A couple of months ago, Paul Graham, Y Combinator co-founder, noted that there is something fundamentally different in how founders and managers run companies. His point was that there are two different ways to run a company: founder mode and manager mode. Most people in Silicon Valley have implicitly assumed that scaling a startup meant switching to manager mode. The latter could be optimistically summarized as “hire good people and give them room to do their jobs”. The results are disastrous, enough to get suspicious if this is actually good advice.
One of the differentiation factors between the two from his point of view seems to be that
- managers go top down, focusing on their direct reports. Departments below that level then act as some sort of black box.
- Founders tend to skip levels freely, with focus on innovation and growth.
Both work, but manager’s mode feels so inefficient in comparison that it seems to be broken. Founders mode is not researched and in many ways intuitive and difficult to reproduce.
These two modes described in this way are incompatible.
My take is slightly different. First, founders and managers indeed tend to have differences in how they manage companies. But this is not a binary choice. Instead, it is a more complex relationship in a triangle of founders, managers and shareholders that define how the company is managed and explains the difference between an early stage startup and a company at scale.
Each participant of this management triangle has different roles, practices, principles and aims, leading to all sorts of tensions and contradictions. The growth decline after the transition to a professional management is caused by a mismanagement of these tensions and contradictions.
Founders create the companies and naturally are the ones who know best why the company was created in the first place – the vision and strategy. As they personally hired people for all key positions, they maintain a network of contacts throughout the entire company, understand its culture and all processes – they were the ones who created them in the first place. Having all this raw information and context is important for the company to survive. And surviving helps them develop pattern recognition specific to the company.
As the company matures, being the central nervous system of a company puts on a strain, so at some point managers come. And usually by the time this happens, startups onboard or intend to onboard non-founding shareholders. This forms a triangle of founders – managers – investors is formed.
And this is where differences arise. If not taken care of properly, this can damage the company enormously.
Managers, even CEOs, are replaceable by design. Yet, no matter how many CEOs later, the founders are still the same people. This difference should not be underestimated. Hired CEOs are bound to create systems “beyond personal influence”. Founders’ connection is existential, extremely personal, “this is my creation”. They can’t transfer patterns recognition from building the company from nothing or personal attachment to the reason the company was created. Mission statements and things of that nature are in a sense like a Tao, reading the same words everyone would see something different.
One should not jump to a conclusion that CEOs and professional managers are useless, though. Not having the trust and authority a founder would have, they are extremely proficient at creating and running processes and systems that allow the company to grow further. After all, no matter how good a founder is, his ability to run things personally is limited. And a company should not crumble if the founder is out of the picture due to personal or other reasons (memento mori). Another benefit is that founders tend to be emotionally invested in the decisions they make. And that’s fine. But there need to be a counter-balance that assesses the situation coldly and can prevent costly mistakes from happening. This is essential to handle larger operations and more complex challenges as the company grows. Rather than competition, a cooperation is desirable.
The post-IPO investors are also not friends, family or those who believed in a small team of three. For many of them, it’s a purely transactional relationship – they hold a financial asset that must provide a return on investment. IPO also brings a portion of speculative shareholders who are very sensitive to share price and other somewhat superficial metrics and ratios. There are long-term shareholders that might be more suitable or less so, but speculative investors rarely if ever benefit the company.
Both speculative and long-term investors put pressure on founders and professional management. If mismanaged, this pressure would lead to an optimization difference and misalignment between founders and managers.
Founders would stay founders for life. CEOs would be replaced, and they know it before they are even hired. As a result, founders optimize for long-term vision and impact. CEOs are bound to optimize for short-term efficiency and predictability. Social media, impatience, share price volatility and other factors would lead to a CEO being driven away by the board and shareholders before long-term plans would be able to pay off. Many shareholders plan within a quarter or two, a year at best. They aren’t willing to tolerate sluggish share performance for a five or ten-year plan, it has no meaning or value to them. Professional management is pressured to adjust. Even if they know their decisions today could be an issue in 5 years – they won’t be there anymore, an average tenure period is 4.8 years. But if they sacrifice short-term gains for a long-term success of the company, they might not be able to stay for even 3 years. This tension means that absent founders’ intervention technical debt would grow, product decision would be made on the basis of immediate increase in revenue as opposed to purpose or even long-term revenue increase if it requires sacrificing quarterly or yearly metrics.
Founders also have this risk, it’s not unheard of for a founder to be ousted. However, they are much more protected by the virtue of also being a shareholder.
Similar dynamic manifests in risk assessment. Founders build a vision, they are willing to take existential risks. Managers are building a career which makes their risk assessment very measured and usually relatively tame. For the shareholders, risk management is portfolio-based. If the asset increased in value this quarter or year – it makes sense to buy or hold. Otherwise, it might be time to either change the management or sell altogether.
The point here is for founders to make a wise choice of key long-term shareholders who actually buy into the vision, the strategy, the culture and are actually willing to wait. The right investors can help maintain the founder’s vision even if he is gone from the company. Unless the founders did their job right, structuring the capital, they have no business in getting angry with the management that has to go for a low-hanging fruit.
Now, to the elephant in the room. What happens if the founder is no longer there and would never be there? Late Steve Jobs won’t return, no matter if we want it or not. In many cases, companies start to lose their way as the founder is no longer there to correct accumulating “navigation mistakes” and the triangle starts to limp. This is exactly why it’s crucial for founders to intentionally cultivate future leaders who understand the company’s culture and vision. This approach can help ensure a smoother transition and maintain the founder’s legacy, even after they step down.
As an additional note, I believe it is possible to grow from a manager to a quasi-founder type leader. Someone who obviously was not part of the founding group, but grew to take on some of theirs characteristics. Satya Nadella wasn’t a founder, but his deep understanding of Microsoft’s culture and his ability to redefine its strategic direction made him a quasi-founder figure. He helped guide Microsoft through a period of significant change, maintaining its relevance in the tech industry. Henry Ford II, grandson of the founder Henry Ford, took over the leadership of Ford Motor Company in 1945. His leadership helped Ford navigate challenges and continue its legacy as one of the world’s leading automakers. He also preserved the Ford family’s influence within the company, which gave him a quasi-founder-like role.
The quasi-founder bridges the gap between the founder’s vision and the manager’s operational expertise. They carry forward the company’s culture and mission while ensuring that the systems and processes are in place to scale.
Such people are rare, but the chances could be increased if companies intentionally nurture leadership within. These types of figures also work best for the transition when founders eventually step down. But before that, it’s best to work together instead of directly replacing founders with professional managers.
The dynamic between founders, managers, and investors is a complex interplay of different priorities, goals, and strategies. Founders bring vision, innovation, passion, and long-term commitment to the table, while managers bring the expertise to build sustainable systems and processes. Investors provide the financial foundation that enables the company to grow and scale.
Ultimately, the most successful companies are those that recognize the value of each perspective and find a way to integrate them into a cohesive strategy. It’s not about competition between these roles—it’s about cooperation.
