University of California Press

Building Sustainable High-Growth Startup Companies: Management Systems as an Accelerator
Author(s): Antonio Davila, George Foster and Ning Jia

Source: California Management Review, Vol. 52, No. 3 (Spring 2010), pp. 79-105
Published by: University of California Press
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S p r i n g 2 0 1 0 | V o l . 5 2 , N o . 3 | R E P R I N T S E R I E S
California
Management Review
Building Sustainable High-Growth Startup Companies:

Management Systems as an Accelerator
Antonio Davila
George Foster
Ning Jia
© 2010 by The Regents of

the University of California

Building Sustainable
High-Growth Startup
Companies:
MANAGEMENT SYSTEMS
AS AN ACCELERATOR
Antonio Davila
George Foster
Ning Jia
M
any companies founded with enthusiasm and hope for high
growth fail to meet their founders’ and investors’ expec-
tations. Based on our research over the past decade (see
Appendix A), one explanation for this underperformance
is the entrepreneur’s resistance to switching to a more structured management
approach and adopting management systems and processes in a timely way.
Management systems are technically defined in the literature as: “formal, infor-
mation-based routines and procedures managers use to maintain or alter pat-
terns in organizational activities.”1 A small company can be run on a personal
basis in its inaugural days. The founder-CEO typically wears multiple hats and
controls all aspects of her workplace.2 She can observe everything that goes on
in the organization and makes all the important decisions. The corporate mission
and chosen strategy can be effectively conveyed and reinforced through direct
communication with each employee. As the company grows, however, this
management style inevitably fails. The combination of growth and a personal
management style can be deadly. The manager of one of the companies in our
research provided a rule of thumb to the limits of a personal management style:
“We had management by personality and it became evident that that wouldn’t
scale. We figured our personalities can go through one floor and two walls. After
that management by personality doesn’t work anymore.”
Growth requires a drastic change in how the company is run. A manager
in a telecom service startup company described this situation as follows:
“Looking back at it, and comparing it to other companies I’ve been working for,
I think the toughest step for a company to go through is going from a small com-
pany where pretty much everyone knows the main goals, the main focus, and the
main initiatives within the company to the point where you stop communicat-
ing the whole business and some people will know some and some people will
CALIFORNIA MANAGEMENT REVIEW VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU 79

know others, but not everyone sees the big picture. And I think it’s a very crucial
threshold and it’s very easy to start having a lot of people running in many differ-
ent directions. The difficulty at that stage is to keep the whole energy focused. It’s
like moving from a two-person boat where it’s easy to make sure you paddle in
the same rhythm, to a 10-person boat where suddenly you have to spend more
time on making sure it’s the same rhythm for everyone.”
Yet, alternative views argue that management systems are detrimental

to startup companies and innovation more broadly.3 These systems are quickly
equated to a bureaucracy4 that kills the entrepreneurial spirit that characterizes
such companies. The argument is that if a startup company wants growth,
it needs to relax these managerial tools. Otherwise, they stifle the company.
Management systems, if left on their own, grow into bureaucracy; and
bureaucracy, as we commonly interpret it, is associated with wasting resources
to comply with business processes that have little if any value. The question is:
Are management systems positively associated with growth or do they constrain
it?
A classic business article identified the entrepreneurial crisis when the com-
pany reaches a certain scale and moves to a higher growth stage and the entre-
preneur has to transition into becoming a manager:
Increased number of employees cannot be managed exclusively through infor-
mal communication. . . . The company founders find themselves burdened with
unwanted management responsibilities. . . . Founders often resist stepping aside,
even though they are probably temperamentally unsuited to the job. So here is
the first critical choice in an organization’s development: to locate and install a
strong business manager.5
Cisco’s early years (between 1984 and 1990) provide an excellent illus-
tration of the tensions between a personal and a more-structured professional
approach to management. In Cisco’s
case, the tensions arose when a new
Antonio Davila is a Professor of entrepreneurship
at IESE Business School. <adavila@iese.edu> CEO was appointed by the board to
George Foster is the Wattis Professor of
professionalize management systems
Management and Dhirubhai Ambani Faculty and processes and encountered founder
Fellow in Entrepreneurship at the Graduate pushback. Two CEOs faced this pushback
School of Business, Stanford University.
before the founders exited the com-
<gfoster@stanford.edu>
pany. Cisco Systems, Inc. was founded
Ning Jia is an Assistant Professor of accounting
at the School of Economics and Management,
in December 1984 by Len Bosack (who
Tsinghua University. <jian@sem.tsinghua.edu.cn> became the first president) and his wife
Sandy Lerner (who became the first
CFO). The following quotes are taken
from a Stanford Graduate School of Business case:6
The Early Years: 1984-1987 . . . The early company organization was unstruc-
tured informal . . . As Cisco evolved . . . Bosack was increasingly uncomfortable
and dissatisfied with the day-to-day chores of managing a company. By January
of 1987 Cisco’s management team had reached the consensus opinion: the com-
80 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU

