How Much Does Leadership Actually Matter in a Startup?
We're searching for top company cultures to be featured on our annual list. Think your company has what it takes? Apply Now »
We tend to see startup entrepreneurs as visionary leaders, coming up with the ideas, directing the team and ultimately taking responsibility for the success or failure of a company. And, yet, there are countless examples of companies with good ideas that have failed because of poor leadership, and companies that have thrived despite merely decent ideas. At least, that’s the general perception.
But before you put too much pressure on yourself to be some inspirational, charismatic gift of a leader, let's explore exactly how much the “leadership” factor actually plays in to the ultimate success or failure of a company.
The leader's roles
First, consider the roles a leader plays within a startup organization:
- Idea generator. It’s the leader's 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, the leader is the one who has to make it.
- Team-builder. The leader hires, fires and inspires people to work their hardest under his or her banner.
- Image-maker. The leader is also the figurehead of the company and the “face” of the brand.
There are undoubtedly other roles that a leader plays, but these are the primary influential ones. And all of this is nice in theory, but how much of an impact does it actually play?
The scientific viewpoint
According to one Harvard study, the significance of “leadership” is actually misguided. Examining arguments ranging from “leadership doesn’t matter at all” to “leadership is the only thing that matters,” empirical research has shown that what is important isn't the consistency in leadership at a company so much as the degree to which leadership is exhibited during critical moments.
As an example, if you tend to be somewhat distant from your employees, and you frequently procrastinate in making decisions, such inactions may not matter as long as you step up during stressful times or react well to a crisis.
The issue of 'luck'
Another study suggested that a CEO’s performance isn’t entirely measurable in terms of his/her leadership ability, or diligence or any other factor that is isolated. Instead, the research suggested, a significant chunk of objective performance can be attributed to the outcomes of random factors -- a fancy term for "luck." This study suggested that anywhere from 2 percent to 22 percent of a CEO’s performance is reliably attributable to luck, depending on the industry of the business.
Nor was this the first study to suggest this relationship. An entire body of literature has been dedicated to analyzing whether or not a business’ performance is objectively tied to any particular combination of factors.
Meanwhile, another, more recent study examined the factors used by various reports to evaluate this “luck” factor in the success of leaders. Using a variance-decomposition analysis, the study reported that luck alone can never be enough to sway an organization from success to failure, or vice versa.
This makes logical sense. And if you’re an entrepreneur, you'd better hope it’s true.
The early-stage difference
Most of the studies referenced here (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 in place at the time these studies came along; the studies then looked at the leader of that particular moment.
But by doing this, the studies did not provide a full picture of how much leadership matters.
The reason is that the early stages of a startup are where leadership matters the most -- before the leader analyzed in the studies appeared on the scene.
As the CEO of a startup, you’re working with a softer, less developed idea, alongside a small team and a lot of unknowns. The market, the idea, the workforce, even the culture of your company are all still volatile, shifting concepts, and it’s your job as leader to help align them.
Stepping in after these concepts are established means that your leadership skills are less influential in the company’s development, and your decisions may be guided by factors already set in place before your time.
For these reasons, early-stage leaders are more important than any that come after.
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 the impact of a CEO’s performance. Yet while we all know that luck figures in to all areas of life, it only makes sense that some leadership factors are beyond our control.
Still, a leader has it within his or her power to make or break a company based on individual leadership decisions and actions. This is especially true during critical moments, as the Harvard study indicated, and during the early stages of a company's development.
So, keep all these factors in mind -- and hope for a little luck, too -- as you start, or continue, building your organization from the top.