Dear Founder,
17 Feb 2024, 14:33
This is the first instalment of The Founder’s Journal. Today, I want to put things into perspective, starting with what business is and what founders do.
A business is not your baby, it is a war machine. As the title suggests, business is war without the bullets, and the founder is the warlord.
This definition has several implication. Let me break it down further, starting with structure followed by the founder’s role.
Warlords
In normal warfare, the King, President or Prime minister makes war with other nations. They are regarded commander-in-chief (CIC). Can you guess who the business equivalent of a commander-in-chief is?
Most people would say the CEO, but that’s wrong. The commander-in-chief is the shareholder/investor/founder. Just like any head of state, they do not get involved in the daily affairs of warfare. That responsibility is passed on via a chain of command, which brings us to the next point.
In the military, the CIC’s role is to hire wise and capable generals. Can you guess who the general-equivalents are in business? They are directors.
Directors are appointed by shareholders based on the shares they command. If a there are three shareholders, for instance, they could make a rule that for every 20% of shares held, one director can be appointed. In this case, the business would have 5 directors, each representing the interests of their respective shareholders. Of course, it gets far more complicated as organisations get larger, but this is the basic principle.
Just like the CIC, the director’s role is not day-to-day; they develop strategy and meet once every three months in a board meeting to see how it’s going.
Okay, back to the military. In the army, generals appoint colonels. Likewise in business, directors appoint executives. The CEO, as you can see, is third on the ladder of seniority and they are responsible for taking strategic guidance from directors and mobilising it to create value (or profit). Executives organise core systems, resources and tactics to achieve strategic goals.
In the army, colonels appoint captains. In business, executives appoint managers. The role of management is to maintain systems, ensure people are trained and have the right equipment to do their jobs. It is worth knowing that executives have more of a leadership role, which is different from a management role. I will write more about this in a future newsletter.
You might think I am describing a large organisation, which is irrelevant for a budding founder. However, as you will see shortly, this is essential knowledge.
Okay, then there are foot soldiers whom we can also call entry level staff in business. They are responsible for performing various tasks, but informed by the grand strategy set by directors.
Why is this essential knowledge for founders?
When working alone as a founder, which role do you play?
Taking the example of a barbershop, most founders mistakenly play every role. An entry level staff member,cutting hair on most days; a manager finding the right equipment; an executive the other day, figuring out systems and tactics; then once in a blue moon, a director thinking about strategy. Seldom do founders ever think of themselves as the chief investor. Yet this is the primary role of a founder.
As a founder, your role is to sponsor the vision and strategy, and look for your return on investment. Granted, when starting out you may not have all the resources, but this is where entrepreneurship kicks in. Citing his professor at Harvard, Mark Lamberti often says “entrepreneurship is the pursuit of opportunity beyond resources controlled.” In other works, the mark of a great entrepreneur is their capacity to commanding other people’s resources.
Nevertheless, in the beginning one may have to throw oneself in the business to create equity (or value). As a software engineer I build software, which becomes the key asset in a business that later operates. As a founder, you can also look for ways to create value in the business using your skills or relationships.
However, consider that a business is a juristic person in law – it is essentially a person that you own – a slave if you will. If the business cannot raise funds, you as the founder can choose to loan the business your money or time, registered against a shareholders loan.
Importantly, you must set a limit to how much time, effort or money you are willing to throw into a business to avoid personal bankruptcy. In many instances, it is better to work elsewhere (even as a consultant) and slowly raise the funds to get the business going.
A good practice when starting a business is thinking about it as an experiment, and asking how much you will willing to spend to see if you are right or wrong. Answer that question in terms of resources, time and effort you are willing to risk whether or not things work out.
As founder, you are the chief investor, taking the highest risk and should expect the highest return.
The reason kings went to war was for glory – a word seldom used today.
Kings went to war to preserve their names, to defend their people, to drive a vision and, in the process, enjoy the spoils. This is no different from the role of a founder – they are the chief visionary, but the chief risk manager at the same time for when all is said and done the buck stops with them.
When investing in stock markets, one should expect a return of about 10% per annum. In private equity (where investors’ funds are deployed to support mind-sized private companies), annual returns range from 10-15%. Venture Capital firms take larger risks on smaller companies, including pre-revenue startups, and therefore expect returns of 25-35% year on year.
I think founder must expect returns north of 50% year on year after the business has paid a handsome salary if you also work in it. Otherwise, it’s not worth it. Without a high return, your money, time and effort are better spent elsewhere, either consulting for companies or in employment, making a decent return on effort without worrying about the problems of building a kingdom.
The underlying point is that founders are warlords, a business is a means to wage war, and one must treat it as such. It is not your baby; your employees are not family. No! A business is a modern war machine (an asset) and its job is to perform and yield a financial return.
Once this basic requirement is met, all other frills can follow.
To summarise
Business is war and founders are warlords.
All businesses have a structure that requires different roles: founders often get lost in the process of switching hats. However , your role is to sponsor a vision and seek a return – not to be buried in the business.
When starting out, it may be necessary to create equity by working in the business, but in the long term, this is not the role of a founder.
Founders take extraordinary risks and should therefore expect a serious return on investment, more than 50% year on year.
Above all, your business is an asset – no different from a property or anything that generates an income. It’s not your baby, it’s a wealthy creation tool.
I hope this was useful. Please leave a comment below. Sharing your feedback and suggestions on what I should improve.
Above all, please share this with a friend and remember to subscribe here.
Until Next week, keep grinding.
Vusi
