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November 2017

Monarch or Money? For business owners it's one or the other.

Nov 1, 2017 1:00 PM
Bruce Hunter

I got a frantic call just the other day from an entrepreneur that had built a new internet start-up from nothing to something. He’d just been given an ultimatum from the VC’s that had been brought into the firm. Relinquish the CEO position in favor of one of their picks (and accept another position) or exit the firm. His question to me? “Should he fight it?” The answer of course was that there was really no fight to be had. He’d already set the wheels in motion when he accepted the resources of the VC in the first place. The only thing he had to decide was whether he should stay with the firm or pursue something else. And that was totally up to him.

What happened here has been a long-time focus for Noam Wasserman of Harvard University starting with a paper entitled “Rich versus King” which was first published in August of 2006 and his most recent work, “The Founder Resource-Dependence Challenge” March 2014. It has also been a key focus in my consulting practice with small and medium sized companies for the last few years and a fundamental take-away from my book, “The Success Cage” launched October of 2013. It’s this. Any business owner has a fundamental question to answer for themselves and their businesses: Do you want to maximize your wealth or control of your business? You can’t have both.

The issue can be gut-wrenching for any business owner. The vast majority have built their businesses from scratch into good companies which provide a decent income for the owner and those associated with the business. To grow beyond the owner/operator-managed company requires different skills and resources than those which brought it success to this point. Two popular sayings come to mind… “What got you here won’t get you there.” “To grow you’ve got to let go.”

The brilliance of Wasserman’s work is that he’s put some hard numbers to support these common refrains. The first work referenced above studied 457 private ventures in technology. Lack of industry sample diversity aside, it came to one major conclusion: The more decision-making control kept by the business owner, the lower the value of the owner’s stake. Wasserman’s more recent study drew from a much larger sample. He used a dataset of 6,130 American start-ups and concluded that retaining full control diminished the organization’s value by an average of up to 58%.

 Within the article, he also reprised some important associated observations from others studying the subject. “After the starting difficulties have been overcome, the most likely causes of business failure are the problems encountered in the transition from a one-person, entrepreneurial style of management to a functionally organized, professional management team.” (Hofer & Charan 1984, pg. 2) In order to grow, the needs of the organization move from the specific knowledge needed to build a product or service offering, (in my parlance “high technical” skills) to the more generalized knowledge and processes of managing a more complex firm (“high leadership”).

The key steps along the organizational journey pose a continuous trade-off between attracting the resources (capital & people) required to grow and build company value & being able to control decision-making. The key question for the business owner? In the end it comes to this. What drives you? Is it the need for maximizing wealth or the need for control? The two do not go hand in hand. And without going into a lot more detail…my experience is that most side with the latter. It’s head versus heart and usually the heart wins.


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