pany needed a more formalized, experienced management structure. As a result,

Bosack stepped down as president of the company.7
In 1988, Bill Graves, an executive at Schlumberger, was brought in as

President and CEO. Graves led the securing of the first round of venture capital
from Sequoia Capital in December 1987. Don Valentine of Sequoia became a
director of Cisco.
Valentine Initiates Change—Graves started to have interpersonal problems with
the founders, Sandy Lerner in particular. Lerner had a very forceful, often dif-
ficult personality, with very strong ideas about how the company should grow
and evolve. As Graves had assumed more operating control of the company, the
two personalities had clashed, with Graves more and more frequently overruling
Lerner’s opinions.8
In April 1988, Graves resigned from his position as CEO. Valentine led the
search and settled on John Morgridge as the preferred CEO candidate:
As part of the screening process, Morgridge met with all of the senior managers
and the two founders . . . With Sandy in particular, Morgridge met and inter-
viewed four separate times. Morgridge’s goal was a modest one: to get Sandy
to a point where she was at least neutral to Morgridge’s presence and role in the
company. By October 1988, Morgridge had been marginally successful. He joined
Cisco as the company’s new president and CEO . . . [He] began by tackling the
issue of organizational structure and professional management . . . Although
manufacturing was Sandy’s area of responsibility, the group was suffering from
a combination of Sandy’s inexperience and the lack of overall priority that it had
been given within the company.9
From October 1988 onwards, Morgridge brought in a new disciplined

professionally focused management team. By December 1989, it had 174
employees. Its revenue and profitability growth from 1986 to 1989 (July 31
fiscal year) were:
1986 1987 1988 1989

Net revenues
(in $millions) $0.129 $1.485 $5.450 $27.664
Net Income
(in $millions) $(0.833) $0.083 $0.388 $4.178
Cisco went public on February 16, 1990. Tensions continued both

between Lerner and Morgridge and between Lerner and the new management
team. In August 1990, Lerner was fired. Bosack resigned very quickly thereafter.
Could Cisco have reached its current prominence without Morgridge
professionalizing the management and instilling formal systems into the com-
pany in its startup days? Prior studies have pointed out two negative outcomes
resulting from failure to deal with the entrepreneurial crisis. The first one is cap-
ping the company at a size that can be managed through a personal style and

