How Leadership Needs Evolve as your Company Scales

Many companies on the verge of growth believe it takes an experienced CEO to scale a company efficiently and effectively. This has long been the view among private equity professionals, and it makes sense. After all, leaders who have been tasked with the top spot and creating exponential growth in the past are aware of the common pitfalls and opportunities that actively scaling startups can face. However, as the rate of marketplace change continues to grow, experience has the potential to be more of a liability than an insurance policy, especially without the presence of other valuable leadership characteristics.

In fact, a CEO’s success (or failure) in scaling a startup of any size may have more to do with their readiness, purpose, and other leadership traits and skills. And how those traits and skills align with a company’s particular stage of growth.

Companies who understand the evolving leadership competencies needed for a company to scale and can act on those ideas to make sure they have the correct leadership and skill sets in place, are the companies who will ultimately succeed in scaling.

Talent needs evolve as companies grow

As any startup leader or employee knows, when you’re smaller, everyone has broader roles and is required to wear many hats; however, as you begin to scale, roles start to become more specialized. That’s even more true of a startup’s leadership.

If you want to scale, the role of your leader needs to change. This can be a shock to the system, as what’s required of a leader becomes a completely different skillset. Whereas a startup leader began as an entrepreneurial challenger and problem solver, once growth begins in earnest, they need to be able to:

Hire the right people and enable them to succeed.
Delegate and give feedback.
Build the right teams and develop the right org structure.

Leadership needs by growth stage

We can generally break down leadership needs by stage using Odgers Berndtson’s ScaleUp Initiative “Leadership Evolved” framework.

With each new round of investments, start-ups enter a new stage in their lifecycle, adding further complexity. As the organization scales, what is required of the leadership also evolves.

Knowing vs. doing

One of the major challenges startups can face is that knowing leadership needs have changed, vs. taking action to align skill sets with those needs, are two wildly different things.

Companies in the venture capital and private equity spaces understand the key activities associated with each stage of growth for their portfolio companies. They also understand that this can be a very difficult thing to do.

One reason for this is that what made a leader successful at one stage will be insufficient in making them successful at subsequent stages. There are leaders who excel at the early stage hands-on skills, but who struggle to transition to the next stage in which a leader must manage and develop teams.

If this is the case, companies have two options:

Assess current leaders against the competencies required at the next stage or two to identify gaps and work to close them through development and coaching.
Hire new leaders with the agility to make these transitions.

Even though developing or finding the right leadership for each growth stage is difficult, it is critically important. In fact, being able to successfully evolve leadership and leadership competencies (or not) is what often makes the difference between companies that succeed in scaling and those who do not.

Don’t count out founders

One dilemma we often help our private equity clients gain clarity around is founder readiness - to replace or not to replace?

At the beginning of this article, we made the somewhat counterintuitive statement that experience isn’t always what’s most important when it comes to startup leadership. For that same reason, do not count out first-time CEOs.

Taking a chance on a founder or first-time CEO may create anxiety, but the numbers tell a different story. The chances of reaching an exit are equal for both first- and second-time CEOs. In addition, research shows that founder-led companies outperform non-founder-led companies:

Founder-led companies were found to perform 3.1 times better than non-founder led companies in terms of indexed total shareholder return over a 15-year timespan. (Chris Zook, “Founder-led companies outperform the rest – here’s why”. Harvard Business Review)
Equally, companies with a founder-CEO have been shown to be more innovative, more likely to take their firms in new technological directions, and more likely to create financially valuable innovations than firms led by non-founder CEOs. (Lee, Joon Mahn and Kim, Jongsoo and Bae, Joonhyung, Founder CEOs and Innovation: Evidence from S&P 500 Firms)

Retaining the founder as your company scales may bring significant advantages to hiring a new leader, especially when it comes to valuable and continuous innovation.

However, if founders are not given adequate support to develop their leadership capabilities, this can pose a huge risk to the company AND to the founder. (More on that later).

Measuring & assessing leadership traits

Instead of looking for experience alone, you’ll want to look for leadership traits that will allow a leader to thrive in moving a company to and through its next stage of growth.

When we’re advising our clients on leadership readiness, we talk about three key factors:

Leadership agility - how well does someone pivot and perform in the face of complexity and ambiguity?
Organizational leadership - how well do they provide vision and help the organization execute that vision with clarity and success?
Leading others - how well do they build and develop teams? How skilled are they in interfacing with stakeholders, such as Boards?

Odgers’ LeaderfitTM framework, developed by our Human Capital Consulting team, breaks each of these key factors into the following competencies:

We see these competency categories as "levers"; the more levers a leader can access and pull in the face of change and complexity, the more successful they will be in moving a startup or company up the spectrum of growth and scale.

