Startups do not fail because they run out of cash. They run out of cash because of the leadership debt incurred.
It is tough to build a startup, but it is even tougher to scale a startup. 90% of all startups fail, and only 0.6% of all startups break through the $10m revenue threshold. Given the current tech rout, we can expect this number to go down even further.
Founders seem to believe the no. 1 reason for startup failure was running out of cash. In my experience as a growth capital investor, running out of cash is not a reason for failure, but a consequence of failure. It is the consequence of the founders' failure to develop strong leadership skills, transition from founder to leader, and build a strong leadership team. If you want to lead your business from initial traction to sustainable high growth, you should start developing your leadership skills now. The longer you wait the more leadership debt you incur and the higher the likelihood your startup will not make it through the growth valley of death.
Leadership debt is usually incurred already in the early-stage phase of a startupIn the early-stage phase of a startup, founders usually focus all their efforts on execution. They build a small team. They build the product. They invest in marketing and sales and generate first revenues. They make all major decisions themselves. But they do not use the early-stage phase to develop their leadership skills. They incur 'leadership debt'.
In the growth phase, leadership debt cannot be repaid anymoreThe situation is totally different in the growth phase. Suddenly, the company has grown from 20 to more than 100 employees who may be dispersed across offices, countries, and even continents. In the growth phase, founders cannot focus solely on execution anymore. They cannot make all decisions themselves but must delegate 90% of all decisions to a strong leadership team. They are suddenly in charge of the people who drive the business. Unfortunately, becoming a strong leader who can attract, retain, and lead a strong leadership team is not learned overnight. It takes time and constant effort. When founders realize they must transition from founder to leader, it is often already too late. They cannot repay the leadership debt incurred. The leadership debt incurred leads to bad decisions that, in turn, lead to business failure.
Incurring leadership debt can be avoidedYou can avoid incurring too much leadership debt.
1.Take ownership of your leadership debt. If a company fails, there is no one to blame but the leader. If you want to succeed, take ownership of your leadership debt. Work on your leadership skills and develop a strong leadership team early on.
2. Work on your leadership skills. Do not postpone working on your leadership skills. Certainly, there are always other things you can focus on. But eventually, your success and the success of your business depends on you transitioning from founder to leader. Do not procrastinate! Act! Read books! Listen to audio books! Attend courses! Hire a coach! Ask for feedback, listen, and improve! Every day.
3. Develop a strong leadership team. If you have a dysfunctional leadership team, you have a dysfunctional organization. Hence, start building a strong leadership team early on. A strong leadership team can make critical decisions themselves and helps you make good decisions. Ensure that your leadership team is not a team of functional experts only. They must be leaders themselves. Empower them and help them grow.
4. Watch out for leadership debt symptoms. You will not be able to completely avoid incurring leadership debt. But you can minimize it and repay it if you notice it early enough. Some leadership debt symptoms are:
Take ActionDeveloping your leadership skills can be the decisive action you take now to create one of the few startups that make it successfully through the growth valley of death. Do not wait! Act!
In my new leadership handbook Leading Effectively, you will find actionable insights and frameworks you can follow to become an effective leader who leads with ease.
If you are looking for a smart path through the growth valley of death, you may enjoy reading my high growth handbook for founders FastScaling.
Source: Inc Magazine