Emotions are a critical but underappreciated aspect of new venture management. Recruit accordingly.
The transition from start-up to scale-up may be among the most hair-raising that an entrepreneur must navigate. You’ve just mastered the family sedan. Now you’re being handed the keys to the Lear jet.
Leading a start-up, you’ve worked out the kinks in your new product or service, validated the business model with your target audience, and laid down your lines of distribution. You’ve surrounded yourself with people who have strong business and market knowledge. People who can take on multiple roles. It’s fast moving, it’s fluid, it’s management by the seat of your pants.
To scale up, you need to slow down. Now you’ll want to put in place the processes and systems and management hierarchy that will allow you to deliver your offering to a growing customer base — day in and day out. For that, you need to assemble an entrepreneurial team with much more structure. A team with functional specialists in marketing or sales or operations. You know, people who won’t be asked to also replace the toner in the photocopier.
When you reach that critical scale-up stage — experts say it often hits at $5 million in sales and 30 employees — what does the management evidence say about what makes great entrepreneurial teams tick? Considering how much research has been conducted on team performance, less than you think.
Team Size and Diversity
Take team size. What research has been done on team size and new venture performance is equivocal. Some suggest larger teams lead to better performance due to their ability to handle complex situations. Others suggest smaller teams boost performance due to their ability to integrate different outlooks.
Same with diversity. In the corporate world at least, it’s generally thought that diverse teams — with their wide range of skills and perspectives — outperform less diverse teams. Indeed, studies have identiﬁed a positive relationship between the diversity in the functional backgrounds of venture team members and new venture performance. But other studies have found no such relationship, or even a negative one. There’s the argument that diverse entrepreneurial teams can actually sputter because of the need to spend so much time and energy defusing emotional conflicts and trying to reach consensus.
It’s a similar story with the educational diversity of new venture teams and ﬁrm performance: no clear answer.
How about gender diversity? This one is tricky. It’s been shown that female entrepreneurs identify fewer market opportunities than their male counterparts. You might conclude that any increased gender diversity of new venture teams may have a neutral or even a negative eﬀect on identifying market opportunities, an important consideration during the scaling-up stage.
Not so fast — a study of gender diverse venture teams in the most entrepreneurially vibrant region in China tells a more promising story. It found that the gender diversity of an entrepreneurial team is positively associated with the venture’s innovation performance. What’s the connection? It seems that having women on male-dominated entrepreneurial teams allows all team members greater freedom to provide unique insights into key tasks that new venture teams have to deal with.
Escalation of Commitment
But there’s another way of looking at new venture teams, besides skills, size, or diversity. If you’re a founder, what sort of top management team would help you make better decisions when the pressure is really on?
Here’s a common scenario: you’re at a crucial point in your young firm’s development. Your key product is faltering in the market. Your investors advise you to cut bait and pivot to another product or business model. But you just can’t bear to turn your back on years of development and seed money. Instead, you decide to double down. This psychological jujitsu is known as the escalation of commitment — better known as “throwing good money after bad.” When you feel the need to justify your original decision, hope springs eternal.
According to new research, this escalation of commitment in an entrepreneurial setting is partly fed by group emotions and social pressures. In particular, researchers found that the level of hope among a new venture’s team members — more than their fear of financial loss — determined whether they escalated their commitment and kept investing in a faltering venture or called it quits.
Part of this may be explained by the fact that entrepreneurial teams often have very strong bonds of friendship. Team members have been through a lot together. They don’t want the adventure to end. As a result, they may be blind to the business reality that the venture has to wind down or change drastically.
The takeaway here is that emotions are a critical but underappreciated aspect of new venture management and decision-making. Many studies have shown the importance for individual entrepreneurs to manage their emotions and re-frame setbacks as learning events in order to be resilient. New venture teams must be adept at emotional management as well.
Particularly when they reach critical forks in the road — and scaling is certainly one of them — entrepreneurs must understand and harness their team members’ emotions. Otherwise, those emotions could lead them past the point of no return.