The Seven Habits of Highly

Effective Entrepreneurial
Organizations

Murthy Mathiprakasam

Originally submitted to Professor Robert Sutton,

Management Science and Engineering, Stanford University

Revised
INTRODUCTION

A significant amount of work has been done in both academia as well as

the venture capital industries in studying what leads entrepreneurial ventures to

succeed and fail. Typically these perspectives approach the subject from the

perspective of product development or sales execution; that is, to understand the

necessary characteristics of products, markets, and company functions to

achieve success. However, there is an entirely different perspective, arguably

somewhat more important, which is the human element of how entrepreneurial

organizations behave and execute as teams. In this paper, I propose seven

organizational components, which are essential to building a successful high

growth entrepreneurial company and whose lack can severely impair the ability of

a company to grow and succeed in the marketplace.

HABIT 1: HAVE A STRONG LEADER FOR A CEO

Leadership and management have received widespread attention in

organizational behavior research given the obvious their impact in mobilizing

teams to achieve collective objectives. However, strong leadership becomes

even more critical in an entrepreneurial setting where uncertainty about tasks and

goals may be incredibly high. Leading in this highly uncertain environment

requires four fundamental components:

1.1 Fairness and Honesty

Entrepreneurial organizations are distinct from larger organizations in the

sensitivity to organizational politics. Whereas in larger organizations the effects

of politics can often be mitigated by structured process; in a growing organization

with limited structure, politics, favoritism, and dishonesty can be fatal. Thus it is

imperative in an entrepreneurial organization to obtain leadership from a CEO

who is open, fair, and honest.

Henry Mintzberg refers to this notion in the article “The Manager’s Job:

Folklore and Fact” when he talks about the manager’s role as a leader and

resource allocator in “reconciling their individual needs with the goals of the

organization…and deciding who will get what.” Shannoni, a Silicon Valley angel

investor, defines leadership as “doing the right thing.” Jacki, a venture capitalist

at Vanguard Ventures, says a CEO must “be fair…be up front about everything.”

Keni, a former CEO and Chairman of a Global 1000 Silicon Valley software

company says, “its not about what you say, it’s always about what you do. We

had a ‘sunshine’ policy where everyone knew everything. It was our way of

letting our employees know we respected their competence and intellect, and

saw them as partners in our entrepreneurial venture.”

1.2 Setting a positive example

Given the small size of entrepreneurial firms and the resulting high visibility of

management, it is crucial that leaders set a positive example of the values of firm

for associates to follow. Jim Collins, in his article “Level 5 Leadership,” refers to

the First Who principle in which leaders “attended to people first.” Daniel

Denison, in his Denison model for organizational culture, suggests a need for

core values “which create a sense of identity and a clear set of expectations.”

Jack also referred to this element of leadership by suggesting that a CEO “takes

responsibility for their actions and is willing to point the finger at themselves.

They must be willing to admit they are vulnerable and says ‘oops, I screwed up.’”
The best example of this is David Neeleman, CEO of JetBlue, who flies on his

company’s flights once a week and serves airline customers along with his flight

attendant staff. He says, “I know that a fish stinks from the head…and that we

can succeed only if I set a good example.”

1.3 Being a confident decision maker

The uncertainty of entrepreneurial ventures also requires a particular strength

in leadership from the CEO. Leaders must possess the experience and

confidence to make critical strategic decisions for the firm when very limited data

or process may exist. Mintzerg refers to the leader as an entrepreneur who is

seeking “to improve the unit, to adapt it to changing conditions.” Bradi, a principal

from Hummer Winblad Venture Partners, mentions that a CEO must “take input

from all sources, make a decision, and not stall. A good leader knows which

decisions are theirs to make.”

1.4 Having Vision

A CEO of an entrepreneurial organization must necessarily be more than a

general manager. The uncertainty of an entrepreneurial venture requires

leadership to not only manage the existing operations of the firm, but to also have

the creativity, vision, and drive to seek opportunities for growth and continuous

improvement. This vision, of course, must be tempered by a sense for realistic

constraints and expectations. However, by combining a creative vision with a

realistic sense for executing on that vision, leaders can effectively recruit

associates to participate in the pursuit of risky ventures. Denison refers to this

characteristic in his model as part of the Mission trait in which there is a “shared
view of a desired future state… [that] captures the hearts and minds…while

providing guidance and direction.” Jack also talks about the role of a CEO as

“having vision to see where to go…the truest test of a CEO is asking would

people follow him or her?”

HABIT 2: RECRUIT THE RIGHT TEAM

Although, a strong CEO is a necessary condition for entrepreneurial

success, it is by no means a sufficient one. As Shannon says, “Entrepreneurship

is a team sport.” The CEO needs to be supported by quality people on all sides:

the board, the management team, as well as the staff in the organization.