much below its business potential.10 The second one is management chaos.11 A
high-growth startup in the medical devices space saw how its underdeveloped
management systems led to problems with the FDA that sent them a letter with
more than 150 quality issues reflecting the chaos throughout the operations of
the company. The management team quickly upgraded its systems to meet the
increased complexity and kept its job.
Serial entrepreneurs, who have experienced this entrepreneurial crisis
before, prepare in advance to navigate smoothly through the transition. Sales-
force.com, an enterprise software company, is a case in point. Early in its life,
the company set up the management infrastructure to coordinate and integrate
learning that would facilitate growth. This focus on building the infrastructure
was not unrelated to its founders’ experience in both large companies such Ora-
cle and their involvement in other startups.12
To examine the relevance of management systems for growth, we under-
took a study of 78 high-growth startups in California termed the SEMAS project
(Stanford Entrepreneurial MAnagement Systems).13 This project complemented
our interactions with numerous startup managers through teaching, case writ-
ing, and additional research projects in this field. Our purpose was to understand
the transition point around the entrepreneurial crisis. In particular, we wanted
to understand whether management systems were associated with the growth
of these companies.
High-growth startup companies may fail because the business model that
was the basis of their strategy does not materialize. They may also fail because
the market does not “open up” in the way and time anticipated. Such nega-
tive outcomes come with the territory of startup companies. High risk taking,
often with radical innovations, is more often rewarded with failure than success.
However, startups often fail or do not achieve their full potential because they
get stuck in this entrepreneurial crisis.14 The equation is simple: “as you grow big-
ger, it’s more efficient to use management tools.” However, being simple does
not mean that it is easy to do. Nor is it an activity that senior executives often
relish. A manager with large company experience described the evolution of his
company: “As we were getting bigger, we had more professional managers. We
could afford more professional managers and not do it all ourselves as we grew.”
In other words, growth requires a certain dose of discipline associated with for-
mal systems and processes. These systems provide managers timely and accu-
rate information for decision making as well as facilitate coordination, resource
allocation, motivation, and performance measurement within an increasingly
complex organization. Our findings are consistent with Cisco’s example—growth
as well as delivering on the promises of an attractive business model needs man-
agement systems. These systems appear as necessary albeit not sufficient for
growth.15
Governments that rightly believe in startup companies as a way to make
their regional economies more dynamic often fail to take into account this
entrepreneurial crisis and the need to transition into building the management
infrastructure. They focus their resources on supporting entrepreneurs starting

new companies but often ignore the need to support the transition through this
stage. The outcome of such policies is lots of small companies that do not grow
beyond a few dozen employees even if their business potential might be much
higher; companies where the entrepreneur has stopped growth in order to keep
the company under control. This outcome is one that government officials in
several countries (such as Ireland) are seeking to reduce. It is possible that many
startups could grow more if more attention was paid to making entrepreneurs
aware of the need to implement systems that support such growth.
The Relevance of Management Systems for Growth

The evidence in our study supports the association between growth and
the presence of management systems. We do not claim that these systems lead
to growth. Growth depends on a host of other critical variables such as the via-
bility of the business model and the industry the firm is in. However, manage-
ment systems do provide the infrastructure that is associated with the likelihood
of a venture safely transitioning through the entrepreneurial crisis.
In many cases, management systems trail needs.16 Because of the
demands on their limited resources, companies hardly ever develop systems
ahead of their needs.17 Rather systems in place are either about right or, more
often, are too primitive for the complexity that has to be managed. The learning
point here is that in most startup companies adding more systems won’t stifle
the entrepreneurial spirit but will sustain growth. Having no systems (chaos) is
as damaging to a company as having too many (bureaucracy); and startup com-
panies more often suffer from the former rather than the latter. Their managers
tend to worry about avoiding bureaucracy but are blind to the danger of chaos.
Figure 1 illustrates the build-up of management systems. In particular, we
collected data from our sample companies on 46 different management systems
clustered around eight different categories: financial planning, financial evalua-
tion, human resource planning, human resources evaluation, strategic planning,
product development, sales and marketing, and partnerships.
Table 1 lists the 46 individual systems for the eight categories. For each
one of these 46 systems, we asked when the company had adopted them. Figure
1 presents the mean adoption rate of the two most frequently adopted individ-
ual systems in each category in each year. There is marked evidence of manage-
ment systems buildup in years 1 to 5 across each of the eight categories. Within
our sample, there is also much variation across our companies in their speed of
adopting different management systems. This variation enables us to probe the
association between the intensiveness of management system adoption over
time and company performance.
Given our sample of companies, headcount is the most widely available
and meaningful variable to assess performance. Most of the companies in the
sample have undergone multiple rounds of venture funding where new and
existing investors pass judgment on the viability of the company and its future
potential to profitably grow. For the subset of cases where both headcount and

