Scaling a business is hard. Blink and you’ve gone from scrappy upstart to a company with 500+ employees, a stacked leadership team and all the trials and tribulations that come with running a scaleup. So once you reach the grown up stage, how do you do it and avoid the pitfalls at the same time?
VC firm Index Ventures has today released its latest guide looking to answer that. Scaling Through Chaos: The Founder’s Guide to Building and Leading Teams from 0 to 1,000 draws on analysis of 200k career profiles at 210 companies, digging into everything from managing and retaining talent to scaling your technical team.
Below is an excerpt from chapter six of the book — building your leadership team. You can read it in full here.
Evolve Your Time as CEO from Doing to Managing
As you scale beyond tens of people into the hundreds, your role as founder needs to undergo a dramatic transformation. You’ll no longer be involved in every hire, or even know everyone’s name. You’ll inevitably feel a weight of responsibility for the livelihoods of so many others. You’ll have multiple investors, and will probably have less than majority ownership or control of the company. You’ll feel yourself pulled away from frontline activities and the raison d’etre behind your business, and sucked more deeply into running the company.
These changes are both inevitable and in the best interests of the company. But adapting to them can be challenging, and you need to adjust the way you spend your time accordingly. One of the most crucial things you need to consider is how to create CEO leverage — bringing people on board and creating processes that can channel and amplify your actions, freeing you up to focus on what only you can do.
Core Executives
At the start, hire just a few executives
In the early days, it rarely makes sense to hire executive-level talent across more than a couple of functional areas. You won’t be able to afford it, and you’ll also struggle to access and land high-caliber candidates. You’re also unlikely to know the precise profile and experience that would be most helpful for your company. In general, we advise you not to hire more than three executives by the time you reach 50 people.
- Title/level = “head of” or director
- Core skill set = tactical + operational
- Title/level = vice president chief experience officer
- Core skill set = strategic + tactical
- Title/level = chief experience officer
- Core skill set = strategic + operational
There are still risks with fractional executives. Are they an outsider or an insider? Are they doing actual work or only advising? It’s important to have clear and aligned expectations around these questions. It may be that a more traditional advisor role is better suited. But if there’s heavy lifting to be done, you want an “insider” mentality.
We favour constructing these relationships as part-time employees rather than as contractors, with a minimum of three days per week. While this can be less favourable from a tax perspective, the “psychological contract” is stronger. Another option is a “burst exec,” who is contracted (three to five days per week) for a few months to deliver a defined project or objective. For example, a people leader who helps to deliver the initial mission, vision, and values documentation plus internal rollout. Or a finance leader who helps you run your next fundraise. The worst type of arrangement in our experience is a one day per week freelancer paid per diem, who never really gets under the skin of who you are or what you need to focus on.
You might find it helpful to engage one or two fractional functionally-oriented executives during the first period of scaling, but construct these relationships as either “burst contracts” or as part-time employees.
Craft your inner circle as you grow
Even with cofounders to share the load, you will need to increase the number of experienced and specialist functional leaders as you scale—people you can comfortably delegate to, and who know what “great” looks like without having to learn it through trial and error.
These executives will be people who can operate at either a vice president or chief experience officer level, who can assume responsibility with a high degree of autonomy to run an entire functional area of the business. They will always (with a 95% likelihood) be better qualified than you or any other co-founder to run their function at scale.
Building a leadership team also brings its own challenges, such as managing internal comms now that there’s a new layer between you and the broader team. Most of your time will now be spent with a small number of direct reports, so you’re no longer directly role modeling the behaviors you want to see in the organization as a whole in areas such as goal setting, feedback (positive and negative), quality bar, and prioritisation.
Find “executive-stage fit”
Very few functional leaders can be star performers at all stages of growth. Companies often progress through multiple generations of leadership in core roles on their journey from startup to IPO readiness. This can be challenging to manage as a founder, since it can involve letting go of executives as well as finding new ones—topics we’ll address later in the chapter.
