Don’t let your hot startup grow into a sluggish, old-fashioned company

Having worked with literally hundreds of entrepreneurs over the past seven years, I’ve become used to asking them this question:

“If you hate big companies so much, why are you trying to create a new one?”   

They’re often stumped by the question, since in their mind’s eye, the company they are busy building will be different. It won’t be dragged down by inane meetings and nosy middle managers. It will remain dynamic, scrappy, a perpetual startup. But how often is this ideal, modern organization actually what they end up creating?

Take Dropbox (#8 on the LinkedIn Top Companies | Startups list) for example. The company blew up the marketplace in 2007 with a product no one even knew they needed. With a $10 billion valuation, 500 million users and roughly 1500 employees worldwide (as of this writing), Dropbox is an unequivocal success. You’d think that a hot, innovative startup like this would easily avoid the problem of replicating an old-fashioned structure. And yet, they experienced some of the problems that we typically associate with traditional, more established companies. Why? Because over the course of its tremendous, and tremendously fast growth, the company built to a familiar blueprint. It lost some of the first principles of product thinking that made its initial success possible. Its launches of two new flagship products, Mailbox and Carousel, were, in the words of VP of engineering Aditya Agarwal, “disappointing. There wasn’t the massive scale we wanted and we ended up having to sunset them.”

Over the past several years, founders and CEOs who were early adopters of the Lean Startup method began to get back in touch with me. In the early days, they were excited about the parts of Lean Startup that are about getting started quickly, like minimum viable product and pivot. But they hadn’t been as focused on the parts that are, frankly, a little more boring: the science of entrepreneurial management and the discipline of innovation accounting. Now that their companies had scaled to hundreds, thousands, or, in some cases, tens of thousands of employees, they realized they had to find a way to hold onto their entrepreneurial way of working, even as they put traditional management tools in place, did more forecasting, and moved toward a very traditional looking org chart.

I have seen firsthand in dozens of amazing companies that when employees are subject to traditional organizational structures and systems of incentives, the same bureaucratic behaviors result. It’s an inevitable consequence of the way those systems are designed.

The reasons behind Dropbox’s challenges were no different. Says Agarwal, “We did not get enough pertinent user feedback. We are building and building but not listening enough. He went on, “One of the reasons it’s hard to build new things at larger companies is because people don’t have the mental model of ‘my job is to actually learn new things.’ A lot of the mental model is you get really good at doing something and then you are supposed to keep on doing that. Yes, there’s incremental learning, but its more about perfecting your craft as opposed to bootstrapping your craft. Even companies that seem to have launched one good product won’t easily know how to do it again.”

The difference between Dropbox and more established, legacy companies, was that at the company’s core, there remained the original understanding of the best ways in which to test, market, and grow ideas. “It was the most painful experience the company has gone through,” Agarwal says, “but also the most rewarding and important one. It taught us so many things about what we were doing wrong building new products. It’s important that you accept the pain and do all the postmortems and you learn from it. And that’s how you get better and stronger.”

After adopting a series of changes, they released Dropbox Paper, a new feature for communicating and collaborating on the platform that draws on what they learned from previous attempts. It launched globally and in twenty-one languages in January of this year.

The “second founding”

What Dropbox went through is what I call its second founding, where they had to re-learn some entrepreneurial lessons in order to find success with developing new breakthrough products like Paper. Revamping the organizational structure of a company is like re-founding the company all over again, whether the company is five or a hundred years old. 

The second founding is the period in a company’s growth when it goes from being just another organization to an institution that’s here to stay. It’s the moment when the company grows up and adopts a managerial culture. For too many companies it’s also the moment when bureaucracy and lethargy set in and the most innovative people—hamstrung by frustration—are sidelined or leave altogether.

For this, and other reasons, part of any second founding story has to be that the founder or founders must be as invested in the entrepreneurs who work for the company as in their own careers. That shift in attitude represents a critical moment in the long-term success of any organization. At the same time, it doesn’t matter how much the founder’s perspective changes if the systems to support what the company is attempting don’t exist. 

Leaders can jump into the air and defy gravity, but without support, they’re coming right back down. In order to fly, they have to build an airplane. The second founding, like the one Dropbox went through, is a critical part of building that airplane.

Being able to experiment with new products while also protecting and growing existing ones, in others words adopting a founders mindset, is critical to success in the twenty-first century. It’s the hallmark of a modern company.

Eric Ries is the author of The Startup Way: How Modern Companies Use Entrepreneurial Management to Transform Culture and Drive Long-Term Growth, from which this article is adapted.