Failing to Scale — Part 1
Domain Expertise at the top
This is the 1st part of a 4-part series on why early-stage tech startups can fail their first few years trying to get into business, due to common and unfortunate circumstances created by their founders, that should, in this day and age, be easily avoided.
In this first part, we are exploring how Domain Expertise residing at the top of the company can destroy desirable products from emerging, and also how it can inadvertently eradicate any innovation that could have been developed by the people who make the product — the “makers”
The full series, tackles:
- Part 1 — Domain Expertise at the top — read below
- Part 2 — Thinking that you know your customers
- Part 3 — You made a Services Business
- Part 4 — You hired the wrong people
Now, before we get started in this series, I need to keep this series to a specific segment of the tech startup market. We are talking about:
- Small-scale, early-stage startups — where there are about ~5–10 people starting a new business, with ~1–5 founders. One of whom is the “ideas” person, who, of course, puts themselves in the top slot of CEO of the company.
- Underfunded, and lack of availability to large capital injections.
- B2B or B2C tech startups, predominantly SaaS.
- Building tech products — not creating tech services companies selling some skill or capability of a person in the company.
With that squared away, we can get into this series, and find out what you need to know about Founders that kill startups like these from the inside.
Domain Expertise
Having large amounts of domain knowledge about your new business seems like such a no-brainer to anyone starting out a new tech business.
How could you start a new competitive business if you didn’t have expert knowledge of who and what you are going after? Seems crazy to start without this level of knowledge, after all!
You simply can’t and should not start a new tech startup business without having an idea about some kind of opportunity in the market. So, someone in the new business had better be the “ideas” person, and their idea had better be backed by some clear opportunity.
You’d think that to be successful, you'd want to start your new business with deep knowledge about the industry that you want to disrupt, and further, you’d want to have a bunch of connections in your own networks, to be able to reach an initial set of consumers of your new idea, to get started quickly.
Armed with both these advantages, you'd certainly feel like you are ready to go! into building out your new tech. Who better to have this kind of superpower than the person most committed to the new startup business, the CEO.
The advantages seem obvious to everyone:
However….
Even though domain expertise in your startup business truly is a superpower, someone needs to have it. However, there are several pitfalls that arise when you combine the domain expert with: (a) a founder, (b) the CEO, and (c) no experience in creating product companies, or any kind of product development.
Funnily enough, there are other options for all startup founders that don’t put domain expertise at the top of the company. But they are rarely if ever, explored in small startups, unfortunately.
Startup investors, angels, and venture capital funding often sees domain expertise as one of the top qualifications for new founders, and as a leading indicator of success. They believe that knowing your industry domain and having prior experience in that industry, and having established networks and relationships are massive advantages for new startup founders. And it is, but, this aspect often overshadows the fact that the founder probably has no experience in the execution of a tech company, no matter what the idea, opportunity, or team and resources that they may have around them.
Those CEOs, if they are not very careful and very intentional about it, can absolutely and inadvertently destroy all of their advantages, as you will see throughout this article.
Over-Confidence, Resolve, and Predictions
OK, let’s get into it.
The first big problem with having lots of domain expertise about your product and market, at the top of the tech business, is that it provides answers (with certainty) to questions that the domain expert hasn’t bothered to ask, and test, on the market yet. They probably never will — because they think they already know the answers, based only on their past experiences and biases.
For example, imagine an ex-Lawyer who has been a Lawyer for 25 years all over the industry, starting a new tech business as a CEO. Then when challenged, not being able to predict precisely what problems all Lawyers might have and what the solution to their problems would be — that they would all buy immediately if it was available to them. No ex-professional is likely to want to admit that they don’t know the answer to that question. It’s a matter of pride. But they absolutely should admit that they don’t know for sure, any answer. Any confidence in any answer, with any certainty in accuracy, is just hubris. Never mind the fact that, more than likely, many other people (before them) have probably tried and failed with starting a new business with the same answer.
A domain expert (DE) that has worked in the same market where they want to create their new product, for years before, as either a service provider or as a consumer of products and solutions. Will be assuming that their idea will immediately resonate with everyone in that market. It’s clearly a “no-brainer”, to them, if you will.
Secondly, if you are the leading domain expert in your new tech company, you won’t be so open to others less experienced than you, (and certainly not younger than you!) questioning whether your assumptions (based on your past knowledge and experiences) are, in fact, sound and true when applied in your new tech business. Your expertise and experience make all your ideas instantly credible, and unquestionable. Imagine how that amplifies if you are wearing the CEO badge at the same time, and it’s an employee of yours trying to challenge the viability, feasibility, and desirability of your idea!
A Founder/CEO with deep domain expertise in any domain (let’s say: Law) is going to assume that no one else could have gained the same knowledge that they have earned over their difficult career working in the [Law] industry. They will want to be “the smartest person in the room” when it comes to challenging whether ideas in that domain will work. These are very strong biases and they are super common in most experienced professionals, who then become Founders of new product companies, building products for that domain!