Professor Tom Byers, Academic Director of the Stanford Technology Ventures

Program, mentions that a CEO “must know what they lack” and Brad says one of

the primary roles of the CEO is to “create the surround sound” of a quality

management team. According to Jack, a strong and active board of directors is

also necessary because “if the board is braindead, it will be very tough to

succeed and mistakes may escalate to the point of total malfunction.”

Careful recruitment of employees who bring specific capabilities to the

organizational is equally critical. Often times, companies assume that a

collection of smart and talented people with limited purpose or leadership will

automatically and inevitably lead the company to success. But as Malcolm

Gladwell points out in The Talent Myth, “the talent myth assumes that people

make organizations smart. More often that not, it’s the other way around.”

Richardi, an 36-year-old MBA who has worked into two startups, mentions, “we

pumped up the middle level of the company with a lot of inexperienced 28-30

year old MBAs who were all wannabe directors. We ended up talking about a lot
of ideas, but never actually doing anything.” Ken says, “as a small company, you

hire people who have a demonstrated record of skills and experience. You don’t

hire people for potential or sheer brilliance. You hire what you need.” Middle

management in particular should only be brought in when the company achieves

a scale that absolutely requires the extra layers of hierarchy. Ken also

comments, “You don’t really need middle management until you have achieved

at least 100 or more employees. Until then, the executive team should be able to

provide a sufficient amount of holistic attention.”

The two most dangerous types of people that an entrepreneurial venture

can bring into an organization are those who are vengeful and those who are

egotistical. Given the absolute necessity for strong coordination and

collaboration amongst all team members in a new venture, even one or two

people who value personal interests at the expense of the interests of the whole

can impair the ability of the organization to grow. Jack mentions, “You don’t want

to import a virus – a little Hitler – who walks around thinking, ‘wait till I get my

chance, I’m going to make these people pay.’” Egoists are just as harmful since

they make take actions that boost their own interests at the cost of doing what is

right for the organization. Jacklyni, a Principal at Silicon Valley strategy

consulting firm that consults for startups, recalls the leadership her friend, the ex-

CEO of Epiphany had in stepping down from the helm of the company. She

recalls, “He knew when it was the time to step down and let a more experienced

CEO take over. The fact that the management team was not egotistical about it

is what led Epiphany to continue to grow.” Stevei, ex-VP Marketing of a failed

PLM software startup, recalls from his own experience, “We made the mistake of
having both a CEO and a President. The ego issues alone impaired our ability to

get anything done.”

A final capability to consider when recruiting team members is having

people whose role is to keep the growing organization in check. Often times, the

primary stakeholders in an entrepreneurial organization by necessity have to

think irrationally in order to generate the explosive growth necessary for a

startup. However, having control mechanisms to ensure that the irrationality

remains bounded is important as well. Steve mentions, “the founders and board

have to be obscenely optimistic; otherwise they’d never sign up. So, you need a

few people on the team who provide a reality check.” Jack comments, “a good

CEO needs a good CFO who can keep the books clean and keep the CEO

clean.”

HABIT 3: INVEST IN HUMAN RESOURCES

Simply hiring the right team up front is not sufficient; developing and

rewarding them continuously is also critical for entrepreneurial success.

Development and rewarding of employees serve the entrepreneurial organization

in many ways. An entrepreneurial organization cannot be expected to grow very

fast if the skill sets and capabilities of its human capital are not actively grown as

well. Furthermore, the cost of employee turnover is significant higher in smaller

organizations that depend more heavily on the contribution of each and every

individual. Therefore, it is particularly wise for the entrepreneurial organization to

incent employees to remain with the organization for as long as possible.

Daniel Denison refers to this in his model as both capability development

as well as empowerment. Denison defines capability development as “investing

in the development of employee’s skills in order to stay competitive and meet

ongoing business needs” while looking at empowerment as giving employees

“the authority, initiative, and ability to manage their own work.” Given the lack of

precedent and process in new companies, it is absolutely essential to give

employees an environment in which they can maximally impact the organization

through their work. David Neeleman of JetBlue comments, “We spend extra

money on training to give our crew members the tools they need to succeed.”

Jack also mentions, “your people should be empowered. If people are not self-

actualized, what is the point of hiring them?”

Encouraging and rewarding employees is also a very important element of

human resource investment. Encouragement and rewards when used

appropriately can build a sense of community and commitment amongst

employees of the firm. David Neeleman says, “it’s important to let people know

what a great job they are doing and what a huge impact they are having on the

company.” At the same time, it is important to be cautious in inappropriately

associating rewards with behavior that may not be conducive to the firm’s growth.