FIGURE 1. Rate of Adoption of Eight Types of Management Systems by Early-Stage Growth

Oriented Companies in Years 1 to 5
Financial Planning Financial Evaluation Human Resource Planning

100% 100% 100%
90% 90% 90%
80% 80% 80%
70% 70% 70%
60% 60% 60%
50% 50% 50%
40% 40% 40%
30% 30% 30%
20% 20% 20%
10% 10% 10%
0% 0% 0%
Years 1 2 3 4 5 Years 1 2 3 4 5 Years 1 2 3 4 5
Human Resource Evaluation Strategic Planning Product Development Management

100% 100% 100%
90% 90% 90%
80% 80% 80%
70% 70% 70%
60% 60% 60%
50% 50% 50%
40% 40% 40%
30% 30% 30%
20% 20% 20%
10% 10% 10%
0% 0% 0%
Sales/Marketing Management Partnership Management

100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
Years 1 2 3 4 5 Years 1 2 3 4 5
Note: Graphs are formed by averaging the top two most frequently adopted systems within each category in each year.
valuation at each funding round is available, the correlation is both positive and
significant. Profitability of venture capital-backed companies in their early years
is typically not a good short-run success measure. The rationale for needing
venture capital arises from cash outflows exceeding cash inflows in the early
years as investments for growth are made. For many of these companies there is

TABLE 1. Management Systems Examined in the SEMAS Research
Category of System Individual Systems Within Category
Financial Planning Operating budget

Cash flow projections
Sales projections
Financial Evaluation Capital investment approval procedures

Operating expenses approval procedures
Routine analysis of financial performance against target
Product profitability analysis
Customer profitability analysis
Customer acquisition costs analysis
Human Resource Planning Core values

Mission statement
Organizational chart
Codes of conduct
Written job descriptions
Orientation program from new employees
Company-wide newsletter
Human Resource Evaluation Written performance objectives for managers

Written performance evaluation reports
Linking compensation to performance
Individual incentive programs
Strategic Planning Definition of strategic (non-financial) milestones

Customer development plan (plan to develop market)
Headcount/human capital development plan
Product portfolio plan (plan about future products)
Investment budget
continued on next page
an inverse relationship between profitability and valuation at successive rounds

of financing.18
Figure 2 illustrates the differential growth rate of high-growth startup
companies with different levels of management systems intensity.19 Systems
intensity for each company over time is estimated by adding the number of
systems adopted each year.20 We grouped our 78 companies into three groups
according to systems intensity in year two and looked at their growth pattern
as reported in Figure 2. The pattern is clear cut. Those companies with higher
management systems’ intensity also grew much faster than their counterparts.
By year five, the average size of a company in the highest intensity group was
about 135 people compared to barely 43 people for companies in the lowest

TABLE 1. Management Systems Examined in the SEMAS Research (continued)
Category of System Individual Systems Within Category

Product Development Management Project milestones
Product concept testing process
Reports comparing actual progress to plan
Project selection process
Product portfolio roadmap
Budget for development projects
Project team composition guidelines
Sales/Marketing Management Sales targets for salespeople

Market research projects
Sales force compensation system
Sales force hiring and firing policies
Reports on open sales
Customer satisfaction feedback
Sales process manual
Sales force training program
Marketing collaboration policies
Customer relationship management system
Partnership Management Partnership development plan

