Moving from startup to established company: Four big shifts

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When a startup begins to mature, the need for a more formal business model brings a new set of challenges--from personnel to policies to customer service.

In a Forbes article a couple of years ago, San Francisco entrepreneur and company advisor John Rampton summarized the five traits of entrepreneurs as passion over money; resilience, because entrepreneurial efforts can fail; a strong sense of self, because starting something from scratch isn't easy; flexibility, because you have to adjust as you build your vision; and of course, vision.

In the tech industry, you can find entrepreneurs working alongside their product developers or doing dog-and-pony shows to raise capital so the doors can stay open. However, once the capital is there and the product begins to gain traction, entrepreneurial companies must make another transition: They must move to a more formal type of organization that adopts project management methodologies (and project managers), corporate policies, new functions like customer service, and a more structured approach to budgeting and financial management.

"When we started to grow and to gain a customer base that we had to support, we had less time to spend innovating and I started to lose my passion for the business," said a business acquaintance of mine who is the founder and CEO of a software startup in the brokerage industry. My friend much preferred cutting code--and planning a trip to climb Mount Everest! So reluctantly but resolutely, he turned over the reins of the business to a more staid and operationally oriented CEO and took a position as founder and chief strategist so he could continue to work on product innovation.

SEE: Quick glossary: Startups

Transitioning from the raw excitement of creating something new and innovative to leading a company that must function more traditionally to support the needs of its growing customer base can be a challenge for many entrepreneurial-minded chief executives. In some cases, the transition forces them to decide whether they want to spin the company or the product off to another organization so they can pursue a new vision. In other cases, they maintain their roles as CEOs or move to chief strategist positions, committing long term to the companies that they started.

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For those who choose to stay with the company as it morphs into a more mature business model, here are the key issues that must be addressed.

1: The need for a more formal organization

The process begins with defining a sales VP, an operations VP, a CFO, a service VP and likely, an HR manager. At the project and/or product level, a layer of middle management begins to appear, in the form of project managers who are adept at managing projects and budgets but who are not likely to be the creative innovators that their senior staffs might be. Tensions can arise here, because senior staff members who innovate the product and likely get paid more than their managers are not going to like reporting to a project or product manager they perceive as a mere "pencil pusher" and not a product developer. This is an area of conflict that most entrepreneurial CEOs have difficulty managing, which is why it is important to bring in a hands-on operations senior executive who has experience managing significant cultural change.

2: The need for policies

As the organization grows, internal and customer-facing policies will be needed to safeguard the intellectual property that the company innovates--and to define employee work hours, benefits, behavioral accountabilities, and expectations--as well as to define how the company interacts with customers and treats customer information. If the company as a startup has been functioning rather loosely in these areas, policy formation and enactment is an area where an experienced operations executive can deliver immediate value.

SEE: Security awareness and training policy

3: The need for a dedicated customer service function

As the company picks up a customer base, it will need to create a customer service function that is dedicated to onboarding customers to its product and then supporting customers once the product is installed. A senior customer service executive will likely need to be hired. This person in turn will hire staff who can support the customers, freeing key product innovators to continue their work with the product.

4: The need to retain innovators

As the company begins to develop into a more mature and formalized organization, there is a risk that it could lose the very innovators who put its product on the map. The company must develop a strategy to retain these innovators by creating an environment that continues to foster and reward creative effort. This is an area where the founder-CEO must work with other senior managers and with key contributors to make this happen. "If they leave, it's a piece of your company walking out the door," said Krish Ramakrishnan, founder and CEO of Blue Jeans Network. "You need to make them invested like founders not just employees."

A word to startup founders

There are many words of wisdom for tech startup founders whose companies begin to gain traction and by necessity, begin to morph into more mature and formalized organizations. These tips can range from selling out if you really don't want to run the evolving company to touching base with stakeholders and investors and working to retain key talent.

In the end, however, determining whether to sell or to remain with the company in a long-term, active role comes down to the individual. If your lifestyle conflicts with running the business, or if running the business is something you really don't want to do, selling the company--even if it is succeeding and poised to take off--might be the right decision. For other entrepreneurs, the idea of growing a business, providing employment opportunities to others, and evolving new business models becomes an innovative challenge in its own right that keeps them motivated. In either scenario, the ability of entrepreneurs to know their own mind is critical. Only then can the best decision be made for the company.

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