As Alfie Kohn mentions in “Why Incentive Plans Cannot Work,” improper reward

systems can end up working exactly like punishment systems by manipulating

people’s interests. Employees may view colleagues as competitors for a fixed

bonus pool for example or may strive for short-term objectives that impair the

firm’s long-term capabilities in some way. Kohn quotes a late Cornell University

professor, John Condry, as saying, “rewards are the enemies of exploration.”

However, by rewarding exceptional performance without implication for particular

objectives, an entrepreneurial organization can recognize employees and

increase commitment to the firm. Professor Byers recalls from his own startup
experience, “its important to show recognition to your employees for their hard

work. One Christmas, we decided to give all our employees an extra 500 shares

of stock. Our board thought we were crazy. But what is nothing more than a few

thousand shares to us was a way we could communicate that we appreciated all

the hard work our staff had given us.”

HABIT 4: ENCOURAGE IDENTIFICATION OF PROBLEMS AND TAKE

CORRECTIVE ACTION IMMEDIATELY

Unlike large organizations where mistakes can be absorbed or remedied

in a gradual fashion, entrepreneurial ventures cannot sustain errors that are not

immediately surfaced and dealt with. There are a number of reasons why

entrepreneurial organizations often fail to identify problems and these reasons

are related to the research done on Groupthink. Groupthink, as defined by Irving

Janis, is “the desperate drive for consensus at any cost that suppresses dissent.”

Janis describes Groupthink as arising in situations where groups rationalize the

correctness and invulnerability of their state and decision making in an effort to

establish a sense of unanimity and peace. However, this suppression of dissent

can lead entrepreneurial ventures to miss critical errors in the organization that

may lead the group as a whole to failure.

Shannon believes that organizations should go as far as incenting and

positively reinforcing the identification of errors. She says, “We need to tell

people that its okay to say its not okay. …We rewarded people with a gift when

they talked about problems in the organization.” When errors are surfaced, its

also important to take corrective action immediately. Jack commented, “If you

make a mistake, fix it quick. Don’t wait until the problem festers and it becomes a
really serious problem.” Carol Bartz, CEO of Autodesk, believes in a philosophy

she calls “fail forward fast,” in which problems are identified and dealt with as

rapidly as possible. She says, “I tell my staff, ‘don’t be afraid to make a change.’

I encourage my employees to think different constantly.” Without this constant

monitoring, surfacing, and active commitment to rapidly deploying

countermeasures, an entrepreneurial organization can be destroyed by an

undetected problem, much like a undetected disease can destroy an organism.

HABIT 5: SHOW INTEREST IN TEAM MEMBERS, SO THAT TEAM

MEMBERS WILL SHOW INTEREST IN THE ORGANIZATION

Too often, managers rely upon simple techniques like money and fear to

motivate and influence employees. However, one of the most powerful influence

techniques documented by Dr. Robert Cialdini is the rule of reciprocity. The rule

of reciprocity simply suggests that people are more likely to commit to giving us

things when we have initially given them something up front. While this may

appear deceiving at first, it is nothing but a formalization of the so-called Golden

Rule: “do unto others as you would have them do unto you.” In this context, it is

important for entrepreneurial organizations that are so dependent on the high

performance of their employees to show sincere interest in their well-beings, both

inside and outside of work.

Shannon recalls from one of her former companies, “We genuinely cared

about each other. One time, I took all the kids of our employees to the Toys R

Us in Redwood City and spent $687 on toys – just to show our staff that we

genuinely cared. We would always issue 10 shares of stock to any employee

who had a new baby. The degree to which you acknowledge people’s lives, the
better they can be integrated in what you are trying to accomplish.” David

Neeleman contributes a portion of his salary to an employee emergency fund,

which supports employees during times of duress, like when an employee loses

a family member. He says, “if you take care of your crew members, they will take

care of your customers.” Carol Bartz perhaps put it most succinctly and most

bluntly when she says, “We give a shit about the people who work for us….we

showed interested in others lives.” By caring for the personal and professional

needs of employees, an organization sets up a positive psychological motivation

for employees to care for the organization as well.

HABIT 6: INCREASE THE VELOCITY OF CUSTOMER UNDERSTANDING

High tech entrepreneurial firms are often characterized by a high degree of

research and development activity. This is often necessary since the basis for

competitive advantage in most high tech firms is in fact the technological prowess

of the company’s products. However, the creative and innovative elements of an

entrepreneurial firm must be guided and bounded by outside customer input, and

to the extent that this input is injected into the organization more rapidly and

efficiently, the organization is in a better position to succeed.

Daniel Denison addresses this idea in his framework under the topic of

customer focus, which he defines as “the degree to which an organization is

driven by a concern to satisfy the customer.” Jacklyn mentions that in her

experience the most important balancing act for startups is the balance of

engineering and marketing/sales. Richard also comments, “Startups too often

are trying to change the world. They should focus on filling a real market need.

