Imagine setting up a company from scratch.
You’re working out of hole-in-the-wall offices, scrambling for investor funding, wooing clients, and hunting for the right talent to grow your team. All this is amid the daily fire-fighting that comes with running a company. You give your blood, sweat, and tears (many tears) to build something from the ground up.
But what happens when you start to make rash decisions, try to fly solo, and become dangerously inseparable from the company – so much so that it threatens its survival?
These might be signs that it’s time for you, the founder, to take a backseat, begin chalking out succession plans and exit the company to prevent failure and fatigue. After all, the company is more than just you. Right?
But how often have you heard of founders stepping down and handing their company’s reins to someone else?
And that is precisely what has given rise to founder’s syndrome.
The founder’s legacy
Stories of founders leading their companies to great success are inspirational and well-known. Most entrepreneurs aspire to be like Bill Gates or Jeff Bezos. And there is data to support that founders are essential to a company’s performance.
Studies show that companies tend to be more innovative and more valuable when a founder sticks around. They also have higher stock market returns, with one study stating that they make three times more than companies without founders at the helm. This is most probably due to the founder’s penchant for disruption and innovation.
But, these studies have one major caveat. Most of the companies studied are younger tech startups with venture capital backing. When a company is starting out, the founder’s vision, mission and personal ethos drive them to build an enterprise that is an extension of their personal brand. But that only lasts for some time.
An analysis of over 200 startups showed that by the time the companies were three years old, 50% of companies were no longer led by their founder. By year four, only 40% of the founders were still in charge. And by the time it came to going public, less than 25% of the founders were around to lead their companies IPO.
While there is no doubt that a founder’s persona plays an integral role in a company’s formative years, it is not the only defining characteristic of a company. With time, the company’s vision, mission, and goal may take a 180-degree turn. In such a situation, founder’s syndrome can play spoilsport and hamper a company’s growth prospects if the founder is overly attached to the idea they started with.
Founder’s syndrome can impede development by suffocating new ideas or refusing to change the approach. More often, the fear of being replaced becomes more prominent to the founder instead of the fear of failing.
Decoding founder’s syndrome
The founder’s effect in genetics refers to a decrease in genomic variability due to a small group of people getting separated from the larger population.
Founder’s syndrome or ‘founderitis’ is very similar. Essentially, the founder can get separated from the company’s larger objective, leading to a decrease in performance.
Here’s how it can go.
- A founder may become aggressive about retaining control and not bringing in experienced external leadership to steer the company in the right direction.
- This can often spell doom for the company because the organisation becomes more about the founder’s vision than the big picture.
- Nothing has killed more businesses than autocratic decision-making by the person at the helm.
The rigidity of sticking to an original idea and not changing or evolving with time, disregarding new ideas from colleagues, and being too emotionally attached to the company can result in a tussle between the founder and the company’s investors.
Research has shown that founders tend to make terrible managers, and companies led by founders have lower management scores than those with other leadership structures.
Simply put, founder’s syndrome is when a company’s founder, who once battled against all odds to build a company, becomes its biggest obstacle, hampering its growth and potential.
The rise and fall of Uber founder Travis Kalanick is a classic example of a founder’s ambition gone wrong. Years of Kalanick’s mismanagement of the company, poisoning of the brand, and creation of dysfunctional company culture led to his demise as the founder. WeWork’s Alex Neumann was unceremoniously dismissed by his board when reports of bizarre business decisions, layoffs and lavish office parties came out.
The crux of this discussion is that transitioning a company from founder-led management to external leadership might be the only way to save the company from its downfall.
The ‘no founder effect’ – when founders let go
For whatever reason they take place, founder exits can be very stressful, messy, and sometimes even painful for all parties involved. Poorly managed exits can take a toll on co-founders, investors and employees and lead to legal and practical issues.
Indian tech bellwether Infosys is a good example. When co-founder Nandan Nilekani exited the company in 2009, Narayana Murthy followed suit in 2011. By 2013, the company seemed to de-grow, and Murthy was brought back in to help revive the company. In 2017, Nilekani, too, was briefly back to help support the company. Ratan Tata’s departure from the Tata Group followed a similar rocky path.
But while the transition can be tricky, a founder exiting their startup and bringing in external leadership need not undermine their legacy. It can simply change the company’s approach from founder-led to founder-inspired.
The impact of external leadership
An HBR study shows that a founder who gives up more equity to hire outsiders builds a more valuable company than one who parts with less equity.
There are many examples of external leadership helping a company flourish. Although the Infosys transition started off shaky, the two exiting co-founders found a leader in Salil Parekh in 2018 and took a final step back. Ever since then, Parekh has turned Infosys around. The tech giant has become the stock market’s darling. Its profit margin is on a roll, growth has quadrupled, and revenues have surpassed benchmarks.
Most founders start with a strong vision but soon relinquish control to grow their company. An external leader can boost the company in areas where the founder is weak. They could have a better understanding of the industry, more experience in launching products, proven skills in marketing, or confidence in dealing with investors. These might be skills that the existing management lacks.
As Martín Casado, general partner at Andreessen Horowitz and co-founder of Nicira Networks, put it, “of all the decisions so far, the one to hire an external CEO was probably the single best decision we made in the journey of the company.” A software engineer, he built a solid technical foundation for his company. However, he needed an external CEO’s sales and marketing expertise to help grow the company.
Additionally, while founders tend to reinvest profits rather than take a hefty paycheck home, external leaders are incentivised to meet performance targets with higher compensation packages. This can encourage them to focus on what investors want – profitability.
A change in leadership represents a perfect opportunity to reset company strategy. Most profitable businesses today have, at some point, switched to external leadership. When Meg Whitman took over from Pierre Omidyar at eBay in 1998, it had 30 employees and a revenue of $4 million. Under her stewardship as CEO, the company grew to 15,000 employees and $8 billion in revenue in a decade.
When Mark Zuckerberg hired Sheryl Sandberg as COO to oversee Facebook’s business operations in 2008, it was a company “primarily interested in building a really cool site; profits, they assumed, would follow.” Two years after taking over as COO, she introduced advertising into Facebook’s products and made it profitable.
Google’s co-founders Larry Page and Sergey Brin handed the reins over to Sundar Pichai in 2015 because they felt he had the grit and expertise required to run the company. After naming him the chief of Google’s parent company, Alphabet, in 2019, Page and Brin now focus on their pet projects – life enhancement tech, self-driving cars and robotics.
The last word
Twitter’s then-CEO Jack Dorsey had stepped down saying, “I’ve decided to leave Twitter because I believe the company is ready to move on from its founders.”
Stepping down need not be a sign of weakness for a founder. It does not have to feel like their legacy or authority is being undermined. Instead, getting a trained, experienced executive to lead the company to greener pastures can signify the founder’s vigour and determination.
A founder leading the company to the highest echelons and taking a step back is not unnatural. If external leaders continue to follow the principles and culture set by the founder, the organisation can flourish even in the absence of its founder. The company and its people will embark on a new journey, gain fresh insight, make new mistakes and learn from them with the founder’s ideals.