Weekly Thoughts


Weekly Thoughts: Royalty Need Not Apply

Here is something that caught our eye this week:

Royalty Need Not Apply

A popular entrepreneurial framework we learned in business school was the trade-off between  “Rich” (maximize personal wealth) or “King” (maximize control). Conceptually developed by academic Noam Wasserman in his popular book The Founders Dilemma, the framework argues that despite media coverage of founder-CEOs (Bill Gates, Mark Zuckerburg, Phil Knight, Jeff Bezos), the reality is that most companies are not run by their founders.  In other words, being Rich AND King is a rare breed.  If this is not purposefully acknowledged, the trade-off can create conflicts.  Wasserman in HBR:

“The reason isn’t hard to fathom: There is, of course, another factor motivating entrepreneurs along with the desire to become wealthy: the drive to create and lead an organization. The surprising thing is that trying to maximize one imperils achievement of the other. Entrepreneurs face a choice, at every step, between making money and managing their ventures. Those who don’t figure out which is more important to them often end up neither wealthy nor powerful.”

Wasserman notes that it’s not as if one of these paths is inherently better than the other.  Rather, the point is that entrepreneurs must be honest with themselves about what they desire most, a choice which can lead to different decision making, different outcomes, and different definitions of success.  For instance, knowing what you are maximizing for has a big impact on whether or not one seeks external equity capital, how aggressively one pursues growth opportunities, and what type of human capital talent needs to be hired.  Of course, this trade-off is not only applicable to today’s startups, as outlined by HBR:

“In 1917, Henry Royce was pushed to merge Rolls-Royce with Vickers, a large armaments manufacturer, in order to form a stronger British company. In a chapter in Creating Modern Capitalism, Peter Botticelli records Royce’s reaction: ‘From a personal point of view, I prefer to be absolute boss over my own department (even if it was extremely small) rather than to be associated with a much larger technical department over which I had only joint control.’ Royce wanted control—not money.”

By Wasserman’s entrepreneurial framework, we are certainly in the King category, choosing to self-fund our growth via cash flows rather than work with external equity capital providers to accelerate our growth.  We are comfortable with the associated trade-offs and are optimizing our business accordingly.

Within Chenmark however, the Rich vs. King framework has taken on a slightly different meaning.  Internally, seeking to be Rich means focusing on the detail oriented work of compounding small, incremental gains consistently (which might sound very familiar to the Slight Edge principal or to the Patriot Way for long-time readers).  Our belief is that this behavior will optimize customer and employee outcomes and will eventually maximize free cash flow as well.  Conversely, being King means seeking headline adoration and personal credit (which is a lot like being a Mercenary as opposed to a Missionary).  Put another way, it is focusing on the sizzle while potentially ignoring the steak.  As may be obvious, we are staunchly in the Rich camp and feel entirely comfortable without the notoriety that comes from being King (or Queen).  More importantly, as we mature in our business pursuits, we are increasingly wary of working with aspiring “Kings”, as the associated ethos is starkly incompatible with our internal values.  Simply put, royalty need not apply.

Have a great week,

Your Chenmark Capital Team

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