Founder in Eleven

Early in my career at TSG, I had multiple conversations with a banker friend who handled loans for small and midsized companies.  This friend was responsible for either reworking a company or selling its assets when a company was in risk or had defaulted on their loans.  One of my favorite quotes from my friend was:

“We could always tell when a company was in trouble because we had to bring our own toilet paper and coffee but the founder would rationalize why they still needed the company plane.”

According to data from the Bureau of Labor Statistics, approximately 20 percent of small businesses fail within the first year — a statistic founders often ignore. By the end of the fifth year, about half will have failed. By the end of the decade, only 30 percent of businesses will remain. In other words, businesses have a 70 percent failure rate within their first decade. 

Given these statistics on failure, it is remarkable how often I have witnessed founders from my coaching, different peer groups, or networking events that can be led astray by a founder’s ego and loss of profitability, often times after early company success (though I never saw one embracing the need for a private plane).  This post will discuss the benefits of embracing profitability while managing issues surrounding founder egos. 

Romanticizing Entrepreneurship

Society often romanticizes entrepreneurship with stories of success tied to the entrepreneur’s character, often minimizing the outside influence of luck and timing.  While stories of Steve Jobs, Mark Zuckerberg, or Elon Musk inundate every media source, it is much more common to find small companies that are just getting by, even failing.  For most founders, ego is a driving force to start a company, but can play a negative role once the company has some success.

To help understand how ego can directly affect the success of a business, I’ve thrown a question into ChatGPT in hopes it can generate an unbiased response based on a wide array of information within its own database.

What role does a founder’s ego play in a small business?”

The founder’s ego can play both positive and negative roles in a small business.

On the positive side, the founder’s ego can provide the drive and passion necessary to start and grow a successful business. The founder’s belief in their vision and their ability to execute it can be a powerful motivator for the entire team. This can also help in creating a strong brand identity and positioning in the market.

However, on the negative side, an unchecked ego can lead to a number of problems in a small business. The founder may become overly controlling, which can limit the growth and potential of the business. The founder may also become resistant to feedback or advice from others, which can lead to blind spots and missed opportunities. Additionally, the founder’s ego may cause them to make decisions based on personal biases or preferences, rather than what’s best for the business.

Overall, while some level of ego is necessary for success in entrepreneurship, it’s important for founders to be aware of how their ego is impacting their decision-making and interactions with others in the business. Striking a balance between confidence and humility can lead to a more successful and sustainable small business.

In my own experience, it was initially very hard to distinguish when my ego was driving positive change for the company versus the negative effects detailed above.  A leader who believes the company success is completely their doing (and not the role of the timing, luck or their team) and making decisions based on their own self-esteem and ego rather than making decisions on logic or reason is often referred to as an “ego trap.” In an excellent article from business insider on Jen Shirkani’s book,  Ego vs. EQ: How Top Leaders Beat 8 Ego Traps With Emotional Intelligence,  the article notes some common ego traps, which include: :

1. Ignoring feedback you don’t like
2. Believing your technical skills are enough
3. Only surrounding yourself with people like you
4. Not letting go of control
5. Being blind to your downstream impact
6. Underestimating how much you are being watched
7. Losing touch with frontline experience
8. Relapsing back to your old ways

Early in my career at TSG, my own unchecked ego almost caused TSG to fail in 2002 after the downturn of September 11, 2001. At the time, when people would ask about TSG, I would share statistics that in hindsight had more to do with my own ego and self-esteem than the profitability of the company.  Statistics included:

• The company has X many employees or customers
• The company just landed this major client
• The company just upgraded our office space
• The company had started our own Dot Com service offering called ConnectSite (like Box) that was struggling with ever getting to profitability

In looking back on the time, TSG was increasingly becoming less profitable and I, as the entrepreneur/founder, could not accept that TSG would need to take a step back in order to move forward.  As I mentioned in a previous post regarding layoffs, TSG had to inevitably lay off some employees in the spring of 2002, even though I had delayed the matter because my own ego could not acknowledge that we were failing at the time.

To get TSG back on track after the layoffs, we developed a tight focus on profits over other metrics.  Profits allowed TSG to pursue managed growth rather than risking the company on a growth-at-all-costs approach.  Over the next 18 years, using these lessons learned about managing my own ego, we never had a non-profitable month even with small investments in managed growth.  We never had to take on outside investors or excessive bank loans, and when it came time to sell the company, the purchase price was based on our growth, particularly profit growth.

Founders, Luck, and Risk-Taking

When TSG was founded in 1996, it experienced tremendous growth, doubling in size every year for the first three years.  In hindsight, the “dot com” boom and the luck of us being in the right place at the right time had as much to do with our early success as any other factors, including my leadership and vision.

It is easy to understand how myself and other founders, fresh off the early success of a business, can fall into an ego trap and believe they can do more by taking on riskier investments.  While there is a desire to “do more,” founders, like any gambler, should look at their investments, pivots, or other growth strategies through their risks and benefits.  Based on our experience after our layoffs, TSG’s new company strategy surrounded its employees, clients, and long-term success of the company.  TSG still focused on taking risks, but incorporating controls to avoid making “bet the company” gambles.  Some particulars in how to manage our risks (and my ego) included:

• Profitable Every Month – One of the primary goals after the layoffs was to be profitable every month.  Focusing on profitability forced us to limit our bets/investments.  We specifically also avoided saying “maximize profitability” as, being a services firm that relied on people doing the work, maximizing profitability would result in burnout, culture issues, and long-term employee retention issues.
• Billable before Non-Billable – Billable work would always take precedent on any Non-Billable work.  During group discussions we found our consultants learned more from billable work, and billable work better served our customers and bottom-line profitability.  If investment bets were delayed, the team embraced that sacrifice.  Investments were focused on our non-billable bench time as mentioned in my previous post,  Culture Quick Fix – Embrace the Bench.
• Client Feedback – As a consulting firm, we had access to our customers who had both their and our best interest in mind.  Whether at our Client Briefings, informal lunches, or projects themselves, we would get feedback on our investments from our clients.
• “2 inch deep” – When there is a chance to make a bigger bet, we would focus on small bets that were only “2 inches deep” where we would do the minimum (often called an MVP or “minimally viable product”) to get client feedback and better understand the investment before committing too many resources and effort.
• Small Pivots – Consistent with “2 inch deep” investments, TSG would focus on small bets or pivots rather than bet the company pivots or sacrifice a profitable month.  While pivoting represents adapting the business model or product offerings to meet customer needs, constantly changing directions can create confusion for customers and employees, as well as drain on resources and morale.
• Team Feedback – Whether my ideas or anyone from the team, during our quarterly meetings all ideas were discussed in an open manner in regards to where we placed our investments.

Summary

Given the high rate of failure for small companies, founders need to be diligent in managing their ego when making decisions for the company that can sacrifice profitability.  The long-term success of a company needs a founder with the vision and drive to grow their business.  A founder, particularly after early success, has to avoid the ego trap of making decisions based on their own self esteem rather than the long-term success (and profitability) of the company.