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What Happens When Founders Are Fired

Replacements face a daunting task.

Jeff Hyman

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When a founder steps down from the company following its acquisition – as David Karp recently did at microblogging site Tumblr – it creates an urgent need for a leader who can bridge two worlds: digital native and corporate. It’s a rare combination that, in my studies of “rock star” talent in high demand these days, won’t be easy to find: a leader who can guide the company forward and, equally important, prevent other key people from leaving.

Entrepreneurial-minded founders don’t enjoy spending their days in meetings, corporate presentations and strategy reviews. This talent tends to be action-driven and hard-headed and is likely to lose patience with playing the corporate game. (I know from personal experience, having left six months after my first company was acquired.)

Karp’s departure from Tumblr, which he founded when he was only 20, follows a well-established pattern. Harvard Business School research has shown that founder-CEOs are often replaced precisely because their companies are successful. While Tumblr’s data is closely guarded, its revenue is believed to be substantially in excess of $20 million.

Related: 4 Lessons From The Pivotal Group Founders On Growing And Disrupting All At Once

On a broader level, Karp’s decision to step down is part of the scope of leadership challenges that occur as entrepreneurial firms transition from one phase to the next. Founders who are so used to doing everything themselves – product creation, sales, pitching to investors, managing stakeholders – often need support in knowing how to navigate these transitions. That’s why they need “hugs and kicks,” as I call it: Tough love and guidance from board members and advisers who help them stay motivated and understand the reality of what they’re facing.

That might have changed things for another founder, John Schattner of Papa John’s, who recently stepped down from the CEO role, while continuing as chairman, after linking a sales slump at the company to NFL protests during the national anthem. The company later apologised for his comments.

Although it’s well-known that startups benefit from having a board (typically, outside investors will insist on this), many entrepreneurs delay bringing in advisers. When a startup is successful, there’s little incentive for the founder/CEO to undertake the time-consuming process of recruiting board members. Then there is the need to compensate board members in some capacity, which may mean giving away equity stakes, which founders tend to guard jealously.

Trusted advisers, though, can make all the difference. As a serial entrepreneur, I was fortunate at the age of 27 to have management consultant and bestselling author Patrick Lencioni as my executive coach – it was literally life-changing. Now as an adviser myself, one of my key points for entrepreneurs (and for employers, in general) is about finding the right talent – especially those who are stronger in areas where the founder and other key leaders are weak (for example, recruiting a strong No. 2 as a chief operating officer). I’ve found it’s much more efficient for leaders to focus on their strengths than to expend so much energy trying to shore up their weak areas.

While some companies such as Google and McKinsey are strong recruiters, most employers are “sloppy buyers” of talent. Some 50 percent of new hires don’t work out, a degree of inaccuracy that is inexcusable for anything in business. Compounding the challenge at digital/internet companies, it’s a seller’s market for talent today, particularly for highly in-demand specialties such as artificial intelligence. The most qualified “rock stars” can basically name where they want to go, what they want to do and how much they expect to earn.

Related: Listen And Learn: Why Podcasts Aren’t Just For Start-up Founders

When the talent market gets really tight – as it is now, the tightest we’ve seen since 1999 – employers often default to hiring someone who is deemed good enough, rather than operate with an open position while continuing to recruit the right person. The problem is that hiring a “warm body,” who is only a B- or C-player, undermines team performance. The existing rock stars will be the first to leave (and will find themselves in demand), because they want to be part of a winning team. It seems counterintuitive because maintaining a vacancy – holding out for a top performer – means the slack must be taken up by everyone else. But, the rock stars on the team will love it because they know their employer is being highly selective.

For entrepreneurial firms everywhere, the challenge is always building a pipeline of talent: Qualified candidates need to be developed ahead of time to succeed key players in leadership roles, as well as to manage functions such as sales and technology. No matter how many other “priorities” entrepreneurs have in growing their business, having the right talent must always be at the top of the list. Without the right talent, even leaders with the best ideas will be severely hamstrung in executing strategy.

This article was originally posted here on Entrepreneur.com.

Jeff Hyman is author of the bestselling book Recruit Rockstars, a professor at Kellogg School of Management, host of the 5-star-rated Strong Suit Podcast, and chief talent scout at Strong Suit Executive Search.

Leading

4 Common Myths About Leadership That Can Hold You Back

Alignment with your values and belief systems is the foundation of becoming an effective leader.

Malachi Thompson

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To be a great leader in today’s world, being a brilliant knowledge expert or technician is no longer enough. Even harder is trying to learn the golden rules of the wrong and right ways to be a great leader. The amount of content spouted in countless books and resources is overwhelming let alone confusing.

