Peter Segall is a Managing Director at Insight Venture Partners. He is also a CEO with a successful track record of growing software and service businesses in the education, human capital management, and healthcare industries. Throughout his career, Peter has worked with over 20 companies, helping them to maintain a solid leadership structure as they scale. He is an expert at building SaaS businesses and currently serves on the board at Nearpod, Illuminate Education, Caremerge, and SiftScience.
In this blog post, Peter discusses company leadership structures, highlighting the benefits of adopting a partnership model. Read on for the full picture, but in summary, Peter shares these insights with CEOs of growing businesses:
- In the startup phase, company founders are typically less focused on defining specific leadership roles and more focused on doing what it takes for their business to survive.
- As companies move into the growth/stabilization phase, founder(s) roles and responsibilities become more defined. Leadership models start to take shape.
- While many companies have been successful with just one leader, the workload often becomes too much for a person to manage as a business scales.
- A one-man or one-woman approach results in a hub and spoke leadership model, where a CEO has countless direct reports and wears too many hats. This leadership model can be overwhelming and stunt company growth.
- Businesses are more likely to succeed and scale faster when they adopt a partnership (or tag team) approach to leadership, where two or more people are sharing the responsibilities of running the company.
- Choose your partners wisely – seek out leaders with skill sets complementary to your own so you can each excel at managing different business functions.
We all know that starting a business is not a solo act. Contrary to the myth of the Silicon Valley Superhero, successful startups and growth businesses are typically the result of great partnerships between founders. But what about companies that are growing out of the startup phase, and into the scaling phase? What kind of leadership structure works best?
The Startup Phase
When companies are just starting up, two or three founders typically perform multiple jobs. If they are lucky enough to have personal capital, financial support from friends and family (or friends willing to work for Chinese food, a couch, and equity), a band of 5-10 people will come together to build an innovative product or service.
Startups that succeed tend to have a meaningful level of trust among founders – they work closely together, are aligned on the same goal and strategy, and are willing to do whatever it takes to survive. During this early phase, one founder may focus more on product and service, and another may drive sales, but they don’t worry much about formal roles or what title goes on the business card. I have seen several startups make it through this phase and into high growth in no small part because together, the founders were a strong team. Indeed, I have seen several startups stall or crash because a founder lacked a strong partner.
The Early Growth Phase
If the Startup phase is successful, companies move into stabilization/early growth. In this phase, a company has a product and growing number of customers who love that product. The company has iterated on their product several times with customer feedback, and they are developing a good feel for who will buy it and how to sell it. If all of this is working well, the founders will usually try to self-fund more growth or raise a Series A.
During this stabilization and early growth phase, the founders often continue their close partnership, but with more specialization and concentration on the different functional areas of company operations. Commonly, one founder manages product, engineering and customer service while another oversees the sales and marketing team. Which founder gets the CEO title may be arbitrary and sometimes doesn’t matter all that much if these functions get built out well.
Typically, this phase involves somewhere between 10 to 100 employees, and perhaps $1M-$10M in revenue. Companies in the stabilization and early growth phase can often feel and act like startups – people doing whatever they need to do to keep customers happy and sales going – and they lack systems and process that are reproducible. But in successful early growth phases, the founders still behave like real partners – cohesively. While there are many examples of the single founder who serves as chief inspiration and ship captain, the more common successful model that I have seen is when two or more partners continue to drive the business as a team.
I have been lucky enough to have involved with three successful software companies that made it through the stabilization and early growth phase – two in educational technology and one in healthcare technology. In all three companies, the founders behaved like partners all the way through. They shared key decisions, bounced ideas off one another, argued, split the major oversight responsibilities and ran the company as a team. This partnership model works because there is always too much uncertainty, too many directions and simply, too much work for one person to do alone in this early growth stage. Having a partner is vital.
