing its value. They are more likely to remain sole rulers, to use their own kingdom instead of taking money from investors, to resist deals that affect their management control, and to attract leaders who will not threaten their desire to run the company.
Choosing power: Founders motivated by control will make decisions that enable them to lead the business at the expense of increasing its value.
Rich-or-KING in establishments
Would-be KINGs can also apply the framework to judge the kind of ideas they should pursue in life. Those desiring control should restrict themselves to businesses where they already have the skills and contacts they need or where large amounts of capital aren’t required. They may also want to wait until late in their careers before setting up shop, after they have developed broader skills and accumulated some savings. KINGs who want to become wealthy should be open to pursuing ideas that require resources. They can make the leap sooner because they won’t mind taking money from investors or depending on executives to manage their ventures.• • •
Choosing between money and power allows KINGS to come to grips with what success means to them. KINGs who want to manage empires will not believe they are successes if they lose control, even if they end up very rich. Conversely, KINGs who understand that their goal is to amass troves of wealth will not view themselves as failures when they step down from the throne. Once KINGs realize why they are turning rogue, they must, as the old Chinese proverb says, “decide on three things at the start: the rules of the game, the stakes, and the quitting time.”