Excerpt from What’s the Second Job of a Startup CEO? by Ali Rowghani:
Phase 1: A CEO’s first job is to build a great product and find a small group of people who love it and use it enthusiastically. A Phase 1 startup CEO is the Doer-in-Chief. You must be deeply involved in both building the product (observing/interacting with users, writing code, designing product specs) and acquiring users/customers. Delegation should not be a word in your vocabulary. If you succeed, it’s because your deep involvement and unique vision give the company a perspective and drive that few others have. The other imperative for a Phase 1 CEO is to conserve money in order to extend the time to iterate and improve the product.
Phase 2: As a Phase 2 CEO, you need to transition from “Doer-in-Chief” to “Company-Builder-in-Chief.” It may seem impossible at first, but you can eventually delegate day-to-day responsibility for everything you did in Phase 1, even Product. Your job is to replace yourself by hiring people better than you into leadership positions. Stated simply, your job as a Phase 2 startup CEO is to delegate everything you did in Phase 1 in order to create time to focus on three critical operational tasks that only the CEO can do: (i) Hiring a leadership team and making sure they work well together, (ii) creating purpose and alignment, and (iii) nurturing company culture. In practice, Phase 2 usually begins when a startup has around 20-25 employees and ends when it reaches 400-500 employees.
Phase 3: In phase 3, you should take profits from the core business and invest them in new, transformative products. As an example, Facebook built its senior management team in Phase 2 while running the business at roughly breakeven. In Phase 3, it began to generate huge profits in its core business thanks to more lucrative in-stream ads, so it could allocate significant resources towards Messenger as a separate product and buy Instagram, WhatsApp, and Oculus.
(i) Here’s another way of describing this. Phase 1: Find product-market fit by doing things that don’t scale. Phase 2: Scale. Phase 3: Expand horizontally into adjacent products or markets.
(ii) Scaling prematurely, ie. moving to phase 2 before you’re ready to, is fatal. See Why startups shouldn’t scale prematurely; Don’t scale before you have product-market fit; If you have low retention, don’t scale and keep your costs low and Why more funding won’t help you find product-market fit.
(iii) One of the biggest challenges for a founder is being honest with yourself that you have not nailed product-market fit, including a profitable business model, and thus whether you are ready to transition to phase 2. It’s hard to admit that things aren’t working well enough for you to scale, particularly because VCs sometimes push startups to scale prematurely.