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Derek Lidow on Mastering the Four Phases of a Successful Startup

The former entrepreneur analyzes the leadership skills that new companies need for long-term success.

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.

As your business matures, adopt processes that decrease variability.

S+B: What characteristics in the entrepreneurial leader make this possible?
LIDOW:
There are five skills that the entrepreneurial leader must be able to demonstrate consistently in high-stress situations: self-awareness, facility with the basics of the business, relationship building, motivation, and leading change.

If you are self-aware, you know yourself and have a good sense of how others see and react to you. This is the emotional intelligence that Daniel Goleman has written about. You never stop being you, but you have to know how to be the version of you that is right for the business and the people in it. I think parenting is a good analogy: In a child’s early years, you provide a lot of protection, nurturing, and direction. As a child gets older, you expose her to more of the world. You let her learn from her mistakes and discover things about herself. You still provide discipline and guidance, but the goal is to have your child develop self-confidence and independence. Eventually, your child grows into an adult. She doesn’t need you in order to survive. This doesn’t mean she doesn’t love you or want you around. It simply means she is self-sufficient. As an entrepreneur, you have the same goals for your business as it matures.

Knowing the business basics may seem a no-brainer, but I have met entrepreneurs who did not have a good handle on cash flow or inventory management, for example. They might love the product and be great with customers, but they aren’t facile with what it takes to run a successful business. You have to learn how the business works. Relationship building is critical because no entrepreneur who seeks to build a business of any scale can do it alone. This pops up in tech businesses where the founder may be a great coder but also a loner. If people—be they customers, suppliers, or employees—do not enjoy working with you, they won’t. There are always alternatives.

Motivation is about what drives you and the people who work for you. You will have choices to make as the business grows from stage to stage. Your motivations will drive your decisions, so you had best be as honest about them as you can. Further, every successful startup goes through rough patches. If you aren’t crystal clear about why you are on this path, you will have difficulty pressing on when times get rocky. Finally, leading change is critical because market conditions and customer demands inevitably change. If you can’t lead your business to adapt, it will go into decline and eventually die.

An entrepreneurial leader does not have to be best-in-class in each of these skills but must have mastered them to the point that she is beyond simply competent.

S+B: Are the four stages and the leadership skills you’ve identified universal? Are they the same in Beijing as in Boston?
LIDOW:
Based on all that I have seen, the answer is yes. There may be different cultural interpretations of how you build good relationships, for instance, but relationship building will always be essential to success.

S+B: Leadership is about achieving shared objectives. You state that there are only three types: cooperative, competitive, and retreating. What are the differences?
LIDOW:
Every relationship of two or more people is based on shared objectives. They needn’t agree on how to bring it about and may not both take action to effect the change. Cooperative relationships are those where both parties agree on how to share the benefits and costs of creating change. Competitive relationships, by contrast, are those in which you don’t agree on how to allocate costs and benefits. You have differing ideas of the ideal outcome. Retreating relationships are those in which one party doesn’t care about how the benefits are shared but is supportive of the change and willing to bear some of the costs.

This framework may seem foreign at first, but it really helps you understand the dynamics in your relationships. Every emotionally satisfying relationship has a mix of cooperative, competitive, and retreating shared objectives. I haven’t found a fourth category yet.

It’s a common mistake to think of cooperative as somehow better than competitive or retreating. Cooperation on everything takes a lot of time and attention—and may not always give you the best result. Each type can be good or bad depending upon the situation. It is your relationship to the objective, not the other party, that matters. For example, you and I may have different ideas of how best to position our new service. We can have a competitive relationship and test our idea to find out which one really is better, and the business wins so long as we avoid adversarial conflict. Or I may take a retreating position by delegating marketing to you so that I can focus on financial matters. Assuming that we each know what we are doing, the business wins from our dedicated focus on those areas. If we cooperated or competed on both, we’d get less done.

Entrepreneurial leaders who are good relationship builders understand the dynamics of the three different categories of shared objectives and how to optimize the mix. Each one is a strategic choice.

S+B: It seems that entrepreneurial leaders must be open to being wrong. Is that true?
LIDOW:
Max Levchin and Peter Thiel, the founders of the online payment system originally called Confinity, are two of the entrepreneurs I’ve studied. PayPal, formed when Confinity merged with X.com, was the fourth iteration of their business idea. They kept getting it wrong—repeating Stages One and Two—until they got it right. It isn’t about preserving what you scratched on the back of a napkin. It is about meeting the needs of a sufficient number of customers in a way that is financially viable and, ultimately, sustainable. Levchin and Thiel aren’t unique. It is highly unusual to get a business just right from the beginning. Most successful serial entrepreneurs I know use an effectual strategy—iterating until they find the sweet spot—rather than a prescriptive linear plan.

S+B: In the book, you say that entrepreneurial leaders need to be selfish enough to be selfless. What does that mean?
LIDOW:
All entrepreneurs are selfish, and it is critical to understand your motivations. Some people want to get rich. Some want to be their own boss and call the shots. Others want to change the world. These are all selfish goals; they are all about you. Each of these is legitimate, but they are not enough to create a successful business. Being selfless means being dispassionate enough to do what is right for the business even if it isn’t your personal preference. You put yourself in service of the business, not the other way around.

One of the more common, and tricky, situations I have seen is a business that has reached the point where the founder is no longer the right person to run it. You need professional managers. Perhaps it is an outside CEO with experience scaling an enterprise in your industry. Giving control of something you started to someone else can be incredibly hard for an entrepreneur. If you are constantly asking yourself how the business can deliver the most value and being brutally honest about the answer, you are being selfish enough to be selfless.

S+B: If you had a theoretical 1,000 hours to devote to starting a new venture, how much of it would you spend on developing your leadership strategy versus putting together the business plan?
LIDOW:
I would spend 75 percent of the time on my personal leadership strategy and 25 percent on the business plan. People spend far too much time on business plans. If you don’t get self-awareness, passion, and motivation right, no business plan will help. Take an inventory of your strengths and where you need to develop. Use mentors to gain access to the wisdom of experiences beyond your own. Different people have different perspectives on you and the business. Listen and learn from them. It is your opportunity to improve and increase your chances of success.

Author Profile:

  • Eric J. McNulty is the codirector of research and professional programs at the National Preparedness Leadership Initiative, a joint program of the Harvard School of Public Health and Harvard’s Kennedy School of Government.

 

 

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Derek Lidow on Mastering the Four Phases of a Successful Startup