The Financial Fact Founders Can’t Forget

This article was originally published on LinkedIn.

Why does your company exist? Read the business press or company earnings statements, and the answer seems obvious: profit. Your company is a revenue-generating machine. Run it well, manage its capital carefully, and it will grow and reward its shareholders.

Alas, this is actually how most experienced business people think. I daresay it would be the answer you’d hear from most recent MBA graduates, too.

But if you talk to company founders, you’ll hear something completely different. They didn’t wake up one day and decide “I’m going to create a company that makes money.” They got into business because they saw an unmet customer need. Sure, they recognized a business opportunity, but customers that were underserved in some way are what spurred these founders into action.

In fact, founders are often at war with their own industries on behalf of those customers. Sometimes they offer a completely new product that disrupts the industry entirely, such as Netflix upending the video rental industry. They see incumbents ignoring customer segments, providing inadequate service, locking in customers with long-term contracts or complacently assuming that their customers will always be content with the current business model.

Unlike professional business managers at many incumbent companies, company founders can never forget this simple fact: Revenue doesn’t come from thin air; it comes from customers.

And this way of thinking, it turns out, is essential to sustainable, profitable growth. In their upcoming book, The Founder’s Mentality, my Bain colleagues Chris Zook and James Allen found that, since 1990, returns to shareholders at public companies where the founder is still involved are three times higher than at other companies. Moreover, among the elite companies that Bain identifies as sustained value creators—that is, those that have achieved a decade or more of sustained profitable growth—two-thirds clearly exhibited the traits of Founder’s Mentality, whether or not the founder was still at the company.

Customer focus permeates Zook and Allen’s definition of these traits. The first is the sense of insurgency described above—the sense of being at war on behalf of the customer. Everyone in the company understands and is energized by the mission to serve customers better than the competition.

The second of these traits is an obsession with the front line. Large incumbent companies often concentrate power and learning at the center: Headquarters becomes the focus of power and resource. Voices from the front line grow increasingly distant and powerless. Not so at companies with Founder’s Mentality. At these companies, the people who deliver value to customers are heroes, and they know it. Think, for example, of the confidence of Apple store employees. At companies with the Founder’s Mentality, the front line doesn’t work for headquarters, headquarters works for the front line to help it serve customers better.

An owner’s mindset, which is the third trait, may seem more in line with the common business answer mentioned above. The idea that management should treat the company’s money as its own is not new in business—it spawned decades of efforts to align management compensation with shareholder returns. It also was the rocket fuel of the private equity industry.

But on its own, Allen and Zook note, the owner’s mindset could harm customers. It sometimes breeds an incumbent mindset, focusing managers not on innovation but on extracting maximum value from the existing business, often at the expense of customers or the front line. Readers of my books or this blog will instantly recognize that as the cause of what I call “bad profits”—charges that offer no additional value to customers and make them feel coerced, deceived or misled.

Founders would never jeopardize customer relationships for short-term revenue gains. And they don’t focus on cash just to hoard it or return it to creditors or shareholders. Instead, they focus on constantly redeploying cash to meet the most pressing customer needs in the most innovative way. They despise any internal bureaucracy that locks up resources and slows decision making. They don’t annually add 5% to each department’s previous budget—rather, they wipe the slate clean constantly, always looking to redistribute funds to where they will offer the greatest opportunity to serve customers better.

The good news for many companies is that they don’t need to still have the founder present to exhibit the Founder’s Mentality. Even incumbents who have lost it over time and become mired in bureaucracy can restore the Founder’s Mentality by focusing on bringing back its defining traits.

A good way to start is with the question asked above: “Why does our company exist?” Ask your management team, your frontline employees and others in your company. If they don’t all immediately cite your mission to serve customers better than anyone else and how your company does that, then maybe it’s time to get them thinking like a founder.

You can learn more about customer advocacy and the traits of founder-led firms on the Founder's Mentality website.


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