As startups grow, founders need to learn to let go
Are Israeli entrepreneurs equipped to deal with the dizzying new challenges posed by their fast-growing companies?
Shoshanna Solomon was The Times of Israel's Startups and Business reporter
Israeli entrepreneurs have a reputation for being inventive and moving fast, developing new technologies and selling off their startups when they are still young. That trend, however, seems to have waned in 2017, as entrepreneurs held on to their companies, raising greater amounts of money privately while staving off buyers in hopes of either raising their baby themselves or getting a better valuation in a sale at a later date.
“Previously, local players set their sights on a quick exit, but this appears to have changed in 2017,” said Yaron Weizenbluth, a high-tech partner at PwC Israel, in the consulting firm’s 2017 exits report. This trend reflects “more than anything, a more mature mindset of local technology firms.”
Indeed, 2017 was characterized by a greater number of larger deals, with an average value of some $106 million, a 66 percent increase year on year, even when excluding from consideration two mega deals that happened in 2017: the sale of Mobileye to Intel Corp. for $15.3 billion and that of NeuroDerm, acquired by Mitsubishi Tanabe Pharma for $1.1 billion. In fact, 2017 saw 11 acquisition deals of over $250 million, while over-$100 million deals accounted for not less than a third of all transactions compared with 15% last year, according to the report.
So, as Israeli startups grow, are the entrepreneurs ready to manage bigger companies? And do they have the talents required to do so?
“Startups are just like newborn children and adolescents. They rapidly shift from one stage to another and adults, the entrepreneurs, have to adapt to these changes in a short period of time,” said Dr. Etay Shilony, who has a PhD in clinical psychology from Boston University and is the author of the book “Israelism,” which analyzes organizational culture in Israel. Shilony is also an adjunct lecturer at the Arison School of Business at the Interdisciplinary Center Herzliya college.
When you have a startup, he said, the key challenges are creating a team, getting proof of concept for the technology, and showing both repeatability — that the results can be duplicated — and scalability, the ability to make many similar products and not just a one-off. In addition, the startup has to show investors that it can create both revenues and profit.
But once a company grows, both by raising money and by gaining customers, the challenges change. “Once a company gets an investment, it shifts into a different position, because now it has partners,” he said, and these partners may have a different agenda. “The startup has to move from dealing with just itself to dealing with others — and that requires a different skill set,” Shilony said.
“As you grow you also start dealing with real customers, real employees, who are not part of the founding group but workers who want to join your company,” he said. “Very few managers can manage to adapt so quickly to these changing managerial needs, because it takes a different set of skills.”
And these skills don’t always come naturally to the entrepreneur, who can have a narcissistic streak, find it hard to let go, be unable to take criticism and believe that their way is always the best way, Shilony explained.
Entrepreneurs who do succeed in building a bigger company “know how to manage their narcissism and egos,” he said. They know how to “put aside their narcissism and cooperate with others.”
Research has shown that companies succeed more when they have “management systems” in place at an early stage. If these systems are in place from the get-go, Shilony said, then the companies could avoid the “entrepreneurial crisis” that they tend to undergo when the number of employees reaches between 50 and 100. “That is the stage at which the company has to transit from management based on personal relationships and familiarity to professional management,” Shilony said in his book.
Be systematic. Don’t wait for miracles
“You need to be systematic, you need to surround yourself with people who can make that transition happen and can adapt to more complicated ways of management,” he said in the interview. “You need to delegate authority to others and filter your ideas through others.”
According to Prof. Antonio Davila of the University of Navarra and Prof. George Foster of Stanford University, management systems include careful planning of strategy, partnerships, resources, products, marketing and sales, and human capital and compensation. And while conventional wisdom sometimes says that management systems stifle entrepreneurship, their study of 78 companies in Silicon Valley showed that these systems were responsible for rapid growth.
Indeed, as the companies grow, founders often find themselves sidelined or even ousted by management, because they find it hard to adapt to changing and fast-moving circumstances. “Some remain equity holders and move on to their next creation,” Shilony said. “Some don’t love to manage; they enjoy the creation process.”
“You need to ask yourself, is this what you enjoy? It may be better to be a happy equity holder in a company that you set up than an unsuccessful CEO in that same firm,” he said. “Letting go is hard. But parenting is all about letting go.”
Israeli entrepreneurs have a harder time adapting to running bigger firms than their international counterparts, Shilony said, because Israelis value intuition over “systematic management.”
“That [attitude] stems from the Jewish culture of having to make do with what you have to survive in different and various circumstances — and also from the Jewish narrative of miracles,” he explained.
