Despite recent belt-tightening by investors, almost $68 billion in funding was provided to over 7,800 startups last year. The venture capital community anticipates a strong startup pipeline throughout the balance of 2017. Capital, along with a well-established support system of advisors, is vital to the ability of these new startups to scale quickly.
As companies experience fast-paced growth, they quickly face questions around how to proportionally scale the leadership team to keep up with the demands of the business. Among the key early considerations: When is the best time to bring on a chief operating officer?
Unfortunately, no single metric, benchmark, number of employees, revenue target or funding milestone reliably indicates when to hire a COO. The frustrating reality is that the right time is just before “trouble” appears -- when the company cannot grow or progress without more organizational structure or when the current C-suite faces more demands than can feasibly be accomplished in even the longest workday.
The “COO moment”: Making the transition
In a startup’s early days, it can seem like everyone is a chief of something. Friends who join together may understandably want to avoid hierarchy in what they initially feel is a joint pursuit of a common dream. As a result, the “C” preface is ubiquitous, and in fact, no one is really the chief of much of anything -- little in the business has evolved to where a chief is required. While the egalitarianism might be socially comfortable, these C-Faux-Os under-represent the value that a properly executed COO role provides. At some point, external expectations on the CEO will make it impossible to meet both the expectations of investors, analysts, media, customers and so on, while also shaping culture and providing the leadership the rapidly changing business requires.
The new COO: From inside or outside?
The search for a COO begins with a crucial decision: Should the COO come from inside or outside of the company? Standard thinking indicates that the insider has the benefit of institutional knowledge while the outsider offers a fresh perspective. There are examples of each working and failing.
What explains the success of either an inside or outside candidate? For insiders, what is most critical is the ability to assert him or herself as the “go-to” person when it comes to the everyday execution of strategy. This is also true for outsiders, but whereas insiders are building credibility in a new, key position, the outsider’s challenge is learning to effectively partner with the CEO to provide a united front to internal and external stakeholders.
The CEO and COO partnership
Getting a CEO and COO configuration right is one of the most complex and difficult leadership challenges any company -- especially a fast-growing startup -- faces. Because each CEO, COO and emerging company’s situation have so many unique elements, properly pairing the leadership teams is always “a one-off.”
One of the biggest mistakes startups make in defining the leadership roles of the CEO and COO begins by saying, “We will work together and figure it out as we go along.” Though there is no doubt that learning will lead to adjustments as the pair work together, the CEO and COO must from the outset have clearly defined boundaries that demarcate separate roles for themselves. The clearer and more correctly they can do this up front, the better. Failing to do so will lead to confusion both inside and outside the company and, as a result, waste precious time and resources.
One of the most important qualities of an effective COO is the ability to be a “world-class follower.” The COO should be comfortable to privately challenge the CEO’s thinking, but the two need to be solidly in step when communicating with stakeholders.
Founders must also be extremely comfortable with the COO and self-disciplined about when and how to chime in. Statements that appear to undercut the COO have the effect of disempowering him or her. Over time, repeated episodes will render the COO completely ineffective.
Challenges for the new COO
One important and immediate consideration for new COOs regards the organizational structure and the change to it that the creation of a true COO position brings forth. It is likely that before the appointment of the COO, the founder deployed a hub-and-spoke leadership style. Here, the founder remains at the center with different executives or departments set apart and reporting directly to the top. When the COO becomes a layer in between what had been direct reports, it may create resentment among those now sensing a demotion of sorts through their now controlled access to the CEO. COOs need to be highly sensitive to this so that communication remains healthy under the new structure.
Getting the COO role right
In any organization, it takes a deft touch to design and manage the CEO-COO relationship effectively. That isn’t easy in an experienced organization, and it’s even tougher in an immature startup; it will require very careful management. For many startups, bringing on a COO indicates progress and growth, yet many founders struggle to effectively integrate the COO into the business. To unlock an organization’s potential, a founder must truly relinquish some control, and the COO must remain a “world-class follower.”
Though there is no definitive time to make the decision to bring on a COO, as the robust startup pipeline continues to receive funding, more startups will evolve to the stage where a second set of executive hands is required. At this moment, founders will inevitably bring in COOs. We argue that this crucial decision is an important milestone in the evolution of a startup and that getting it right will lead to exceptional results.