Small business is the backbone of the U.S. economy and a critical source of growth in both economic activity and jobs. That’s a refrain we’ve all heard over and over. It also isn’t quite true. According to Derek Lidow, a successful entrepreneur who now teaches entrepreneurial leadership and creativity, innovation, and design at Princeton University, the vast majority of those economic benefits derive from those small businesses that survive and scale. The failure rate of startups is high, and new mom-and-pop operations simply replace others that have fallen by the wayside. Thus the challenge, and Lidow’s passion, is to help new ventures grow and thrive beyond infancy.
Lidow founded and led the iSuppli Corporation until its sale for US$100 million, and earlier was CEO of the power semiconductor company the International Rectifier Corporation. In his new book, Startup Leadership: How Savvy Entrepreneurs Turn Their Ideas into Successful Enterprises (Jossey-Bass, 2014), Lidow argues that boosting the success rate of startups is not dependent on better ideas or savvier business plans. Based on both his personal experience and extensive observation of other entrepreneurs, he believes that what’s needed is an understanding of four distinct phases of business maturation and the ability to supply the right kind of leadership for each.
Lidow spoke with strategy+business recently about the skills that entrepreneurs must have—or will need to develop—in order to successfully grow their companies from startups to successful, sustainable businesses.
S+B: You say that most startups fail not because of a bad idea but because of bad leadership. What do you mean?
LIDOW: In my experience and research, I have found that there is no shortage of great ideas. A great idea, however, does not guarantee success. What led me to write the book was the realization that there are four periods in the life of a startup, from the initial idea to long-term financial sustainability. Each one requires a distinct leadership attitude and set of leadership skills. Only about one in 50 individuals begins the process with the full set of skills. There are too many smart people who fail when they don’t need to, because these skills can be learned. Those who learn them are not just entrepreneurs; they are what I call entrepreneurial leaders.
S+B: What are the four phases, and what makes them distinct?
LIDOW: The first phase is customer validation, where you go from having an idea to finding a customer willing to pay for your product or service. The second is operational validation. This is the phase where you deliver to the satisfaction of that customer and find more customers. The third phase is financial validation. Here you must demonstrate that the firm can create value in changing market and competitive conditions. In the fourth and final phase, the firm must be proficient in an innovation process through which it can acquire new customers as fast as or faster than they depart. By stage four, the firm should not be dependent upon the founder.
One of the big changes in the business as it evolves is the move from project-based work to process-based work. In the first stage, you are iterating a lot as you try to figure out exactly how your product or service can thrive in the market. Few ideas survive intact after contact with the customer or the supply chain. You are revising and refining. You are creating change. This is a project-driven stage because you expect a high degree of variability as you try to get things right. As your business matures from serving one customer to serving many, you need to adopt processes that decrease variability and increase efficiency. Processes, by their very nature, resist change. From Stage Three on, running the business isn’t as sexy as it once was. The same entrepreneur who was taking chances and making it up as he went along now has to shift gears and reward structure and predictability. It takes a discipline that many entrepreneurs lack, particularly those attracted to start a business as an escape from big companies with their strict hierarchies and processes. Other entrepreneurs feel that they won’t be needed anymore. The transition to Stage Three can be scary, but it is absolutely essential if you ever want to get to Stage Four.