Risk Tolerance

Startup companies go through a number of phases as they mature from an idea, to a small team, to a growing team, to a small company, to a big company.

And along this journey, the leadership team you need changes. You need little to no leadership structure when you have a small team, you need some sort of leadership structure when your team is growing, you absolutely need a leadership team when you become a “company”, and the leadership team becomes incredibly important when you become a big company.

In the last week, I’ve had several conversations with CEOs in our portfolio who are leveling up their leadership teams and are recruiting executives from larger organizations.

I’ve counseled them to make sure that they hire executives who have a lot of risk tolerance.

High growth companies that emerge from a startup situation tend to be volatile. They have a lot of turnover in their organization, they have moments when the cash balances get low, they sometimes face existential risks.

If you have executives that you need to spend a lot of time comforting and solidifying, that’s not good. Ideally your leadership team is your steadying force and if you are steadying them, then your setup is suboptimal.

It is always tempting to bring in people who have operated at a scale well beyond where you are. And I am not saying you should not do that. You should. But just make sure they can handle the heat in the kitchen because it’s gonna get hot sometimes.


Comments (Archived):

  1. David C. Baker

    I’ve been studying “leadership teams” for the last couple of years to see how they go wrong. Not that you shouldn’t have them, but they seem to create some unintended consequences that need to be managed.First, having a leadership team (LT) unwittingly thinks you’ve communicated adequately to the troops. You talk about things with the LT and it “feels” like things have been discussed and socialized, but it doesn’t make it out of those boundaries.Second, employees can feel like raising issues to the LT is like throwing a suggestion over a big wall. They don’t know what happens to the suggestion, what the process is for dealing with it, and a final resolution isn’t adequately communicated back. It’s a black hole that they resent.Third, there’s this slow enlargement of the LT where people who really shouldn’t be there are added for other reasons: someone at a similar level is on there and it would be conspicuous to not include them; someone with a lot of experience demands to be on the LT before joining the company; etc. The hard decisions about who should be on the LT still need to be made, and it’s good to have a trial period of 3-6 months that automatically expire unless most everyone agrees that they be on boarfd.Fourth, LT members must be objective, able to listen, courageous enough to take a stand, etc.Fifth, by all that is god in the heavens, make the meetings short so that people look forward to them and decisions are made efficiently.The best LTs are small, populated with a diverse and supportable POV, and realize that a lot of work isn’t complete until it’s communicated to the rest of the folks not on the LT.

    1. Vivek Kumar

      LT should help and no hider communications

    2. creative group

      David C. Baker:your insightful contributing post added substance. This post was an asset. Prospective added to our group. The wall was obviously too tall.Appreciated!Captain Obvious!#UNEQUIVOCALLYUNAPOLOGETICALLYINDEPENDENT

  2. William Mougayar

    I would add that the newcomers should know well that they will be in a “build” mode more than being in a “manage” mode where everything is handed to them, and they just run things. So, make sure they understand that the modus operandi is to figure things out (under lots of uncertainty) instead of coming for help every time.

  3. iggyfanlo

    I’ve written this comment on your blog a few times… I WISH YOU HAD WRITTEN THIS 15 year ago… But it’s super solid advice and to me is the best kind of guidance an investor should be giving their startups

  4. TeddyBeingTeddy

    I’d say leadership is more critical at the beginning, the foundation of company. So many pivitol decisions and so few sample sizes and resources.Whereas a later stage company, if properly raised, becomes nearly self sufficient regardless of the figure at the top…

    1. Tom Labus

      Don’t know about that. Knowing when the company should take risks is a key function of good management and essential for growth

      1. TeddyBeingTeddy

        I agree with that, if the growth trajectory and risks mostly happen before a company is mature, doesn’t strong management matter most in the early growth/foundational years?

        1. Tom Labus

          Tougher decisions later on with more at stake.

  5. jason wright

    Bureaucrats need not apply.

  6. Tom Labus

    This is like major organ transplanting!! But you kinda know pretty soon if someone is out of place. A good discussion to have before hand is what kind of staff and assistants that have now and work with in the current position.

