Home / Opinion / Online Views /  Why founder-CEOs flounder

Around 472 million entrepreneurs worldwide attempt to start 305 million companies every year, according to estimates by the Global Entrepreneurship Monitor. Of these, only one-third, or 100 million, will see the light of day. Of these, every eight out of 10 will fail.

In his book published in 2012, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Start-up, Harvard Business School professor Noam Wasserman demonstrates that the primary reason why start-ups fail is not the market or product or state policy—it is people. Some 65% of start-ups fail because of people issues. And the biggest of these people issues is none other than the founder-CEO.

Wasserman’s book is the outcome of 13 years spent collecting data about 4,000 start-ups and 10,000 founders and mining them for patterns. One intriguing pattern he discovered was that 52% of all founder-CEOs were replaced by the time a venture was three years old. What was even more intriguing: of this 52%, three-fourths were of the firm belief that they deserved to continue as CEO—and had to be fired by the Board. And the most intriguing: the more successful the founder-CEO, the more likely that he or she was fired by the Board. Wasserman calls this “the paradox of entrepreneurial success."

Here are a few more counter-intuitive findings of Wasserman’s research:

• 51% of entrepreneurs made the same money as at least one person who reported to them—or even less.

• Your start-up is less likely to succeed if you set it up with your spouse or sibling or family member or friend than if you did it with an absolute stranger.

• Founders who gave up equity to attract investors made more money than those who didn’t and retained maximum control.

Looming over each one of what Wasserman calls the founder’s dilemmas—right from when is the right time to chuck your job and start a company, to should you have co-founders or go solo, to whether every co-founder gets a C-level title regardless of whether they’re capable—is the mother of all the founder’s dilemmas: do I want to be rich or do I want to be king? Money or power?

Wasserman’s insight, which many founding—and foundering—CEOs would do well to heed, is the absolute need for clarity about one’s motivation in starting a company, and the importance of differentiating between what serial entrepreneur James Altucher calls, the “real reason" and the “good reason".

The “good reason" for turning entrepreneur could be to make money/grow the nation’s economy/create jobs/help the poor, while the “real reason" might be to lord it over lesser mortals (Wasserman doesn’t quite put it like that. He calls it “the desire to create and lead an organization.").

In a Harvard Business Review (HBR) essay in 2008 on this subject, Wasserman cites the example of Henry Royce’s reaction when he was pressured to merge Rolls-Royce with another manufacturer. “From a personal point of view, I prefer to be absolute boss over my own department (even if it was extremely small) rather than to be associated with a much larger technical department over which I had only joint control." Royce wanted control—not money, notes Wasserman.

Not every entrepreneur has such clarity about the motives for starting a business. Many think they are in it to make money, but they get their real kick from giving orders, from not having a boss—from being in charge, basically. Such a founder, for instance, when faced with a senior executive who wants some autonomy in decision-making—something any responsible post would naturally entail—will be unwilling to delegate responsibility even if the organization’s growth requires that he does so.

If giving up some control seems unthinkable for an entrepreneur, then he or she must choose a business that does not require much capital, so that rather than get investors on board and struggle to retain control, they could remain in charge and bootstrap their way year after year.

Those who want both—grow the company through external funding, and also run the show because it is, after all, “their baby"—usually end up badly. They are either forced out by the board and the company survives independent of their control, or the transition proves stormy, and they take the company down with them.

Founders who accept the necessity of making a choice do much better. Wasserman cites the example of Russ Wilcox, co-founder of E Ink. In 1998, when the board appointed a new CEO, Wilcox took on roles in finance, sales, product marketing and even research and development to expand his skill set. Six years later, when the board wanted a new CEO, it couldn’t find anyone more suitable than Wilcox and made him the CEO.

“Entrepreneurs face a choice, at every step, between making money and managing their ventures," writes Wasserman. “Those who don’t figure out which is more important to them often end up neither wealthy nor powerful."

There are exceptions, of course. And every entrepreneur wants to be the exception—to be a Bill Gates or a Mark Zuckerberg, who attained immense wealth along with immense power. But then, if you were Gates or Zuckerberg, you would have done it already.

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