For example, in one educational technology company I was involved with, one founder was the “Ms. Outside,” focused on sales, positioning, etc., and the other was “Ms. Inside,” focused on engineering and operations. This company grew from $1 million in revenue to $40 million in six years, in no small measure because the two founders continued to work well together throughout this journey. In another company I worked at, the CEO was product- and technology-focused and the COO drove the go-to-market teams. This partnership grew the company from zero to $9M in revenue before it was sold to a PE firm. Both scenarios worked well because the founders worked together cohesively, each bringing different skills but the whole being more than the sum of the parts. Importantly, having a true partnership at the top made difficult jobs less stressful and more fun for both of them.
The Scaling Phase
If a company is doing well, the next phase is the scaling phase. I have seen companies stall and struggle during this phase because they did not have an effective partnership model at the top. In fact, I made this mistake myself.
It is during the $10M-$100M phase when one or more founders frequently take on a narrower role or leave the business altogether. They may have enjoyed the excitement and thrill of the startup more than scaling. Or they may not have the experience and skills to handle the business’ increased complexity. During this phase, one founder will usually settle in as the ongoing CEO (or perhaps the founders or investors will recruit an experienced manager as CEO from the outside).
Hub and Spoke vs. Tag Team
There are two common models of leadership at the top of these companies: the hub and spoke model and the tag team model. The hub and spoke model is where the CEO has, for example, seven to ten direct reports, each one leading a functional area of the business. The tag team model is where the CEO has a very clear number 2, such as a COO, or perhaps a CFO with broad authority, or an EVP Operations, who oversees several areas of the company. In my experience, nominating a clear number 2 is more likely to yield success during the scaling phase.
Why is the partnership model better than the hub and spoke? First, if all key decisions have to flow through one person, the company can’t move as fast as it needs to gain market share quickly. Second, if all disputes among functional heads have to be resolved by one person, the company is probably not resolving conflicts quickly enough and is likely distracted on intramural issues when they should be focused externally. Third, and most importantly, strong CEOs are usually highly knowledgeable and experienced in product and technology or go-to-market strategy and operations; but I have never met one who is great at both. Successful CEOs know their gaps and bring in a strong senior number two leader to complement them.
When I first became a CEO, I defaulted to the hub and spoke model. I found this model did not scale well. Too many people had to sit around a table to make key decisions. Too much of my time was spent referring and reconciling differences. Most importantly, I was distracted from focusing sufficiently on the market because of the need to pay attention to the details of internal operations.
Eventually, I realized this and learned that I needed to delegate more authority. I hired an experienced CFO who took on many of the responsibilities of a COO. In turn, this enabled me to focus more on external matters, including sales, marketing, networking and market trends – which in turn helped us develop a winning strategy for the business.
To give another example, I worked at a company where the business scaled from scratch to $300M. Here, the CEO focused much of his energy on product and technology and had a very strong EVP Operations who oversaw sales, marketing, services and internal coordination – because this played to their respective strengths. Splitting major responsibilities was a winning leadership model for the company.
So, Dear CEO…
Sports analogies can be stretched too thin sometimes. But the best football teams usually have an incredible head coach who sets strategy and an incredible quarterback calling who executes the plays.
When I was running a large division of a publicly traded company earlier in my career, I inadvertently built a hub and spoke leadership model. This division was generating about $130 million in revenue at the time, and I had about 400 people reporting to me. The number of decisions I had to make and the number of direct reports was overwhelming, and it's clear now that I could have scaled the business faster if I had the equivalent of a COO to share the responsibilities.
After this job, I took over as CEO one of the companies mentioned earlier and recruited the strong CFO mentioned earlier, who had served as a sort of COO in many respects. I spent a great deal of time in the market and setting strategy, and the CFO helped monitor and guide internal operations. We increased the value of the business six times, reached 40% market share, and had a great outcome for all of the shareholders and stakeholders.
The CEO job is one of the most rewarding jobs in the world, but it can also be a lonely and stressful one. When I meet a CEO who is in his or her second or third CEO gig, there is usually a COO or President present – that’s because the CEO has learned their lesson.