  7. Matt A. Myers

    @fredwilson:disqus – it’d be really valuable if you had any data to share on roughly the cost expenditures increases (% wise and/or proportion of budget?) as companies grow in size?

  8. pointsnfigures

    I run into a fair amount of “corporate” or “consulting” people that fancy working for a startup. They have an image in their minds about what it would be like. When we chat, I focus on how they did their old job-what sort of resources they had to draw on and how they got them. It’s different in a startup. Where I play in Seed and Series A the heat in the kitchen is hotter.If you are a person that is interested in working for a startup, it’s important to note that it is not a failure of your personality if you aren’t comfortable working at an early stage startup–maybe you are more comfortable looking later down the capital stack. Or, maybe not at all. Not every person fits in every role at every level. We are all different and have different risk tolerance.

    1. Donna Brewington White

      This is a really good word, Jeff. I have had to learn to respect the people I meet when recruiting who know their growth/funding stage boundaries.With a really tight market, hiring that is more creative will find untapped resources such as large company execs who have appetite for a startup. But I find that most startups (understandably) don’t have the candidate assessment capabilities to predict that someone can do something they’ve never proven they can do and can’t afford that level of risk.

      1. pointsnfigures

        This is true.

  9. awaldstein

    To @disqus_AsyAYSvW65:disqus point small and without capital is a completely different animal requiring different skill and people than looking for traction with dollars to utilize.As someone who has spent a career split between ground floor startups and turnarounds for established brands using M & A to build new segments there is only one generalization that fits from my experience.Zero correspondence between the skills and dynamics discovering a market and those needed to leverage an established or growing one.Some can do both. Not common though. They are completely different.

  10. sigmaalgebra

    ForAnd along this journey, the leadership team you need changes. You need little to no leadership structure when you have a small team, you need some sort of leadership structure when your team is growing, you absolutely need a leadership team when you become a “company”, and the leadership team becomes incredibly important when you become a big company. there is during the stages of growth a change from “structure” to “team”.I can believe that in a big company, especially public C-corporation, the “leadership team”, i.e., C-suite, needs some structure, e.g., who handles some disaster that some toxic chemical was discovered in some of the coating of one of the parts of one of the products.

  11. Jeb Hurley

    Hiring executives who have significant risk tolerance is good counsel Fred. I would add hiring leaders who understand how to reduce scaling risk is equally important. Identifying those leaders requires focusing on their approach to developing and sustaining strong, trusting relationships within and across teams.

  12. K_Berger

    The thing is, if someone hasn’t been in a startup or persistent high-risk situation, not sure they can judge themselves in terms of this risk tolerance. They don’t know what they don’t know.The people doing the hiring need to look for situations where someone handled risk and then make the call if that is transferable to handling it on a more consistent basis.

    1. Susan Rubinsky

      I worked for a high-risk startup back in the day. One of the questions I was asked in my initial interview was “What was the most stressful thing you have ever experienced and how did you get through it?” I answered (something along the lines of), “I grew up with two raging alcoholic parents who were completely neglectful. I received no support — emotional or financial. I decided in fifth grade to concentrate on education and to get out of that situation as fast as I could and ended up living on my own before I even graduated high school. I worked and worked my way through college.The best part of that experience is that I had the freedom to do whatever I wanted and the perseverance to create a plan to not only survive but excel. You can basically throw anything at me and I will figure out a way to deal with it.”My interview was supposed to be one hour. Five hours later, I was still there and the initial interviewer was introducing me to the “team” — the founders and a team of about 20 programmers.Good times.

  13. Donna Brewington White

    One of the big adjustments for me when I began focusing on recruiting for startups was that a hire was not a failure if the person stayed with the company for fewer than five years. :)Every so often I share your post on “Turning the Team” with a founder. Some of my searches result from the need to replace the early “friends, family or network” hire with someone who can take things to the next level or scale.I believe it is risky to hire someone to scale who has never done this, especially when huge rapid growth is anticipated. It can be done (I’ve seen it) but this is when the person’s characteristics and history need to be examined closely for evidence of this capability and you need to know what drives them.