As competent as a leader may be, they’re still human. Most leaders over-leverage on one or two of those components and need some coaching and development to learn to leverage the rest. For example, a leader may over-index on using facts and logic (via thinking dexterity) to sway stakeholders, but could fall short when this approach doesn't work for audiences that are brought along through other types of influence, such as strategic clarity or personal spirit.

No leader naturally possesses every key competency. This is where coaching and development come into play to ensure a high chance of success.

Setting your leaders up for success

Identifying the right leader is only part of the equation for successful scale. Once a company finds and hires a leader to take them to the next level, they must make sure that leader has the support they need in order to succeed in that endeavor.

To put things into perspective, the Corporate Executive Board estimates that 50% to 70% of executives fail within 18-months of taking on a new role, regardless of whether they were an external hire or promoted from within. Harvard Business Review estimates that the cost of this failure equates to 400% of the executive’s salary.

Regardless of a new executive’s qualifications, seamless alignment with the team and cultural assimilation can make or break the onboarding process. This is an even bigger deal than you might think:

Statistics reveal that 50% of startups don’t make it past their first 5 years.
66% of the time, this is due to a lack of investment in the founder's leadership capabilities and/or a lack of support provided to help them develop critical decision-making skills. (Noam Wassermann, The Founder's Dilemma)

So, the good news is, you can stack the numbers in your leader’s favor (and your own) by investing in leadership development and coaching. There are several things you can do, regardless of stage, to give your leadership the best chance of success:

Establish baseline leadership capabilities
Ahead of coaching and development, organizations need to better understand their leaders’ capabilities relative to the success requirements both now and over the next few years. We do so through an online battery of leadership and personality surveys, combined with a competency-based interview by a business psychologist. The resulting report identifies, in a consistent and objective way, a leader’s strengths as well as their opportunities, risks, and derailers, the latter of which can be addressed through coaching and development.

Invest in best-in-class executive onboarding
We are thrilled to have launched an innovative Executive Onboarding initiative in collaboration with SurePeople and Harvard Business Publishing. As highlighted by our US CEO, Kennon Kincaid, "Our pioneering program aims to drastically increase new leadership success by optimizing relationships and expediting the transition from orientation to productivity." When done well, executive on-boarding more than pays for itself. Indeed, a recent Harvard Business Review article found that “organizations with a standardized on-boarding process experience 62% greater new hire productivity, along with 50% greater new hire retention.” Learn more about the one-of-a-kind program and its benefits here.

Conduct frequent reviews that assess leaders in relation to those baseline capabilities to identify gaps and development areas
As leaders reach critical junctures in their career, they must gain objective insight into their leadership strengths and gaps – and act on those with a clear purpose.

Using our proprietary leadership assessment method, LeaderFit™, we work with organizations to assess executives for senior roles, based on benchmark norms, cultural contribution, and business requirements. We also help organizations determine whether leaders have the capacity to execute against growth plans or strategies. Learn more about our assessment methodology and LeaderFit™ here.

Invest in coaching and leadership development
Coaching is important for your leaders, regardless of experience level. Our experienced and accredited coaching professionals work with executives to help them understand their assessment results as well as achieve greater self-awareness around their leadership strengths, development opportunities, and potential derailers. They also equip these senior leaders with tools and strategies that will allow them to generate new insights, enhance their overall impact, and effectively help a company scale. Learn more here.

Engage in Systemic Team Coaching

Systemic Team Coaching is especially important for first-time CEOs and PE-owned companies. At its core, Systemic Team Coaching helps senior executive teams develop their collective leadership to more effectively co-create value with and for all their key stakeholder groups. This kind of coaching leads leadership teams to a level of engagement and collaboration that can transform the wider business ecosystem.

The best CEOs recognize and acknowledge it’s their leadership that will determine whether their team’s work will live up to its potential and propel the company forward.

But when a top team works together with a common vision, a company is twice as likely to adapt faster than the speed of environmental change and have above-median financial performance. (Source: Dewar, Keller, & Malhotra, CEO Excellence, 2022)

Using a systemic approach, we work with top teams, both when they are together and when they are apart, to help them improve their collective performance and effectiveness, including how they work together. Learn more here.

Final thoughts

Scaling effectively can be challenging, in particular because leadership needs and competencies can look so different at different stages in a company’s evolution.

To set your company or portfolio company up for successful scale and exponential growth, think carefully about exactly what you need before you make a decision about who you need.

Given the importance of identifying and assessing leadership skills, it’s a good idea to seek help with crucial leadership decisions. But keep in mind that large executive search firms may approach executive recruitment with a fixed process. For evolving companies and startups, more nuance is needed when selecting leadership to help you scale.

Odgers Berndtson, in addition to our global POV and footprint, takes the time to truly understand client needs. We are deeply experienced in helping to identify tailored leadership needs and have developed industry-leading proprietary tools to help you assess leader fit based on company stage, needs, and goals. If you’d like a partner in building leadership for scale, or would like to talk through your needs, please reach out.