Competition, Territory, and Obedience
Another downstream problem of this bias, which is also not so obvious to these kinds of founders, is that no one that this kind of CEO/founder actually hires, from here on out into their new company, will ever question their authority on their expertise in any [Law] related matter to do with customers or the market.
There will be no place for those new employees in the CEO DE’s business except to focus on just delivering whatever solutions the CEO DE decides will surely work for their business. The CEO DE won’t be spending their capital on hiring other domain experts like them. They will think that they have that knowledge and experience covered (by them), and thus they just need makers to make, not more DEs to decide. The CEO DE will want to maintain control of what gets built because they have all the ideas, and that will be clear to anyone coming on board. Especially, if these new people are not veteran professionals in product development. They won’t be hired, of course, because the CEO will not value their expertise (in product development) over their own expertise (in the target domain).
What the CEO DE does not yet know (at this early stage of the business) is that whatever their ideas are (about how to build their business, and what to build for their business), no matter how they communicate them, they will receive little to no challenge from the people in their business who are responsible for making them into a product. Whether those ideas do, or do not, in fact, work in the market, with the target customers.
What is far worse than that, is that no one will be bothering to check on the effectiveness of those built ideas in the market either! Since no one feels responsible for their success.
ProTip: This is the number one reason that most software teams (who are taking orders from a CEO) don‘t bother to measure anything that they build in the market. Since they had no say or skin in the game of deciding whether to make that thing or not. The CEO is presumed to have done all that already. They simply get busy doing their design and build jobs, and never question why the things they build don’t actually have any impact on the market! Somebody else must be caring about that aspect. Obviously, and it won’t be them!
Consequently, the CEO’s weaponized domain expertise is at risk of being the main thing that creates the future bottleneck of their business. Why? because they will see everything that is controlled by them through the frame of their superior expert domain expertise, and thus they are most qualified to make and control those decisions.
Thus, every decision about product planning, technical execution, and business strategy of their new company will need to be controlled by them, since that is what they bring to the table.
Intellectual Arrogance
The second thing to understand about this particular superpower (at the top of the company), is that domain expertise in “the problem space” (of the business) does not magically endow you with domain expertise in the product, engineering, and marketing expertise of “the solution space”.
Thinking that it does, is a dangerous manifestation of “Intellectual Arrogance”.
Let me spare you from looking it up. This is the idea that you can imagine that expertise in one domain (i.e. Law), automatically extrapolates to making you an expert in other domains (i.e. product development in tech). Basically, the idea is that you are so damn clever that you only have to master one domain to have mastered all domains.
We need founders with “Intellectual Courage” and humility to challenge the world and change it, not “Intellectual Arrogance”, where they think they can do this on their own in spite of everyone else.
Seriously!, if making new scalable products was as simple as just having an idea, identifying some buyers, and building the first thing that pops into your head. a.k.a “Build it and they will come”, then, only ~2% of startups would ever fail, and all CEOs would be sipping their martinis on their 50 m yacht in Monaco, in 3 months’ time! Job done!
It just does NOT work like this — never has!
You need to know that this characteristic of CEO DEs is one of the top reasons why more than 90% of startups never make it past the first couple of years. Since it allows them to direct: “building the wrong thing, from day one”, or they drive the makers in their business to “build the thing wrong, so that it all goes wrong far too soon”. Either of these two outcomes sends the business flying into the ground sooner than it should.
Disempowered Innovation
Thirdly, what is not so obvious about the pitfalls of applying this superpower from the top of the company, is that dictating your assumed solutions to those making your product utterly disempowers those “makers” from innovating at all!
That’s right! Your actual tech innovators are your makers, who are deep within your own company! You just didn’t know it.
As a CEO DE, even if you take a brilliant, and well-considered idea, that you are absolutely certain will work for your customers. Then you go ahead and dictate that to your makers, to just blindly follow your orders, because you said so. If you make just one mistake, or take one misstep, or have a miss in the market with your new idea. Or, what is actually built isn’t exactly what you may have described in words and pictures — and this happens 9 times out of 10. Then no one else in your company will be taking personal responsibility for fixing the outcome of your decision. Let alone, caring about whether it worked or not.
No one will care. You disempowered them from taking responsibility for it. Therefore, you are the only one invested in it succeeding now.
They may be “accountable” to you for doing it, but they won’t be taking responsibility for it succeeding. Those two things are not the same thing. You can absolutely do your job really well when doing what you are told to do. Paid professionals will do that to the best of their ability. But caring about the outcome? That requires them to take personal responsibility for it. And you don't get that level of care and responsibility by ordering people around with your ideas based on your hunches when you use positional authority to make it happen.
As mentioned before, those people will do their jobs well, but they are just as happy to move to the next thing you prescribe and ignore the embarrassment of any failure that you may have created behind them. They may even just ignore the impending doom that they already see the business heading toward, by your hand — as well!
You are a fool to ignore this principle of working with smart, educated people.
Now, let me tell you a dirty little secret about smart people, particularly tech “maker” people, that is far, far worse than just becoming subservient to taking your orders, and thus disengaging with the success of your business.