To be unstoppable leaders for our businesses and our people, tuning out from the noise and distractions potentially misguiding us is pertinent now more than ever. Pay attention to any presence of these four myths and make guiding your people a more soul-enriching journey that they and you will want to continue well past your leadership term’s end.

Myth 1: Great leaders are highly ranked individuals

Richard Branson proves a classic example of how great leaders can get to the top without having ivy-league school connections and astounding qualifications. Having had enough of struggling at school, Branson dropped out of the highly reputed Stowe boarding school at the age of 16 to start a magazine called Student. The first publication sold $8000 worth of advertising. We all know the Virgin story from there on. Then there are the likes of Rachael Ray, food industry personality whose empire has amassed a $60M fortune without her having any culinary qualifications whatsoever.

There’s a common entrepreneurial DNA that runs through the veins of such leaders. An avant-garde vision, tenacity and patience seem to be common underlying themes for many. For others, it’s about making sacrifices and taking risks that could cost their life to serve a cause extending far beyond serving their own needs.

Related: 22 Qualities That Make A Great Leader

By publicly speaking out against the Pakistan Taliban’s extremist rulings, one of which of was to prevent females from accessing education, Malala Yousafzai became a target. At 15 years of age, a masked gunman boarded her school bus and shot her in the head. She survived and many months of rehabilitation spurred her determination to fight for every girl to have the opportunity to attend school. The work she achieved through establishing the Malala Fund with the undying support of her father, earned her the Nobel Peace Prize in December of 2014.

Whether from desperation or a happy place there is always the genesis of a passion driving a persistence to go against the grain and to continue the fight. Often there’s no formal training, qualification or certification in sight.

Myth 2: Following a certain checklist of behaviours will make you a great leader

The ‘fake it ‘til you make’ adage has become a common throw-away phrase consultants and coaches spout as a means to quickly build confidence. Following advice to merely emulate the behaviour of those you admire and respect can pose grave risks, especially when you become a leader by default as opposed to by your own audition. Smart teams can smell falsehood and copycats a mile away. Your integrity will often be scrutinised and your jury will constantly evaluate the values and principles you lead by. One foot wrong might end your leadership term just as quickly as it began and not necessarily by your team’s choosing.

Imagine being tasked with driving credit card sign-ups yet you yourself struggle to make repayments on your own overdraft. How long can you resist your inner conscience? You’ll feel the tug every time you invite a customer to sign up and at every request to your team to follow suit. At some point, you’ll be struggling to face yourself see in the mirror.

This article was originally posted here on Entrepreneur.com.

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9 Ways To Get Employees To Buy Into Your Vision

Your business is your dream come true, now it’s time to include your employees in your vision to drive future success.

Nicholas Bell

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Your vision statement is the foundation of your business. It is the baseline against which all strategic planning is assessed and the benchmark against which all results are measured. However, as important as it is to have a vision when it comes to business success, it is equally important to get your employees to buy into this vision to ensure that success.

Here are nine ways to get your employees to buy into your vision by making it their dream, as much as it is yours…

  1. It must be believable – Your company vision needs to be within the realms of possibility otherwise people just won’t believe in it. It must be steady, achievable and relevant.
  2. It must be inclusive – Employees need to see how they can play a part in achieving this vision to make it relatable and inclusive. If they don’t understand what the business does, they won’t care how well the business does.
  3. It must be reinforced – Talk about your vision all the time. Don’t assume everybody has read it or is familiar with it as new people may not have seen it and older people may have forgotten. Constant communication is critical to ensure everyone is, literally, on the same page.
  4. It must be transparent – Make sure your communication around your vision is open and clear. Talk about it with clients, with all staff members, at all meetings and keep on talking until everyone understands it. When a vision is tangible and accessible it is far more achievable than when it is ethereal and vague.
  5. It must be practical – Don’t make flamboyant statements that are almost impossible to achieve like, ‘We will be number one in X!’. Be practical. It doesn’t matter if you’re not number one, it does matter  that  your vision is practical.
  6. It must be shared – Connect people’s careers to the vision by creating opportunities for them. Show them how the work they do is tied back to the vision and the business. If the business is only about profit and customer, then employees often don’t see how they fit in or why they are important. Create opportunities for them and they will be inspired to achieve your vision.
  7. It must be people-centric – People make up the core of your business. It is bigger than just one person or one idea. So, give them something to aspire to with a realistic, practical and human company vision.
  8. It must have purpose – Embed your vision and its values into the way you do business. The way you treat your employees and your customers and the choices you make should all reflect your vision.  Take it beyond just ‘We want to make money’ and show how your vision positively affects your community and others.
  9. It must be visible – Put your vision on doors, in emails, on letterheads, in proposals. Show what you stand for at every opportunity. Employees need to feel that there is a cohesive plan for the future. This will not only drive engagement but it will keep them steadfast when times get tough – they believe in the ship too much for it to sink.