Miracles, he said, find a way of getting Jews out of trouble — like the plagues that got the people of Israel out of Egypt, or the lights of Hanukkah, which lasted for eight days instead of one. “With miracles and Jewish events, there is no place for systematic planning, ” he said, and that has trickled down to Israeli management culture. “We are more entrepreneurs than builders.”
Some Israeli tech entrepreneurs have, however, managed this transition successfully, he said. Mellanox Technologies Ltd., Check Point Software Technologies Ltd. and Wix.com, for example have managed to grow into large and successful firms, although still most startups either fail — by closing down — or get sold at an early stage, he said. And indeed, entrepreneurs of these larger Israeli companies say that growing their firm is a constant learning and adapting process. And just when you think you are stretched to the maximum and are doing the best you can do, a new challenge comes up to show you that you can actually go that extra mile.
“The biggest worry when you are a startup is that you are going to run out of money,” said Nir Zohar, president and chief operating officer of Wix.com, a do-it-yourself website development company. Zohar was part of the founding team of the Tel Aviv-based firm. “The end of cash is the doomsday scenario.”
As a larger company, he said, your preoccupations are different. You need to grow sales and capture the market, and other things need to match this growth, like headcount, creating a brand, and developing customer care, because “otherwise the company breaks.”
“Now, my main worry is growth and execution,” he said. “And that means that you need to be fast, deliver fast, deliver quality and you need to stay relevant… It is an endless learning curve.”
Founded in 2006, Wix.com held an initial public offering of shares on the Nasdaq in 2013 and today employs some 2,000 workers globally. Its shares advanced 29 percent in the past 12 months. “What works for 1,000 workers, doesn’t necessarily apply for 2,000,” Zohar said. “The challenges change,” but the key is understanding how they change and adapting to these changes.
Delegating, he said, is another tough thing to do. “The key is to hire people who are more intelligent than you, to find people who are super, super smart, ” Zohar said. “If you let your ego drive you, because of your fear of being replaced or having someone too smart who argues too much, you end up being surrounded by people who are not strong enough to take you to the next level. You always want people that can grow with you.”
The CEO and founder of Mellanox Technologies Ltd., Eyal Waldman, said that the main challenge for startups is to start getting revenues and sales, and then a profit. “You also need to build a team and raise money. You are dependent on investors and nobody knows you yet, so you need to convince companies and important people to start working with you and start becoming your customers.”
The company, a maker of servers and storage switching solutions, was founded in 1999 in the northern Israel city of Yokne’am. The firm held an IPO on the Nasdaq in 2007 and now has a market value of some $3.3 billion. Its shares have advanced 58 percent in the past 12 months.
For a big company, Waldman said, the challenges are different. “Once you are a big company, you want to reach that $1 billion sales target.”
Waldman also finds it hard to delegate. “As your company grows you have to get used to the fact that you cannot be involved in all the aspects of the company. To delegate is hard, because I believe that my input is pretty valuable and that I can help in many ways. When the company was a startup I was much more involved in all the various processes of the firm. I miss that. I used to be more hands on. Now I need to talk a lot. It is harder to play in the adult playing field, because if you fail, now the drop from the top is steeper and the fall is harder.”
Ori Lahav, the co-founder and chief technology officer at Outbrain, a Netanya-based content recommendation platform, said that as the firm gets larger, “your focus is not your one product anymore, but a package of products aimed at a number of markets, dealing with different cultures.”
Outbrain suggests interesting and relevant content to internet readers, and powers many publishing sites including that of CNN, Fox News and Slate. The firm employs some 600 workers around the world, including 250 in Israel, mostly in R&D. Outbrain, which has raised some $193 million to date from private investors, was named by IVC Research Center, which tracks the Israel high-tech scene, as one of the 24 Israeli firms that are ripe to hold an initial public offering of shares.
“As a management you are not dealing anymore with building your product, but dealing with running the organization. The product becomes the organization,” Lahav said.
As the company grows, it is also important to get all employees on board about the DNA of the firm they are working for.
“As a small company, the company culture gets passed on at the coffee machine,” he said. “But as the organization grows, there is much less interaction between management and the workers, and so you need to start formulizing the DNA — give everyone the tools to become ambassadors to this culture.”
He believes the founders are key to the success of the company and should stay on in leading the firm as it grows. “Most companies, like Apple and Google, for example, got to greater heights when their founders returned. Founders do something different for the company — they are an important part of the company.”
“Challenges push us forward,” he said. “As a startup or as a developed company, the challenges are always new, and stretch your abilities. And this is what gives us that thrill. And at each stage you tell yourself, now I am really stretched the utmost — but then the next stage arrives. The challenges grow as your company grows.”
