How Much Does Leadership Actually Matter in a Startup?
We tend to see startup entrepreneurs as visionary leaders, coming up with the ideas, directing the team, and ultimately being responsible for the success or failure of the company. There are countless examples of companies with good ideas that have failed because of poor leadership, as well as merely decent ideas that have thrived because of great leadership — at least, that’s the general perception.
Before you put too much pressure on yourself to be some inspirational, charismatic gift of a leader, I’d like to explore exactly how much the “leadership” factor plays in to the ultimate success or failure of a company.
Roles of the Leader
First, let’s take a look at the roles that a leader plays within a startup organization:
· Idea generator. It’s your job to come up with new directions and new possibilities for the organization (and solve tough problems).
· Decision maker. When it comes time to make a hard decision for the company, you’re the one who has to make it.
· Team builder. You’ll be hiring people, firing people, and inspiring people to work their hardest under your banner.
· Image maker. You’re also the figurehead of the company, and the “face” of your brand.
There are undoubtedly other roles that a leader has to play, but these are the primary influential categories. All this is nice in theory, but how much of an impact does it actually play?
Scientific Study
According to one Harvard study, the significance of “leadership” is actually misguided. Following different arguments ranging from “leadership doesn’t matter at all” to “leadership is the only thing that matters,” empirical research showed that what was important wasn’t the consistent degree of leadership shown by individuals within a company, but rather what degree of leadership was exhibited during critical moments. As a basic example, if you’re typically somewhat distant to your employees and you frequently procrastinate decisions, that might not matter as long as you step up during stressful times or react well to a crisis.
A Matter of Luck?
Another study suggests that a CEO’s performance isn’t entirely measurable in terms of his/her leadership ability, or diligence, or any other isolatable factor. Instead, it suggests that a significant chunk of objective performance can be attributed to the outcomes of random factors — a fancy way of saying luck. This study suggests that anywhere between 2 and 22 percent of a CEO’s performance is reliably attributable to luck, depending on the industry of the business. This isn’t the first study to suggest this relationship, either. There’s an entire body of literature dedicated to analyzing whether or not a business’s performance is objectively tied to any combination of factors.
However, another, more recent study examines the factors used in a variety of reports to evaluate the “luck” factor in the success of various leaders. Using a variance decomposition analysis, this study reports that mere luck could never be enough to sway an organization from success to failure or vice versa. If you’re like me, this makes logical sense to you — and if you’re an entrepreneur, you better hope it’s true.
The Early-Stage Difference
Most of the studies I’ve referenced above (and most studies in general) have neglected one crucial element of a leader’s role in a startup. They’ve focused on the entire life and death of various companies, usually high-profile, established ones. The mechanics of these organizations were already put in place when the targeted “leader” for study took over, and therefore don’t give you a full picture of how much leadership matters.
In my experience, the early stages of a startup are where leadership is most important. You’re working with a softer, less developed idea, with a small team and a lot of unknowns. The market, the idea, the workforce, and even the culture of your company are all volatile, shifting concepts, and it’s your job as leader to help align them. Stepping in after these concepts are established means your leadership skills are less influential in the company’s development, and your decisions might already be guided by factors that were set before your time. In practice, early-stage leaders are more important than any other kind.
The Bottom Line
It’s undeniable that leadership is important; even the most critical studies relegate the effects of luck to only a fraction of a CEO’s performance. We all know that luck is a factor in all areas of life, so it only makes sense that some leadership factors extend beyond our control. However, it’s still within the leader’s power to make or break a company based on his/her actions. This is especially true during critical moments, as the Harvard study referenced earlier indicated, and during the early stages of your company development. Keep this in mind as you start, or continue building your organization from the top.
For more content like this, be sure to check out my podcast, The Entrepreneur Cast!
