Founder liability: The cost of success in business

by | 12 Mar 2023

Founders are often the driving force behind a successful venture. As I outlined in the common mistakes when building a sales team article, effective founders are passionate, authentic and driven. You can read the full article here.

This is why they chose to build a business in the first place.

However, as the business landscape changes or the company reaches its next stage, the founder may become a liability.

In my experience, this is often due to the founder’s personal attachment or inability to be progressive.

Protective instincts

First-time founders can be compared to first-time parents, as they both need to learn to balance their protective instincts with allowing their “baby” to grow and develop.

Just as new parents may be inclined to “mollycoddle” their child, similarly new founders may be tempted to micromanage every aspect of their business. This can stunt its growth by not being progressive.

Recently we were engaged by a VC fund to help their portfolio company that was struggling with financial and operational challenges.

After reviewing the financials, we noticed that a significant portion of expenses went towards employee salaries – certainly not uncommon in technology businesses.

We uncovered that the company had doubled its staff size from 12 to 24 employees within six months.

The founder had been eager to expand the team quickly to meet increasing demand. However, in the absence of a CFO, they failed to consider the financial implications of this decision.

Although the new employees were hired rapidly and in quick succession, the founder neglected to account for the essential ramp-up time required. New hires need to be properly onboarded and given clear direction and objectives, including OKRs.

This resulted in the company experiencing cash flow problems and was at risk of insolvency due to its inability to meet financial obligations.

The founder’s imprudent decision to hire without proper planning caused severe strain on the company’s resources and profitability.

The need for objective decision making

To avoid short-term layoffs, we recommended freezing spending and securing a bridging loan.

As short-term layoffs would increase costs and negatively impact remaining employees. As a result, the founder was advised to take immediate action for cash flow relief.

The founder chose not to act on our recommendations, instead believing that the issue would resolve itself.

Unfortunately, this decision proved to be costly, which forced the Board to empower us to take action to protect the business.

Despite our efforts, negative consequences ensued, including layoffs that could have been avoided if the founder had taken action earlier.

This serves as a lesson that proactive and objective problem-solving is crucial for avoiding negative outcomes in business.

Signs of becoming a liability

If you are a founder or working with a founder who is struggling to progress, there are some common signs to look out for:

  • Losing focus: The founder may become distracted by personal issues or other ventures, leading to a lack of focus on the company’s goals and vision.
  • Refusal to delegate: As the company grows, it becomes increasingly important for the founder to delegate responsibilities to other team members. A founder who is reluctant to delegate can stifle growth and create bottlenecks in the company’s operations.
  • Refusal to change: A founder who is resistant to change may cling to outdated processes or ideas, preventing the company from adapting to a changing market.
  • Inability to keep up: As the company grows, the demands on the founder’s time and energy increase. A founder who is unable to keep up with these demands can become a liability to the company’s growth.

Navigating the tricky situation

It’s time to take action. Here are some steps you can take to support the founder:

  • Have an honest conversation: The first step is to have an honest conversation with the founder about their role in the company. Be clear about the issues you have observed and give specific examples of how their behaviour is impacting the company’s growth.
  • Offer support: Founders may face challenges that impact their performance, whether personal or professional. Offer external coaching and guidance to help address these issues.
  • Explore alternative roles: Consider exploring alternative roles if a founder can no longer fulfil their role as a CEO. They can shift to a strategic or advisory role or focus on a specific area that suits their strengths.

Final thoughts

Dealing with a founder who has become a liability is a tricky situation, but it’s important to address the issue head-on.

By recognising the signs and taking action, you can help the founder get back on track and ensure the continued growth and success of the company.

Remember, the founder is an important asset to the company, and it’s worth investing the time and effort to help them overcome any challenges they may be facing.

What next?

If you’re struggling with a founder or business that needs assistance, we’re here to help you.

As independent advisors, we can coach and guide you to overcome your challenges and help your organisation achieve its goals.

Contact us today to learn more about how we can support you.

Mitul Ruparelia

About Mitul Ruparelia

Mitul Ruparelia is a Managing Partner of Fortius Partners, a growth transformation partner for private equity and venture capital backed businesses. He has over 20 years of growing profitable, sustainable business units, defining strategy and leading sales, marketing, product, innovation, finance, raising investment and people management for established, underperforming, and scale-up businesses. He has helped companies scale to valuations of over $1 billion.

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