Startups, leadership is the challenge

14th May 2020  

by Silvia Manduchi

Startups are born from entrepreneurial projects that could not exist without the figure of the founder or, if you like, the entrepreneur. The main challenges that await the entrepreneur become particularly difficult in two phases: in the startup phase, in which the first objective is to assert the vision on the market, and in the scaleup phase, in which the team must demonstrate to be able to scale the business towards long-term growth.

In Venture Capital, in order to proceed with an investment, we look through a due diligence process for objective data (turnover growth rate, customer base reach, etc.) that indicate, before others, that the startup is taking the path of affirming its vision on the market and that it is laying the right foundations for the sustainability of the business. Another fundamental component that the analysis cannot ignore is the team: more specifically, interviews are held with the founder to understand if there are the conditions to take the organization through the challenges that await it.

I would focus in particular on the analysis of the team, more complex because less objective, the moment when we ask ourselves: is the founder able to lead the team towards a shared vision? And again, is the team laying the right foundations for future development?  And finally, is the team constantly on the alert about the changes coming from the external environment?

It is important to ask these questions during this phase of the analysis because we must not forget that the entrepreneur is just one person and the startup is an organization of more people, and that analyzing the propensity of this group of people to face the challenges allows us to translate the due diligence along future time axes. We see countless examples where the idea and vision are not enough, as there is a lack of sharing such a vision and a culture of responsibility; other cases where the team has postponed internal structuring over time and missed key opportunities; or even cases where groupthinking leads to underestimating changes in the competition and marketplace.

Let us now look specifically at the two phases (startup and scaleup) with the lens of a theory I am fond of, that of Adaptive Leadership; founded at Harvard, it lays the foundations for a concrete analysis of leadership as it takes us back to its roots and identifies whether the team is asking the right questions to increase its chances of success in the future. We should strive not to use the over-abused word “leader”, but rather “exercise of leadership”, as Marty Linsky, founder of the theory, reminds me often. In fact, leadership is not a characteristic of a person, but an exercise, even a sufficiently exhausting one.

The first challenge for an entrepreneur is to be able to unite and involve the people in his organization towards a shared common goal. Therefore, according to this approach, the entrepreneur must be willing to take a hard road, and paradoxically, to unite the organization towards a vision, an idea. However, the market can change quickly, the product may not be validated by the customer base, and more generally, the external environment may have an impact on the organization itself. So how does the entrepreneur manage to unite the people who make up the organization towards a vision about which he inevitably asks himself questions? The successful entrepreneur is often well aware of the risks he runs, but he decides to take the most difficult path because of a conscious choice to bring himself and especially the entire organization to the affirmation of his vision towards the outside world, because he firmly believes in the entrepreneurial idea not as an end but as a means to allow the organization to establish itself on the market.

In the early years of a startup there are often limited resources, in terms of money and time. So much so that the risk of bankruptcy due to lack of cash is always just around the corner. This is why a start-up is an organization that lends itself better than others to the exercise of leadership, and where the motivation of a small group of people remains essential, because it is more exposed to external risks. The greater the "friction" that startups face, the more it is necessary to instill a culture of shared responsibility, so that everyone's efforts are prioritized and united towards a shared common goal.

Next, the decisive challenge facing the entire founding team is to lay the right foundations for scaleup. Coordinating a more structured reality requires a different effort than motivating a small group of people towards a common goal. Specifically, it requires to keep active the exercise of pursuing multiple interpretations of reality and also requires to take into account how individual goals deviate over time from the common goal of the organization to address changes in the company structure.

From the first point of view, multiple interpretations of reality allow founding teams to dilate the diagnosis phase of the context in which the startup moves and therefore to be able to direct it in the best possible way towards ways, once again, unknown ex ante: would developing a new line of business allow us to be more recognized by the market or would it lead us to divert the value proposition? Would outsourcing customer care allow us to scaleup or would it drive us away from the end customer? When we verify that the team is asking these questions, it is a positive sign because diagnosis and interpretation are part of the exercise of leadership. Of course, action is also necessary, always with an experimental approach, to verify what my client thinks, for example, about recent changes in customer care or to verify if a new line of business is recognized as consistent with the core business and if it impacts the increase in sales in a lasting way.

The second effort that the team has to make in the scaleup phase is not to lose sight of the internal organization, because, paradoxically, the more the vision was previously shared the more effort will be needed to adapt it to the evolutions that are required by the scale-up phase. People will then be asked to lose something from the initial phase. The loss is as endemic in the evolution of our DNA as it is in the evolution of organizations. Too often, those who want to exercise leadership do not realize that their hard work includes managing the fears of loss that accompany every member of the organization. Now that the new organization will be populated with outside talent, how will I maintain the role I have built up over the years? The new business development could decide to take a completely different path from the one we have followed so far and my skills developed over time would no longer be fundamental. These are examples of questions that need to be addressed by those invested by the authority to structure the company before they turn into behaviour that is harmful to the company itself.

In conclusion, what is certainly essential to analyze, inherent to the team, is its ability to ask the right questions and maintain an experimental approach, rather than running the risk of analyzing whether the answers to the same questions are correct, since we often have to wait for the results to verify the answers.