September 22, 2022
September 22, 2022
By Rob Andrews with paraphrased content from Carter Cast and Brooke Vuckovic’s HBR Article September 9, 2022
Over the past 10 years, and particularly through the bull market that lasted well into 2021, investors have chased the most promising startups and their founders. Among them was “John,” whose bravado, assuredness, and larger-than-life charisma were viewed as assets that spoke of his zeal and commitment. But now, in a sharply changing investment environment, these same personality traits are seen as liabilities as investors ask him tough questions about performance and capital requirements for his business. Instead of engaging, John’s immediate response has been to shut down the conversation. “I’m not worried about getting funding,” he said, despite his latest pitch for additional capital being turned down a dozen times. “This isn’t my first startup. I’ve rung the bell three times before, and I will this time too.” In this piece, we examine the observations of Carter Cast, clinical professor of innovation and entrepreneurship, and Brook Vuckovic, clinical professor of leadership at Kellogg/Northwestern:
It’s a bad behavior, one of the classic “executive derailers” that have long fascinated psychologists and social scientists (Horney, Hogan & Kaiser, Dotlich & Cairo, etc.) who identified and cataloged behavior patterns that cause the mighty to fall. In this article, Cast and Vuckovic examine three categories of detrimental behaviors that are becoming more common among entrepreneurs as they face mounting stresses over their funding and the health of their businesses. These behaviors are “moving against,” “moving away,” and “moving toward,” all of which are coping mechanisms that attempt to regain control through manipulation, deflect reality and harsh criticism through avoidance, or avoid pain and fear through ingratiation.
Becoming increasingly aware of their stress-related behaviors and self-destructive patterns is increasingly important for entrepreneurs today, especially those who have never lived through an economic downcycle. Self-awareness, paired with professional and personal support, can stave off self-destructive behaviors and promote more positive interactions and, importantly, results. For many entrepreneurs, this is uncharted territory as venture capital funds have pulled back their investments, resulting in a 22% decrease in early stage, Series A and B rounds in the second-quarter of 2022 alone. Startup valuations are in decline, as well. Market volatility has cast a pall on initial public offerings (IPOs), with 72% fewer new listings in the first half of 2022 compared to a year earlier. In fact, institutional investors are telling many of the founder/CEOs they coach and advise not to expect any new infusions of capital for at least 18 to 24 months — and perhaps longer.
These combined pressures will increase leadership challenges for entrepreneurs and founder/CEOs, making it likely that their self-defeating behaviors will increase as market conditions erode and investors’ demands intensify. As a result, Cast and Vuckovic anticipate founder/CEOs will have an even greater tendency to fall prey to their derailers.
An entrepreneur’s optimism — there is a way, a solution can be found — is a positive trait when trying to launch a new business, albeit within reason. When it becomes unbridled, however, that optimism can turn to willful blindness about both the business-threatening forces that exist around them and the negative personality traits within them. Often, this is exhibited by the tendency to “move against” — denying the difficulty reality and refusing to address the challenging questions that go with it.
John was a classic example of moving against, as he refused to address what he did not want to face. But arrogant defensiveness isn’t the only “moving against” behavior. It can also manifest as redirection, diverting attention from the issue at hand, such as by spiraling rapidly into ideating, sometimes coming up with brand-new strategies on the spot and spinning schemes about new products, new markets, and growth possibilities that can save the company. As a result, the management team feels whipsawed and confused, and investors, unclear on the company’s strategic direction, begin to lose confidence in the leader.
Founders in this category are skilled at winning others over, sometimes distracting investors to issues with their blinding displays of razzle dazzle. For example, Adam Neumann, who was at the helm during the rise and fall of WeWork, ending with his departure from the company after an attempted IPO was a spectacular failure, is at it again: He is part of a new real-estate startup that reportedly is worth $1 billion. This latest venture and the size of the investment has sparked some outrage in the startup community, but ironically, also acknowledgment that this is Neumann’s singular talent. As one real estate executive told the BBC, “Adam is clearly an incredible salesperson, and he can create a narrative and a vision. He was very successful at raising a lot of capital for WeWork.”
But sales spin often doesn’t work in challenging business conditions that need straight answers. The remedy calls for the contrary — becoming more steward and less salesperson — to sublimate the ego and demonstrate humility. The advice here is to listen closely to customers, don’t over promise, and own business issues.
In this category of behaviors, founder/CEOs move away from problems (sometimes literally) instead of making decisions. Suddenly, they are difficult to reach or quick to dodge tough conversations. One founder Cast & Vuckovic know refused to engage with the company’s chief marketing executive about continuing to invest in advertising or cutting back marketing spend. “I’m tied up, on the road, meeting with investors” became the cover story for avoiding uncomfortable conversations. Similarly, one first-time startup executive was so undone by needing to reduce headcount that he skipped the executive team meeting to plan these reductions and sat in his car instead, scrolling through social media and toking on a joint.
An extreme example is Vijay Mallya, a flashy multimillionaire known for his extravagant lifestyle, who first avoided making tough decisions around his signature venture, Kingfisher Airlines, when it faced huge financial losses. He then tried to disappear into relative obscurity in Great Britain, until he faced extradition to India in 2020 to answer fraud charges surrounding his use of loans from banks in India. Though extraordinary, his case provides a cautionary tale for founder/CEOs who exhibit avoidance behavior of a milder variety: dodging questions from board members and refusing to give investors updates. Such refusals usually risk violation of investors’ information rights that are spelled out in term sheets.
Unfortunately, these founder/CEOs also often avoid the one remedy that can help: reaching out to trusted advisors such as a peer CEO, consultant, executive coach, mentor, or active, interested investor. Instead of burying issues in hopes of them going away, the better action is discussing significant issues to improve clarity and demonstrate visible leadership. Leadership can be honed during crisis, and having the courage to address the issue is half the battle. Stay tuned for Part 2 of this article next week as we further examine how founder/CEOs can avoid self-destructive behavior under pressure.
Consultants in Retained Search & Leadership Advisory
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