We can distinguish three leader personas that map against stages of a company’s life: builders, scalers, and optimisers. Each of these personas also brings a distinct blend of leadership thinking: strategic, tactical, and operational.
1st Generation — Builders excel at reasoning from first-principles to quickly spin up a function from nothing. As multi-tasking player-coaches, they thrive in ambiguity.
2nd Generation — Scalers are skilled at templating ways of doing things at scale. They’re seasoned managers, and demonstrate strong potential, if not first-hand experience, of being effective managers of managers.
3rd Generation — Optimisers have worked at large corporations. They know how to lead big, multi-disciplinary, matrixed organisations that connect across multiple geographies and business units. They’re experienced “leaders of leaders.” While they can add value post-IPO, they’re rarely helpful in a pre-IPO company. In fact, their process-heavy mindset can be destructive in high-growth.
The point at which these types of leaders come into their own varies by function. Headcount is one key factor. Since engineering and sales teams tend to be the largest, the need to switch from “doing to managing” and then to “managing managers” tends to happen here first. This is reflected in our analysis below. But other factors also contribute. For example, as you prepare for an IPO, you need a chief financial officer and general counsel who have the credibility and gravitas to reassure institutional investors.
If you hire the wrong type of leader for your stage, expect things to go wrong, even for individuals with exceptional track records and pedigrees. Scalers will struggle to hire and inspire the calibre of people needed for them to step-up to be optimisers. And optimizers will struggle to get into the weeds and lead by example, which is necessary as a builder.
While the functional teams that experience most growth are the most likely to need transitions in leadership, the tenure of different functional executives illustrates the different dynamics at play. The longest-tenured executives are in finance, engineering and legal, while the shortest-tenured are in people/HR, followed by sales. This aligns with our experience — finance and engineering leaders have more objective and tangible skills and qualifications. By contrast, leadership of the people function is more subjective and intangible, and depends upon a close match between the values and behavior of the people leader and the CEO. Sales leadership has very measurable objectives, but performance shortcomings show up quickly, and the area can be prone to a mercenary mentality.
Can people move between the builder, scaler and optimiser leadership styles? Sometimes you’ll find leaders who excel at one of the earlier stages, and who go on to specialize as serial operators at that specific phase in the startup lifecycle. You can also find leaders with less experience who can continue to thrive in leading a function, even in hyper-growth. Conversely, you’ll sometimes find a leader with huge amounts of experience and maturity who is able and motivated to step back from scaler to builder, or (more rarely), from optimiser to scaler. But it’s vanishingly rare for a successful double step-back from an optimizer to a builder.
Cofounder Relationships
Should cofounders stay or go?
Cofounder harmony is critical to the early success of any startup. However, while a large majority of founding CEOs retain this position in successful companies through to IPO or exit, only a minority of co-founders retain an executive role through to IPO. In fact, many end up leaving the company prior to exit.
The principal reason for cofounders stepping back or out is that they lack the skill set or desire to build and lead a large team. In these cases, there might be an alternative and mutually-beneficial role for them within the company, such as being an individual contributor or leading a sub-team or initiative. However, many cofounders choose to step away entirely. They might prefer a return to an earlier-stage environment, or they might wish to start a new company, or pursue entirely different career or personal goals.
These transitions can be hard for you and other cofounders to navigate. Hopefully you’ll both end up on the same page, making the transition a bittersweet but positive experience. You might benefit from the input of a mutually trusted advisor or board member in preparation for such a conversation. But ultimately, as CEO, you have to find a solution that is in the best interests of the company.
The same advice applies to yourself, if you feel joyless or unable to cope at the thought of leading the company through the next set of goals and challenges. This isn’t a character flaw or failure. Rather, it’s a mature and brave acceptance. While investors undoubtedly prefer founder-CEOs, they also know that this isn’t always in the best interests of either the company or the founder.
