Five Challenges That Can Derail Hypergrowth Start-Ups
RHR has been engaged to advise on leadership and management challenges by venture capital (VC) firms and founders of companies that are engaged in rapid scaling. We have observed that the ability of many of these hypergrowth companies to scale rapidly can be compromised by two factors: (1) the developmental challenges inherent in first-time founders-CEOs and (2) the system inefficiencies inherent in prioritizing speed and growth over building corporate processes and structures.
Hypergrowth companies have periods of intense growth, which can manifest in doubling or even quadrupling quarter after quarter for several years. Rapid growth, often necessary to gain market scale, can be extremely disrupting to individual leaders, their coworkers, and company culture. We have observed that those founders-CEOs and companies that have successfully navigated these growth periods have consistently overcome five unique challenges.
1 Challenge: First-time founders-CEOs differ significantly from CEOs who have been hired into previously sustainable companies (i.e., “traditional” CEOs). Traditional CEOs have been promoted and vetted through their career to be strong operators and have demonstrated leadership ambition. First-time founders-CEOs tend to be subject matter experts (SMEs), often in engineering, product, or design, with unusually high passion and drive for change, innovation, and entrepreneurship. Often the operational and leadership abilities of these founders-CEOs are deficient to the tasks of growing and leading beyond the requirements of a small company.
Solution: Founders-CEOs who have successfully navigated this challenge have acknowledged their operational deficiencies. They have responded by (1) focusing their operational responsibility on those operational areas where they have actual SME, for example in product, engineering, or design, and (2) have learned how to hire and trust proven leaders to lead in the other operational areas of the company. Hypergrowth companies’ potential success is highly dependent upon the founder-CEO exercising their vision, passion, and skills in their area of expertise and getting out of the way in the other areas of the company where they are unskilled.
2 Challenge: By the time a start-up has moved into hypergrowth, the senior team is made up of a cadre of battle-tested, highly trusted colleagues who have been with the founder since the beginning, along with accomplished, externally proven senior leaders who have been hired more recently. Many founders-CEOs are confronted with the challenge that some of their trusted colleagues from the early days are struggling with leading in a much larger company, and most founders-CEOs struggle with the emotional decision of removing them from their responsibilities. Many founders-CEOs also have difficulty deeply trusting the accomplished new hires because they haven’t bonded through the experience of surviving the difficult early years together.
Solution: Successful founders-CEOs have figured out the challenge of deciding between personal loyalty versus business interests in determining (1) who among their highly trusted early hires is able to scale and (2) who among the recently hired accomplished leaders can be trusted to be in it for the vision and mission, not just the financial opportunity.
3 Challenge: First-time founders-CEOs often are highly confident in their SME and are able to make decisions and move rapidly in their subject matter area. However, they often exhibit indecision in unfamiliar leadership arenas, and their indecisiveness becomes a bottleneck that slows down rapid growth.
4 Challenge: When founders-CEOs haven’t articulated clear decision-making processes, their senior teams also exhibit confusing and inefficient decision-making, which seriously inhibits execution speed.
Solution: Successful founders-CEOs have come to the realization that they need to define clear decision-making processes for themselves and their senior teams. They often institute different processes for those areas where they have SME and are confident versus areas where they don’t have expertise and confidence. Many founders-CEOs have implemented some type of decision or prioritization process, such as drive/partner/audit/ignore.
5 Challenge: Strong cultures that leverage company mission and values to motivate employees to excel and exceed expectations are necessary for rapid scaling. At some point in hypergrowth companies growing their workforce, founders-CEOs realize they can no longer ensure culture fit in new hires by personally interviewing all candidates. They must train and rely on the next layers down to intuitively know who will fit the culture.
Solution: Successful founders-CEOs realize that they must own the responsibility of maintaining culture through periods of hypergrowth by consciously and actively manifesting culture-consistent behaviors in all they do. They are authentic and transparent and frequently engage in town hall-style meetings to articulate and demonstrate behaviors consistent with the company culture.
6 Challenge: Hypergrowth companies build up “efficiency debt,” where rapidly scaling companies must prioritize product and go-to-market over business operations, and therefore, many necessary corporate structures and processes are undeveloped or seriously underdeveloped. Efficiency debt often results in “the left hand not knowing what the right hand is doing,” with wasted effort, frustration, and a decrease in employee morale.
Solution: Successful hypergrowth companies recognize this efficiency debt and know they must periodically revisit these un(der)developed company capacities. They keep the efficiency debt top of mind and continually institute risk assessments and mitigation strategies until they reach enough scale that they can devote the necessary time and effort to build in the requisite organizational structures and processes.
We have seen some venture-backed start-up companies exit their founder-CEO because they failed to rise to these challenges. And we have seen other companies experience considerable delay in reaching scale—some to the point that their competitors have overtaken their initial market lead. Being a first-time founder-CEO is an unbelievably daunting experience; having the ability to recognize when they are stumbling, seek assistance, listen to feedback, and course-correct is a requirement for ultimate success.