• FIC Hansraj

Founder’s Dilemma

What is it that you truly desire? Power or Money?


This is a question that every entrepreneur has to ask themselves at some point during their journey and the decision is what makes or breaks their start-up in the long run. Recounting success stories we always talk about Mark Zuckerberg, Bill Gates, and many other members of the exclusive club of entrepreneurs viz CEOs. While this fantasy of establishing a start-up and running it for the foreseeable future is what drives all budding entrepreneurs, the majority of them have to face the gruesome reality that their innovation is appreciated but not their leadership. This issue when addressed takes the face of a Dilemma that every founder has to face.

Founders' Dilemma | FIC Hansraj
Founders' Dilemma

Founder's Dilemma is an opportunity cost problem faced by the majority of entrepreneurs after their start-up gains traction and subsequent success. The dilemma is a decision that the entrepreneur/start-up founder has to make between giving up executive control and gaining funding or retaining control and losing out on capital from investors. The trajectory of the start-up can manifest into one of the two alternative paths depending on whether the founder will gracefully accept the investor's decisions to hire a professional CEO and step down, or whether the founder will retain control, hence forgoing the funding.


Every entrepreneur is driven by the desire to change the world, the desire to create something of their own, and naturally the desire to become rich. Out of the countless masses, few visionaries are fortunate enough to see their dream to fruition. Naturally, entrepreneurs are the best people to run a start-up in the initial phase, since they are the ones who know their product, their customers, their operations, and the universe centered around the start-up the best. Having grown so attached to their start-up, founders often use euphemisms like ‘baby’ or ‘child’ to describe their creation. They lay the foundation of their vision, hire co-founders, relatives, connections, and employees who share their perceptions. Thus, the entire culture of the workplace is laid down by these personal beliefs. However, once they have managed to achieve little success, new factors start coming into play.


To scale up, more capital, more employees, and more infrastructure are needed. Investors come to the rescue in the guise of a wish-granting fairy, bringing on board the much-needed expertise and the resources. However, all of this comes at a cost to the entrepreneur, the cost to their power and autonomy, which sometimes they are unable to pay.


Founders more often than not get too attached to their creation, thus unwilling to nurse an objective or a realist approach. Investors are outsiders, who do not care much for the creation but are excited by the potential value the creation could be of to them. Naturally, when they have a look at the day-to-day of the start-up, they bring their objective notions, and to facilitate their execution in the face of the perceived founder’s bias or naivete, they introduce a new character of the disinterested expert i.e., manager. While the entrepreneur understands the vision, the manager understands the world and beyond a certain degree of success that can be attributable to the founder’s capabilities, the investors in most situations believe that the founder should give the ‘baby’ for adoption to the manager.


In some instances, the founders are self-aware of their calibre and they willingly give up control, in the belief that sacrificing their power will lead to the perpetual existence of their creation. There is of course the inherent ambition of becoming rich that drives this decision as well. In situations of disagreement, the investors can justify their decision by stating the pitfalls encountered in the past. However, the change becomes much harder to justify when the founder has delivered results. Founders believe that they have led the enterprise to its success up till thus they automatically assume themselves to be the best fit to run the start-up. Investors believe that the founder has performed excellently up till then, but the organization has levelled up and the next phase will witness different challenges at a much larger scale, requiring managerial expertise over entrepreneurial vision.


Most founders are unable to find acceptance in the reasoning stated by the board of investors. This is primarily because of their emotional strengths, their ambitions of creating something of their own or getting out of the 9-5 monotony, the very reason for the initial success has assumed the role of a liability in the next phase. Founders are control freaks who enjoy power, making it difficult for them to accept lesser roles and their resistance often leads to grotesque leadership transitions. The situation is quite paradoxical in a sense, since the faster the founders achieve initial success and scale-up, the quicker they lose managerial control, running at the risk of being kicked out. In many cases, disagreements between the board of directors and the founder over the future vision of the start-up stem from the strong set of ethics and moral values possessed by the entrepreneur. This is quite common in internet start-ups, where investors are constantly pushing to monetize their creation through advertisements or data mining. Despite the founder’s ethical morales, their hand is often forced by the board of directors, since they do not possess absolute power. This difference of managerial vision culminates in the inevitably ugly break-up where founders are pushed out of their start-ups through managerial control.


Apple founder Steve Jobs originally stepped down as CEO and brought John Sculley to lead. However, when his creative autonomy was being suppressed by Management, he left Apple causing the company to go on the brink of bankruptcy. However, when he returned as CEO, he took the company to new heights. This incident serves as an example of the significance of the decision taken when faced with the dilemma.

Founders Dilemma FIC Hansraj
Trade-Off

Thus, the entire premise of the dilemma boils down to the problem of choice; Money or Power?


When we present the dilemma in the form of a pay-off matrix, the magnitude of the importance of the decision is evident. While the ideal and romanticized scenario for every entrepreneur is to be the exception, not every founder gets to live the dream. Most fail to grasp the cost that being an exception requires, where the price is in terms of the compromise on personal values, preconceived notions, and the inevitable disintegration of their original vision with which they started. Founders often consider bootstrapping their start-up thus declining funding at multiple stages because they want to be king and rich. However, an entirely different set of challenges await their desire to become big solely using self-amassed wealth. Zerodha founders; Nikhil Kamath and Nithin Kamath fall under this category of founders, who became billionaires after a decade of compounded hard work and perseverance.


The underlying basis of the decision taken draws from the very reason they chose to become an entrepreneur in the first place, be it the desire to escape the monotony, or to become rich, or to create something of their own. For those who choose to be king, they are driven by their ambition of managing their own creation and having control even if it is at the expense of their creation’s value whereas for those who choose to be rich are motivated by wealth and the desire to see their creation sustain for generations to come even if it requires them to step down. Thus, the choice between money and power allows entrepreneurs to truly understand what success means to them; to be rich or to be king?



References:

Harvard Business Review

Forbes

University Affairs



Author: Jayesh Rungta

Illustration by: Udeshay Teotia