Entrepreneur, Author, Professor, Global CEO

November 8, 2012

Entrepreneurial Leaders Understand Trees

I get a steady stream of visitors coming to ask me for advice on entrepreneurship. I am constantly meeting with Princeton students, local entrepreneurs, and entrepreneurs from around the world that happen to be visiting the area. I get all sorts of questions but most of them fall into the general category of, “what should I do next?” This is a tough question to which to give a specific answer because every situation is so different. But understanding a bit about how enterprises mature narrows down what sort of questions I need to ask in order to give decent enough advice that entrepreneurs keep coming back to ask for more.

Entrepreneurial Leaders (ELs) need to understand how enterprises grow and mature. Enterprises need very different things from their leaders at different times. What an entrepreneur was doing well in one phase to grow their enterprise may be the wrong thing to do just a few weeks later once that phase ends. Almost always the question, “what next?” gets asked because the entrepreneur does not realize what their enterprise wants from him.

Forgive me for sounding a bit like Chauncey the Gardener in Being There but Hurricane Sandy has made me think of trees. Here in Princeton the biggest impact of the storm came from all the trees that have been blown over – onto power lines, cars, and even people. Trees make a decent, albeit very general, analogy for the growth of an enterprise. Trees grow in a certain order, first a seed, then some roots and the trunk, then the branches and the leaves. You cannot grow a tree naturally in any other order. If the roots do not grow out under the ground while the branches are growing out into the sky, then the tree will topple over and die. Similarly, if an EL doesn’t grow their enterprise in an orderly and balanced fashion then the enterprise will be stunted and its foundations weakened. And this will make the entire organization vulnerable to the slightest disturbance in the customer base or reduction in economic wellbeing.

Ideas grow into startups, which grow into mature enterprises, in four distinct phases. Each phase requires very different leadership, and every entrepreneur strains to make each transition.

Phase One: Getting the Idea Right, Germination

A seed cannot make a tree unless it starts to germinate. Similarly, even the best startup idea cannot begin to be turned into a tangible enterprise unless is transforms into something actual customers want to buy. The fuel for the transformation is provided by the passion of the founder and his small dedicated team along with whatever money they have available. Unfortunately most ideas, like most seeds, fail to take root. Fortunately we now understand the entrepreneurial germination process much better than before and good practical advice is widely available to help make it through this Phase. The ‘Customer Discovery Process’ that Steve Blank describes in his Four Steps to the Epiphany is an example of an excellent step-by-step process for making it through this phase. Paul Graham’s Y Combinator process is another excellent prescription, as is the one that Eric Ries describes in The Lean Startup.

At the end of the germination process the entrepreneurial idea has transformed itself into a product or service that some actual customers commit to buy. But as soon as you have a product that customers are truly interested in buying the nature of the work, and the leadership required, shifts dramatically.

Phase Two: Product Viability, Becoming a Sapling

As soon as you convince some customers to buy your product or service you will need to figure out how to deliver it reliably, not just a couple of times. You will also need to simultaneously find new customers. This phase requires putting into place rudimentary capabilities to produce and deliver your product and to find and satisfy customers. This phase gets screwed up very, very often because entrepreneurs do not understand the basics of how enterprises work and they do the wrong things to set up their rudimentary capabilities. I will write more about this in future blogs.

Phase Three: Operational Effectiveness, Growing Strong

Many entrepreneurs feel disoriented and demoralized by the time they enter into Phase Three despite their success in being able to satisfy real customer with real products. The needs of the enterprise become overwhelming as customers demand that you become more effective in delivering what they want. What the enterprise did to find and deliver its product crudely but reliably to its first wave of customers must be rethought, redesigned, and rebuilt in order to deliver it effectively to all the new higher expectation customers that could want it. The objective of this Phase is to put in place robust capabilities to sell, to deliver, to hire people, to do the accounting, to purchase things, … – everything required to enable the enterprise to grow as needed without the intervention of any single person – even the founder, and specially the EL. This exhausting rebuilding is also required to remain competitive. Many entrepreneurs stunt the growth of their enterprise at this point because they do not want to give up being involved in some of the routine activities that go on. This stunting weakens the enterprise, making it vulnerable to being preyed upon by competitors. In venture backed companies founding entrepreneurs are often replaced as CEO in Phase Three if they are still around. I will write more about Phase Three in future blogs.

Phase Four: Self-sustainability, Innovation

Most entrepreneurs, and even investors, forget about Phase Four because they have already bailed out or they are too exhausted to make it completely through Phase Three. A tree will die unless it can replace the branches, leaves, and bark that fall off. Similarly any enterprise that cannot develop new types of products and capture new customers will die as some customers and products no longer generate any business. For an enterprise to become self-sustainable it must create a successful process of innovation. If the founding entrepreneur is still around (having survived this far, the entrepreneur is now almost certainly an EL) he will find this challenge reinvigorating – after all innovation is fun! Creating a process of innovation is nonetheless tricky and many otherwise successful entrepreneurs and leaders fail here. They fail because they cannot resolve the inherent conflicts between making something very efficiently, as required in Phase Three, and accepting the inherently inefficient and risky experimentation required to be innovative. And yes, I will write more about this too in future blogs.

The leadership demands to make it through each Phase are completely different. That is one reason why there are so few Entrepreneurial Leaders, entrepreneurs are completely unprepared for these four big challenges. That is why my answer to “what should I do next?” is usually some variation on, “take these actions that are required to finish the phase your enterprise is in now while learning what you’ll need to do in the next phase.”

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