The Founder's Leap: How to succeed with growth equity

This article is intended for software & tech founders who have bootstrapped their company and who have either taken or are considering taking growth equity capital.  

Drawing from a decade of working with and coaching nine bootstrap founders, I’m not convinced founders know exactly what they’re signing up for when they take on growth capital. Most investors pitch themselves as “founder friendly” - meaning they want to keep the founders at the helm. And while this is true, the transformation required of founders to successfully stay on top is more profound than most understand it to be.  

In fact, it’s my experience that the very set of skills bootstrap founders master in the first phase of the company run counter to the capabilities required at the next. That is, there is an inherent paradox for founders in mastering the “Chapter 2 skills”. Out of the 9 bootstrap founders I’ve worked for, only 4 have managed to keep their jobs (and two of these likely because they were minority investor transactions). 

Thus my attempt to outline a handful of ”disciplines” that are both essential to learn as well as challenging to master. While this list is not exhaustive, it is, I believe, directionally accurate. I’m eager for other perspectives and comments.  

1. Hiring, managing (and firing) a first-rate executive team 

Why it’s critical: Retooling your executive team is the foundation of inflecting a business at the growth equity round. While founders have typically hired a set of capable individuals, many managers & executives will need to be either replaced, upleveled or layered to make room for outside talent that has the skill and experience needed to unlock the next level of growth.  

Bootstrap founders must become excellent at identifying talent gaps and hiring and managing first-rate executives. While this sounds easy, attracting, recruiting and managing top-level talent is exceedingly difficult.  It will require help from a strong HR and/or recruiting leader and mentorship from your investors and advisors.  

Why it’s a challenge: The first reason bootstrappers struggle here is they are loyal to their existing team.  It’s hard to identify talent gaps and even harder to part ways with loyalists. Part of this is founders not knowing what “excellent” really looks like.  Many founders are not calibrated on talent and therefore miss critical opportunities.  

Additionally, founders may resist upleveling their team.  After all, it can be uncomfortable and intimidating to hire experienced operators who are going to bring new perspectives and challenge your thinking. Many founders lack the humility to hire and retain great talent.

2. Collaborative decision making

Why it’s critical: Succeeding after a growth equity round requires that organizations fundamentally change who and how decisions get made. Decisions must be decentralized for several reasons.  

First, decision making must be pushed down in the organization in order to move at the speed required to execute quickly (and at scale). Second, part of upleveling the talent in the organization is leveraging their knowledge and expertise. Founders will struggle to attract and retain talent if they don’t entrust managers to make the call.  Third, research has unequivocally shown that the best performing organizations cultivate a diversity of opinion, thought and experience. This necessitates a collaborative process.  

Why it’s a challenge: Founders find this transformation difficult because they are used to making decisions themselves. They’ve been successful because they consolidated decision making to a small group (sometimes just themselves) and built an organization around them that was optimized not for debate but for quick execution. Giving up decision making to a collaborative process is not only unsettling for founders, it’s much less efficient.  

 3. Financial Acumen

Why it’s critical: Taking on institutional capital requires that CEOs be versant in sophisticated financial planning and management. Many founders underestimate the amount of financial reporting needed for legal and regulatory reasons. But more importantly, as a business grows in size and complexity, it’s imperative CEOs understand the financial and operational underpinnings of the business. That as well as being able to run FP&A cycles that chart and track the future of the company. While it’s true that the CFO should lead this effort, CEOs need to be able to be an integral part of the process. 

Why it’s a challenge: Entrepreneurs and sole proprietors are trained on a much simpler financial picture: profitability and cash burn. Learning the new world of institutional investor financial metrics and reporting can be overwhelming. Further, growth equity CEOs need to be able to think about, plan and communicate on a 3 to 5 year time horizon. This level of planning and forethought (see next discipline) can be difficult and feel impractical.

4. The Strategic Planning Process 

Why it’s critical: Typically as companies mature it gets harder to grow using the same playbooks that got you there. At the growth equity phase, the levers of growth become more complex and varied. You need offensive strategies to steal market share from competitors, defensive strategies to keep new entrants at bay, strategies to expand your TAM and/or M&A strategies to create cross-sell opportunities. The number of strategic options proliferates and making sense of which one is right and what priorities you should have can be mind bending. 

Why it's a challenge: In early stage software companies the primary drivers of success are product-market fit and speed of execution. Founders survive by being nimble and executing efficiently. Further, they develop intuition and instinct in guiding their company.  

The growth equity strategic planning process can be a shock for founders. It involves multiple work streams such as conducting market research, organizing customer feedback, running financial scenarios, gathering stakeholder input… blah, blah, blah. To an entrepreneur, all of this reeks of corporate bureaucracy, red tape and wasted time.  But make no mistake, your board will want to hear more than your "gut instinct" when it comes to agreeing on a strategy and plan.

5. Operational rigor 

Why it’s critical: As a company grows in size and scale not only do the operational challenges multiply, they become even more critical to success. As companies add employees, layers of management and scope of initiatives, things can quickly grind to a halt. Further, the strategic priorities coming out of your planning process require a level of understanding and coordination across your function that can be exceedingly challenging.  Operational excellence is existential at the growth stage and almost every process and system needs to be rebuilt for scale. 

Why it's a challenge: Not surprisingly, founders typically bristle at the process and forethought required to level-up operational rigor.  Goal setting processes, escalation paths, project review cycles, cross-functional committees feels antithetical to the agile approach that brought success in the early stages of the company. Building systems, reporting, and communication norms that create operational excellence is burdensome for even the most mature organizations and CEOs.  It’s a lot to expect for a bootstrap founder.  

Concluding thoughts

If you’re a founder and have gotten this far in the article, I’d love to hear your thoughts. I admit that I’m stereotyping the prototypical founder here, and I don’t mean to underestimate the founder’s ability to transform themselves as they take on growth equity. Then again, my first-hand experience having worked with 9 different bootstrap founders is that the transformation in how you lead and manage the company is more profound than you might realize. All that said, I have seen founders succeed.

I’ll conclude by observing that the common characteristics which these founders possessed were… humility, self-awareness, and a strong appetite for personal and professional growth. I believe that any founder who embraces the journey with these qualities can not only survive but thrive during the growth equity phase.