Tech makers with no skin in the “decision-making” game of what solutions are tried and built (over time) are going to get bored and uninspired by whoever is making those kinds of decisions. They are either going to quit, or they are going to end up creating and worshiping their own technical goals, expanding their own professional skills development, and are going to start achieving technical feats of their own creation. Whether your business needs those things or not!
As opposed, to what you want them to be caring about, focusing on a positive outcome for your new business!
They are going to grow in their profession with or without you or the opportunities you provide them, whether you like it or not. It’s not their fault, it’s all on you, now — you are making all the calls! and those calls really don’t satiate their ambitions.
You must understand that if “makers” are not led by the “struggles and needs of their customers”, they will be seduced by “technology trends”, shiny objects, and cooler tech companies than yours.
This is not juvenile behavior. To treat this as that, is just ignorant. This is just how they are responding to a lack of control over their own mastery of their chosen profession. It is their coping mechanism with a loss, that you and the company should have been providing for them.
What Should Be Done?
So, what do you do then? What should you be doing? Instead of controlling the flow of work from a CEO DE at the top of the company?
Well, firstly, don’t misunderstand the point begin made here. This isn’t about NOT having ideas at the top of the company. Ideas can absolutely come from anywhere, at any time, by anyone. Even from the CEO of the company, of course.
This is about the unforeseen problems with installing the domain expert as the CEO at the top of the company, then, having them control everything that is done by the company because they think that they are the only expert in the company.
This is about how a CEO DE needs to go about trusting and empowering other experts in their company with the context of those ideas, not the solutions for them. Particularly to the educated and smart, and experienced “makers” who are actually the people that turn everyone’s “brilliant” ideas from ‘thin air’ into revenue-generating businesses. This is not commodity work, done by soldiers taking orders, by any means. You are very wrong about that if you think that works in this industry.
If you treat these people like slaves, then obedient and incompetent slaves you will grow. Then, frustratingly, you’ll be doing all the hard work fighting them, and your customers in your market just to survive. While your competitors will be easily eating your lunch.
Didn’t you know?
Domain Expertise is, in fact, a superpower for a startup, no question about that, but please remember this:
Domain expertise can also be hired-in into a startup. Tech-savvy founders know this fact and don’t allow domain experts, nor Salespeople, to run their tech businesses — for the same set of reasons. These founders actively mitigate against this to avoid the business being overcome and controlled by all their trappings (Sales and domain experts dictating product development). They don’t let CEO DEs become the future bottleneck of the company preventing it from scaling in the future.
Sidenote: Not that you should ever, ever compare yourselves to the big tech companies out there like Google, Netflix, Microsoft, or Facebook, whatever — but to humor, those of you who find it too intoxicating not to want to do that, take a leaf out of the book of just about any famous tech founder you’ve ever heard of. You name them. Their foremost domain expertise was: “product development”, not domain expertise in some industry career.
What you need to do, to keep domain expertise as an effective superpower, (and not a crutch for your future business), if you are a CEO DE, is that when you grow your company and hire more staff, you either:
- Devolve that domain knowledge and expertise to the tech innovators in the company, through regular collaboration, and let them figure out what actually works on your customers and market, OR
- You move the domain expert to work directly with the tech innovators in your company — as a SME.
If you DON’T do this, and instead, you keep critical domain expertise at the CEO level of a tech company, not only are you taking big risks with your future business in terms of creating expensive mistakes, but you are also going to prevent your business from scaling in the future.
Remember how that works?
It’s because the CEO will become the bottleneck of all decision-making of the future, about every detail in the business. Everyone else in the same business will subordinate their work (and their souls) to that bottleneck, and the CEO’s regime. There is only so many people’s work a CEO can control personally and directly. Let’s call that number about ~15-20. A CEO like this will be hitting up against that hard limit on how many people they will hire into their business. So subconsciously, they won’t go beyond their number, for fear of losing control of their business.
They won’t get the people they really need in their business over time. The good, competent, and capable people that they convince to work for them, won’t tolerate being treated like slaves, and they will leave promptly. The CEO will keep churning people, and feeling like none of them “get their business nor their superior leadership skills,” so good riddance to them — next!
Even though controlling every decision in the business may sound appealing to a lot of CEO egos, beware! Series A & B experienced investors are smart enough to know about this kind of bottleneck holding back businesses from scaling. They will be hunting for underperforming businesses with a future, then get control of them, and remove those CEOs from power while hand-cuffing them to the company, restructuring the company, and establishing new more-competent leaders in product development to replace the CEO, and their former regime.
There is nothing quite like the feeling that comes with having someone else take your baby from you, that you sweated over for years. Then, to have it ripped out of your hands, and raised a more lucrative way than you had done, while you get to look on in shame and envy, living out your meager velvet handcuffs.
Lead with trust, context, and humility, not with control and arrogance.
In the next part of the series, we are going to see how other aspects of CEO DE’s affect how they behave, and the consequences and outcomes of that.
Next up is about thinking that you know your customers, and what they will definitely buy from you.