  14. awaldstein

    Yes.The one function is finance where that expertise really helps obviously. Also Enterprise Sales.Other than that building a new market and brand from the ground up is just different.Almost the only thing I’ve ever done, except in a few occasions with Atari, Keynote where I came in, both public with brands and rebuilt though obviously in very different markets.Just realized that I also did this with Racal–forgot about that one and that market.

  15. sigmaalgebra

    Excellent. A keeper, kept. Thx.For “risk tolerance” generally and more specifically forIn your hiring process, you have to ascertain whether their is even a smidgen of risk tolerance in the DNA of your hire. This is your job, CEO. Get good at this. I’d insert, in some of the most severe cases, the “DNA” is literally correct. I.e., it is accepted by mental health professionals that anxiety disease is genetic, that is, in the “DNA”. Such a person can have a horrible time with risk and find it very stressful. The stress can lead to depression, more problems with confronting risk, clinical depression, and death.Might want to be careful about praising too much the accomplishments and potential of someone with a Bachelor’s or Master’s 4.0 grade point average: Such academic performance can be the result wildly excessive perfectionism, of being terrified of anything that could possibly be criticized, of doing way, WAY too much, and concentrating too much on the formality of the grade point average and too little on the reality of what was being learned, how well, and WHY.In academics, what is respected most of all is original work, and for good original work maybe a 3.0 grade point average, or 3.5 in the major subject, is good to have but in practice a 4.0 seems not to help much and maybe to hurt. I.e., original work, attacking a problem never solved before, is risky. Even if solve the problem, there can be some question in the minds of others just how significant the solution is, and that is more risk.But the original work may be closer to what is needed for big success in the real world of business than a 4.0.Also, beware of grades in some graduate courses: There can be an unspoken attitude that at this level the students are in the courses to pick and choose what they want for their specialization, research direction, or career where they like some of it and set aside some of it. In particular, in some of the best research universities, there is no coursework requirement for a Ph.D. degree. Instead, the courses are introductions to research by experts in their fields, and how seriously a student takes a specific course can depend on their research interests. Indeed, in particular, the good students have at least some research project underway and won’t want to neglect that research for some course where they have only casual, speculative, or curious interest.Instead of 4.0, the goal is the research, and that is essentially just “pass-fail”, not receiving a letter grade.If this low emphasis on grades might be taken as some easy street, in fact far and away the biggest challenge in high end academics is just the research.Once when I was at an air show, an F-4 did a flyover — the thing is a monster, a beast, TWO engines, was loud down to my toenails.As I learned one afternoon talking about optimal control at MIT, lightly loaded, as for BDA, could take the thing up to 8000 feet or so, dive, go supersonic, pull up, and continue supersonic all the way to 100,000 feet — the thing is a BEAST.If I were flying an F-4 for BDA, I’d consider going in at 60,000 feet or so, i.e., hopefully above air defenses, at the last second dive at about 2.5 Mach, and do the 8000 foot pass at full afterburner, hopefully 2+ Mach, trailing radar reflective chaff the whole way.This story of avoiding air defenses makes still more clear the importance of the hard work in applied math, physics, and engineering of the stealth of the F-35 that let it recently do a photo shoot of Iran undetected.I can believe that the F-14 and F-15 are still bigger beasts and the F-22 the biggest beast so far.

  16. Matt Zagaja

    One time I was managing an organization (a political campaign) and there was a week I almost missed payroll. Literally one of the scariest weeks of my life. I don’t even want to imagine life after it actually happens.

  17. Susan Rubinsky

    Hell YES. Been in several of those startups in all different life scenarios. You can do it when you’re young and have no responsibilities (yeah, I did that.). Or do it in your 30’s when you have a house and a little kid (yeah, I did that. not sure HOW I did it but I did.) Or you can do it when you’re older and have money in the bank but still want to come in and bring some wisdom to the team (I want to do that in the future.)

  18. pointsnfigures

    No wonder they don’t pay minimum wage at some campaigns (this is a joke)

  19. Matt Zagaja

    The candidate dropped out of the race a couple weeks after that :(.