Focus on selling first and adding processes later.” Steve summarizes the point
very simply, “Failed companies are often technology-driven and try to sell the

world on how cool their widget is. To succeed, a company must have a flat

hierarchy and be organized around the customer. The goal should be to

increase the velocity of customer understanding throughout the organization as

much as possible.”

HABIT 7: CREATE AN STRONG CULTURE

Tying all of the habits together is the seventh habit, which should be a

guiding principle for everything that the organization does. A strong culture which

promotes creates social controls, organizational norms, and inspires innovation is

absolutely mandatory for a growing entrepreneurial organization. David

Neeleman says, “the only thing that keeps me up at night is the possible dilution

of our culture.” In the absence of a culture that supports the foundation of

corporate growth, the organization will not be able to mobilize as a team and

succeed in the marketplace effectively.

Charles O’Reilly in his article, “Corporations, Culture, and Commitment:

Motivations and Social Control in Organizations” talks about the three

fundamental purposes of culture. The first is to establish control over processes

in the organization. Some companies by the nature of their products require high

levels of control in order to be successful. Brad mentions as an example,

“hardware companies are almost always in need of significant process in their

culture since yield is a larger concern than within software companies.” The

second purpose is to develop company-wide norms that set the social rules for

conductance both during good times as well as the bad. Jeff Hawkins, the

founder of Palm Computing says, “if you have the right culture, you can get
through the tough times. But you have to layout the policies up front so nothing

festers later on.” And the third purpose of culture is to inspire the innovation and

creativity that is essential to entrepreneurial growth. Professor Byers comments,

“Innovation is a function of teamwork and creativity. Sometimes this requires a

heavy hand from the CEO; sometimes it can be done organically. But either way,

everyone’s core values must be discussed in order for the organization to be

effective.” Thus, having an effective organizational culture lays the foundation for

the entrepreneurial venture to execute its growth strategy and function as a

cohesive team through the struggles that the company faces. As a senior

manager, this issue is of particular importance, since as Jack mentions, “The

culture of an organization reflects on the idiot at the top.”

SUMMARY

In summary, it is clear from both documented and empirical research that

these seven organizational behavior habits form the basis for some of the critical

success factors of an entrepreneurial organization. By having a strong leader at

the helm, hiring the appropriate team to surround the leader, investing and

rewarding that team, encouraging the identification of problems and

understanding of the customer, and building a strong corporate culture; an

entrepreneurial organization can lay the organizational foundations for ensuring

its growth and success in the marketplace.

BIBLIOGRAPHY

Cialdini, Robert. “Influence: The Psychology of Persuasion.” 1993 Quill William

and Morrow.

Collins, Jim. “Level 5 Leadership” 2001 Harvard Business Review

Gladwell, Malcolm. “The Talent Myth” 2002 Gladwell.Com

Janis, Irving. “Groupthink.” 1971. Psychology Today

Kohn, Alfie. “Why Incentive Plans Cannot Work.” 1993 Harvard Business
Review

Mintzberg, Henry. “The Manager’s Job: Folklore and Fact” 1990 Harvard
Business Review

O’Reilly, Charles. “Corporations, Culture, and Commitment: Motivations and

Social Control in Organizations” 2001 Readings in the Management of
Organizations: An Integrated Perspective.
SPECIAL THANKS

“Jack” – Venture Capitalist at Vanguard Ventures

“Jacklyn” -- Principal at Silicon Valley strategy consulting firm

“Ken” -- former CEO and Chairman of a Global 1000 Silicon Valley software
company, currently a Venture Capitalist in Silicon Valley

“Brad” – Principal investor at Hummer Winblad Venture Partners

“Richard” – Former Director of Consulting and Director of Account Management

at two Boston area startups

“Shannon” – former CEO of a networking equipment company and currently a

Silicon Valley angel investor

“Steve” – ex-VP Marketing of a PLM software startup in Mountain View, CA

Professor Tom Byers – Academic Director of the Stanford Technology Ventures

Program

Stanford Technology Ventures Program for access to video archives of Carol

Bartz, Jeff Hawkins, and David Neeleman
AUTHOR BACKGROUND

Murthy Mathiprakasam

Education

Currently candidate for Master of Science in Management Science and

Engineering at Stanford University, expected graduation June 2004

Bachelor of Science in Computer Science from Massachusetts Institute of

Technology, June 2000

Bachelor of Science in Management Science from Massachusetts Institute of

Technology, June 2000

Work Experience

Supply Chain Consultant at Optiant, enterprise software startup in Boston,

working with high tech manufacturers

Research Analyst at Fletcher Spaght, boutique BCG spinout strategy and market
research consulting firm in Boston, working with high tech startups and venture
capitalists

i
Names have been disguised for privacy and confidentiality