Related: 22 Qualities That Make A Great Leader

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What’s Your Number? How To Unpack Company Valuations

Business is booming. Investors want in. But how do you put a price on the value of the company you have built with your own hands?

Louw Barnardt

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Company valuations is such a hazy part of the scale-up journey of a private company. Putting a price tag on a business is both art and science. At the end of the day, the number that makes the headlines (if ever disclosed) will be where willing buyer and willing seller meet.

But how do you , as business owner,  go about setting your asking price? Before approaching investors, it’s a good exercise to determine your own valuation range for the business. Choosing the right valuation method is the first big question. The answer has many parts to it, but the most important driver is the stage of the business.

Let’s look at some of the most commonly accepted valuation methods in our market:

Earnings Multiple

Applicable stage: Established, profitable companies

Listed companies, institutional players and private equity investors normally invest in a company for its cash flow profit that can contribute to their portfolio income. More often than not, companies will be valued based on their current earnings (bottom line profit after tax).

This method can only be used for companies that consistently make a profit. A multiplier will be chosen based on the company’s perceived risk. Younger, more risky businesses will likely have lower multipliers (as low as 3 and 4) and high growth, well established, lower risk companies will get higher multipliers (8-15).

Sometimes small adjustments are made to current year earnings (like non-standard, non-repeating income statement items) after which the valuation is set at Earnings times multiplier equals company valuation.

Related: 7 Factors That Influence Start-up Valuations

Discounted Cash Flow (DCF)

Applicable stage: Post-revenue start-ups, growth companies and established businesses

The most commonly used method in practice, the DCF method argues that a company’s value is determined by the future cash flows that it will yield to investors.

The starting point is creating a five to ten year cash flow forecast for the business. This is no small feat. In order to create a full financial model – income statement, balance sheet and cash flow statement – for the next decade requires a lot of work, both from a strategic and technical perspective.

Investors love this model because if forces the owners to put a clear strategy and expansion plan for their business into numbers. It will include dozens if not hundreds of assumptions – all of which can be scrutinised for reasonability. The result of financial model will be five to ten years’ worth of projected cash flows. These amounts are then discounted to present value at a discount rate that reflects the company’s risk and expected cost of capital.

The sum of the discounted future cash flows plus a terminal value (that represents the value after the five or ten year period of the model) then represents the valuation of the company after some final small adjustments for things like existing debt in the business.

Revenue Multiples

A revenue multiple valuation approach is focused on the market for similar businesses and is underpinned by your company’s current turnover. It seeks out the sales price of other similar companies in the country or worldwide, adjusted for size, stage and market differences.

A company that sold for R100 million at a turnover of R50 million would have a two times revenue multiple (valuation/revenue). If the average revenue multiple for similar companies is in a certain range, this multiple is then slightly adjusted and applied to your business.

If the average sale in your industry has been two times revenue but you are growing much faster than the average with a better competitive advantage, you can argue that two and a half times revenue is a more applicable number for your business. Revenue multiples are often used as a reasonability check in the market for the current asking price.

Related: Why Start-ups Like Uber Stumble When They Scale

Other methods

Most established companies are valued using one or a combination of more than one of the above three methods. At start-up stage, there are a number of other methods like Cost to Replicate or the Scorecard Method that early stage investors look to. When a company is simply in too early stage to practically value it, seed stage investors would also consider SAFE Agreements (Simple Agreement for Future Equity) – an instrument that determines that the percentage of the company the investors are buying with their investment. This is only determined when the Series A round is raised at a future date and under certain conditions, generally at a discount to the price the series A investors are paying.

Company valuations are complex. Many of the above technical factors play a role. A lot of it also comes down to the salesmanship of the owners and the negotiating capabilities of the parties. In ‘How Yoco Successfully Secured Capital And The Importance Of A Pitch’, the Yoco team speak about the importance of the right approach in their recent R248 million fundraising

Don’t go into this process without seeking some kind of expert advice. The price of the wrong valuation is simply too high. Make your numbers and your arguments bulletproof and you will be on your way to defending a strong and exciting valuation for your next raise!

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