Leading a Startup in Stage Four: Self-Sustainability

Many entrepreneurs and stage-three top executives feel no pressure to move on to stage four of enterprise maturity -- self-sustainability through innovation. They are enjoying great success; the existing business is thriving, and most stakeholders are content. Over time, however, customer preferences change, the terms of competition shift, and today’s leading businesses become tomorrow’s also-rans. Unless the enterprise can renew itself through innovation, it too will eventually wither and die.

Renewal can come in many forms: new types of products, new business models, the opening up of entirely new markets, or major leaps in existing capabilities that set new product or service benchmarks. But renewal is tricky and many otherwise successful entrepreneurs and leaders fail here. They fail because they cannot resolve the inherent conflicts between producing something very efficiently, as required in stage three, and accepting the inherently inefficient and risky experimentation required in stage four. If as a founding entrepreneur you are still around after stage three -- a big if in most cases -- here’s what you can to do maintain that delicate balance:

Beware of complacency.

Several years may elapse between the completion of stage three and the need to embark on stage four. During that period of growth and consolidation you begin to reap the rewards of your hard work. But you and your colleagues may also be developing a false sense of security, lulling you into putting off innovation that goes beyond merely tinkering at the margins of your product or service. Although some enterprises can survive for a long time by harvesting value from a very slowly evolving business, most can’t. The day will come when you will need to shake off the organization’s lethargy and lead change. Be vigilant and don’t let that day come too late.

Create a process of innovation.

Renewal doesn’t occur spontaneously. It is a process like any other, requiring resources, structure, and governance. (In addition, you may also import innovation by acquiring innovative enterprises and preserving their cultures.) Fortunately, recent years have seen tremendous interest in the subject of innovation. There is a vast and growing literature about it and many examples of innovative companies that have found ways to institutionalize it alongside the existing business.

Balance innovators' intrusions and producers' prerogatives.

Ensure that the enterprise's culture is equally supportive of innovators and the “producers” who want to improve efficiency. Make it clear that you value both the producers and the innovators and that turf wars and sabotage won’t be tolerated. In my experience, trouble is most likely to come from the producers -- successful managers who are adept at improving processes, not running risky, open-ended projects. They may feel threatened by innovators and they have many ways to make it look as if the innovators are struggling. On the other hand, innovators can be contemptuous of managers they regard as uninspired and standing in the way of the future.

Be evenhanded and open.

Establish a process for allocation of resources that is fair and transparent. The resources required to support innovation decrease the resources available for other areas. Competition for resources -- a point of contention in every enterprise -- can be especially fierce in this case. You can’t make that competition go away, but you can make it less destructive by establishing a defensible process, tied to long-term strategy and agreed upon metrics and milestones, for managing the trade-offs between the existing business and innovation efforts.

Customize HR practices to help maintain balance.

Rewards, incentives, and performance management should be at least partly tailored to encourage the distinct behavior and results you want from producers and innovators. For example, to the extent that incentives are tied to revenue, they will penalize innovators, especially in the early stages of their efforts. In addition, career tracks must be modified to provide equally motivating opportunities for those innovative people who want to change everything and those enormously productive people who want to improve what they already do.

Back to the future.

Founding entrepreneurs who are still around for stage four will find its challenge reinvigorating -- innovation is fun. For many entrepreneurs stage four is a return to their roots, to the days of dreaming big and inspiring people to sign up for the vision. If you are one of those few who have survived, you will now find yourself with some considerable strengths that you previously lacked: You have developed the essential leadership skills that typify successful entrepreneurs. You understand both the project orientation needed for innovation and the process orientation for needed for the existing business. Your people have seen you successfully lead major transitions before. They know you can do it and they will follow you more enthusiastically than ever. And you know you can do it and therefore lead more confidently than ever.

The wages of persistence are mastery.

When you complete stage four you have a fully mature, sustainable enterprise capable of maintaining an efficient and constantly improving existing business while reliably innovating. This marks the end of your entrepreneurial journey -- a journey that can take anywhere from three to 20 years But no matter how much or how little time it takes, you will have traveled a great distance from the big dreams of stage one, to the challenge of getting a basic business up and running in stage two, through the hard slog of stage three and the delicate balancing act of stage four. You will have arrived, and -- as a consummate leader -- will be fully ready for your next departure.