A firm develops because the founder and entrepreneur can sell and win business. The firm then grows turnover. The entrepreneur sells, makes goods, delivers services and does everything needed to satisfy customers. Of course, there comes a point when the entrepreneur can no longer cope as a sole-trader. He or she must employ.
But it’s the personal characteristics of those employees that matter. This blog charts a typical SME’s growth as it evolves along a trajectory known as ‘the theory of the firm’1. We argue here that in many cases those from Generation Y have a huge role to play, forming a cadre of junior leaders. It’s possible that Gen Y solves entrepreneur divestiture problems so common today as entrepreneurs search for exit strategies.
To minimise her risk, the entrepreneur typically first secures the services of contractors. Whilst she has to pay them more than staffers, she can dispense with their services at an instant. There is therefore, a false sense of security that if things go bad and the business dries up, the entrepreneur can regress to sole-trader again without loss. It’s false because the converse is also possible – the business might increase and the contractors might up and leave at a whim. Under this arguably more likely scenario, the entrepreneur is left stranded with lots of business and no one to deliver it. A company reliant on contractors is in a position of instability.
At some point the entrepreneur must bite the bullet and recruit staff. That way, a future can be planned.
Typically, the entrepreneur initially recruits low-level operatives – people to do the work. With good growth, the firm then comprises the entrepreneur and, let’s say, 10 staff – 10 operatives like social media gurus in a marketing agency or software developers in a software services firm. Those 10 are sure to be good indians but are unlikely to be good chiefs.
Many firms comprise an entrepreneur at the top and a plethora of doers with no one in between.
Tough at the top
This is a tough time for entrepreneurs. Typically they’ve not been trained for this conundrum. They’ve never managed. They are good at wining business but not in mustering groups of employees in a sensible structure to get the various jobs or projects done. Much of the foundation-building ‘HR’ stuff gets missed. Delegation is done, but it’s often accompanied by micro-management by the entrepreneur.
The most difficult decision for entrepreneurs is determining what they actually want from life and from the business. Many things are possible at this point. They can embrace management studies and learn. Or they can appoint others to run parts of the business, with themselves as conductor and policymaker. Or they could spread their risk and invite others in at the top.
Appointing others needs planning and takes time. It’s not something that the entrepreneur can do at a whim when suddenly one day they decide they want out.
Much of the problem for the entrepreneur is the degree to which they still want to do their old job – evangelising about the products and services, travelling the patch and convincing would-be customers to buy. Having done it for what seems like forever, it’s what they know. Change is tough. And managing people is tough. Often the inclination at this point is to appoint a senior manager to manage the people – at least that removes one of the difficulties. And with that the entrepreneur feels that she might just be able to engineer herself out of the business, leaving someone else to manage, while she owns.
So is there merit in this strategy?
Senior manager option
There is a popular presumption that anyone can run a business – it’s why accountants head up a large proportion of the UK’s firms and that’s part of the UK’s economic problem. Entrepreneurs often miss the point here – it was their detailed knowledge of the technics of the business that convinced customers to buy. It was their detailed knowledge of the technics of the business that had their staff follow them and heed what they said. Technicians – those steeped in the technical aspects of the business – make the best salespeople. Technicians understand the business and hence make the best decisions about investment. Technicians are best at piloting the firm’s future. Bringing in a management generalist as a pen-pushing overhead is unlikely to yield the next phase of growth.
So arguably it’s someone steeped in the business that’s wanted. Unfortunately however, searching for someone with knowledge of the market and the business and with management competence too is going to be tough. After all, if anyone has these competencies in abundance, they’d likely already be high up in a firm or have started a firm themselves. They’d be unlikely to be looking for a role in an SME reporting to an entrepreneur while herding a gaggle of doers.
It’s also worth noting at this point that anyone with such skill and knowledge would likely command a significant salary. That’s often a sticking point. The assumption by many entrepreneurs is that such a person would be looking for an increment – maybe 20% – over the existing operatives. This is seldom the case – often the jump from operative to technical manager is significant, with technical managers commanding two or three times the operative pay.
After all, the entrepreneur in the same position would demand significant returns.
Technical managers – people who understand the technics of the business, the market and how to manage people and finance – are scarce. This means that recruitment will take time. It’s not just a case of going to a recruitment agency and getting 20 CVs. It will take many months – even years – and such an individual must be individually targeted and headhunted.
So how does a firm grow beyond this obstacle?
The simple answer is that the solution must be planned for. When the business shows early signs of success and the first operatives are hired, some of these operatives must be primus inter pares – ‘first among equals’ – people who show inclination to lead, are technically excellent and have an interest in rapid personal development.
Such people can be recruited for. All the selection tools are in place today to show who these people are. And the entrepreneur simply needs to develop them. As those junior leaders take form and shoulder responsibility, the entrepreneur’s job will slowly become easier.
The entrepreneur must delegate, though. There’s no point in developing junior leaders only to micro-manage them and have them realise that they’re not really going to get the responsibility they crave, and leave. Entrepreneurs must learn delegation.
Gen Y solves entrepreneur divestiture problems
So rather than build a firm comprising the entrepreneur and a plethora of operatives, the entrepreneur must plan to develop staff ‘leads’ – consulting lead, software release lead, marketing automation lead or whatever. Initially these junior leaders will have no staff in their teams. They’ll get operatives appointed project-by-project, job-by-job. Then as they grow their area of the business, they’ll need support from their own doers. And slowly the firm will evolve.
This idea of organic growth fits well with Generation Y, the Millennials, those young people who so lament how they are treated by that entrepreneurial Generation X above them. They crave responsibility, autonomy and personal development.
So growth beyond the initial burst is more of a slow, steady affair. It’s no good the entrepreneur thinking after ten years that she’ll appoint someone to take over the firm while she goes off to play in her favourite sandpit. Finding that someone will likely be impossible.
When those junior leaders grow, they will form the backbone of the firm. And when the entrepreneur thinks about selling up, those leaders will give the firm its value. Remember that buyers value a firm for its people, its markets and its products.
Recruiting operatives – doers – all those years ago and then frantically seeking a chief, a super-manager, does little to add value in any of those three domains.
1 The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. See https://en.wikipedia.org/wiki/Theory_of_the_firm