What are the most important aspects of startup management? What type of management team does your startup need?
While big businesses need to learn how to innovate, the entrepreneurial startup needs to learn how to manage itself. According to Peter F. Drucker, startups need to focus on four specific things: their market, financial planning, setting up a management team, and what role their founder should play in the business.
Keep reading for helpful advice that every entrepreneur of a startup needs to hear.
1. Watch the Market
Drucker writes that people in startup management must always keep a watchful eye on their markets. Innovation’s unpredictability often leads to surprise failures and successes that the startups didn’t anticipate, and it’s crucial to spot and seize new markets as they emerge before they fall into competitors’ hands. As discussed before, with truly novel innovations, predicting the exact market is impossible. Therefore, startups should always expect that their innovation might resonate with an unforeseen market segment. Remember: Both successes and failures can serve as indicators, revealing wholly unexpected avenues for growth.
(Shortform note: While, as Drucker points out, there may be no way to predict exactly who your customers will be, a new business does have the power to shape their customers’ experience. In Raving Fans, Ken Blanchard and Sheldon Bowles write that simply meeting a customer’s expectations isn’t good enough for your startup’s survival, but if you exceed their expectations, you’ll convert customers into word-of-mouth advocates who’ll bring even more customers to your business. Just be mindful, per Drucker’s advice, that you recognize who your customers are and identify their real needs, not the ones you envisioned when you started your business.)
2. Watch Your Money
Drucker writes that a lack of robust financial controls can doom the most promising startups, particularly those that grow too rapidly. Many entrepreneurs fall into the trap of wanting to withdraw profits prematurely, which can starve their businesses of much-needed funds during their growth stage. Drucker insists that any “profit” made by a startup should be reinvested back into the business—anything less leads to problems down the line. Also, as your startup expands, it will outgrow its initial funding method, necessitating the addition of partners or a public offering of stock. Anticipate your future needs and set them in motion today.
(Shortform note: While it’s certainly important to manage your business’s finances, not everyone agrees with all of Drucker’s points. In Profit First, Mike Michalowicz suggests that entrepreneurs shouldn’t reinvest all their money back into their expenses, arguing that reinvestment into growth makes a business unstable and reduces the amount of free cash it has on hand in case of emergencies or the need to pivot in response to changes in the market. Instead, Michalowicz says that business owners should claim their profits first, thereby limiting the funds available to expand their business and forcing them to spend it more wisely. His approach forces a startup to focus on efficient spending rather than the pursuit of runaway growth.)
3. Establish a Management Team
Drucker says that after you make your startup’s financial plan, the next step is to set up a management team. The reason is simple—if successful, a startup cannot be run by the founder alone indefinitely, and you have to prepare for this transition before managing the business reaches a crisis point. As a general guideline, if it looks like your startup might double in size over the next four years, it’s time to start shifting the management structure. This process should begin informally, allowing each potential member of your management team to reflect on what they have to contribute while learning how to work with each other. Then, when you need a management team, you already have one in place.
(Shortform note: The management structure Drucker recommends is a fairly traditional hierarchy, but there are different options available. In Reinventing Organizations, Frédéric Laloux describes an emerging form of organizational structure in which workers are mutually supportive, yet largely self-managing. In this new style of organization, individuals have roles instead of strictly defined titles, and management’s place is to advise the group instead of leading by mandates and directives. Laloux writes that it’s hard to convert a long-established business to this new mode of thinking—it’s easier to set self-management in place in the initial organizing phase that Drucker says must be addressed as soon as a business starts to grow.)
4. Determine Your Founder’s Role
Creating a management team begs the question, “What will the startup’s original founder do?” The original entrepreneur must make sure that their ego doesn’t hinder the business. Founders who insist on maintaining absolute control often drive their businesses into the ground. Therefore, founders need to reflect on several key questions: “What does the business need going forward? Which of those needs can I effectively address? What role do I genuinely want to play in this company—or do I even want to be a part of it at all?” Sometimes, the answers lead entrepreneurs to realize they’d rather step away from day-to-day management and find a niche where they can contribute while letting someone else make the big decisions.
(Shortform note: Not infrequently, founders who don’t follow Drucker’s advice to reassess their roles as their companies grow may find themselves ousted by their own investors. The problem is that the skills and strategies that worked to run their business in its early stages might not suit an evolving company. Especially if the founder is overconfident about their leadership abilities or their impact on the business’s growth, they might even resist much-needed changes to keep their company afloat. In the long run, not reevaluating the founder’s position within their own business could threaten both their livelihood and their company’s future.)