Policy for partnerships
Partnership milestones
Partner monitoring systems
intensity group—more than three times bigger. We grouped companies in years

one and three with very similar patterns. We also used statistical tools to fur-
ther check the significance of this finding. The pattern was repeatedly consistent
with our argument: management systems are associated with growth,21 growth
and management systems go together.22 This evidence does not mean that
management systems lead to growth. This would be a very naïve reading of our
results. Growth depends on a number of factors such as the nature of the busi-
ness opportunity, the depth of management talent, and the quality of the busi-
ness model to a large extent. Yet, without the ability to execute as reflected in
the presence of management systems, the probability that growth will be elusive
increases.23
The size of the lowest intensity group is interesting in that it reaches
about 50 employees. There is some evidence suggesting that the number of
employees that can be managed using the personal management style, this is
without systems to support managers, is somewhere between 50 and 80 people
depending on the complexity of the company and the skills and time commit-
ment of the manager.24

FIGURE 2. Company Growth Path in Years 1 to 5 According to Management System Adoption

Intensity
180
Highest Intensity
of System Adoption
160
140
Mid Intensity
Headcount
120
of System Adoption
100
Lowest Intensity
of System Adoption
80
60
40
20
0
1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
Year
Note: Graph is formed by ranking the management system adoption intensity in year 2.
This evidence confirms the argument that the adoption of management

systems is associated with growth.25 While this may be counter-intuitive—why
would fast-moving company need tools that appear to constrain creativity and
slow down growth?—it can be seen through the following metaphor. Think
about a car: the faster it goes, the more sophisticated the technology required
to keep it under control. At the very elite auto racing level, Formula 1 teams
have highly complex and extensive systems infrastructure both on and off the
track. The same logic applies to growth with startups. The faster they need to go,
the more management systems infrastructure they need.
Venture Capital Investment as a Stimulus

to Growth and Management Systems’ Adoption
Implementing management systems can be costly and entrepreneurs
often need guidance in navigating through the entrepreneur crisis. The presence
of venture capitalists is associated with faster adoption of management systems.
Growth is an imperative for venture capital investors. The criteria many venture
capitalists list for selecting their investments invariably includes the ability of
the investee company to identify a large market opportunity they can quickly
grow to exploit. Figure 3 (drawn from our prior research) highlights this growth

FIGURE 3. Growth from Starting Month of Venture Capital–Backed vis-à-vis Non–Venture

Capital–Backed Companies
Venture Capital–Backed Non–Venture Capital–Backed

60
50
40
Headcount
30
20
10
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40
Month
Note: Graph is based on monthly payroll data for 194 venture capital-backed companies and 344 non-venture capital-backed companies from
Trinet, a third party service provider.
imperative for a sample of 194 venture capital backed companies vis-à-vis a

sample of 344 non-venture capital backed companies.26 In the first 40 months
of a company’s existence, the venture capital backed companies grow on average
twice as fast.
Within our sample of 78 companies, we have 60 venture capital backed
and 18 non-venture capital backed companies. Figure 4 presents relative sys-
tems adoption of these two groups for the eight management systems categories
in Table 1.27 Venture capital backed companies not only adopt more manage-
ment systems, but also adopt them earlier compared with non-venture capital
backed companies.28 The most marked difference between the two groups is in
the faster adoption by venture capital backed companies of financial systems,
product development systems, and sales/marketing systems. Successive rounds
of venture financing information are available for the 60 companies. For these
companies, we observe a marked increase in the adoption of multiple individual
systems within each category over successive rounds of venture financing. For
example, at the time of the series A funding round there is 32% adoption of the
three individual systems in the financial planning category; by series B, the per-
centage adoption increases to 74%; and by series C, it increases to 86%.

FIGURE 4. Rate of Adoption of Eight Types of Management Systems in Years 1 to 5 –

Venture Capital–Backed vis-à-vis Non–Venture Capital–Backed Companies
Venture Capital–Backed Non–Venture Capital–Backed
Financial Planning Financial Evaluation Human Resource Planning

100% 100% 100%
90% 90% 90%
80% 80% 80%
70% 70% 70%
60% 60% 60%
50% 50% 50%
40% 40% 40%
30% 30% 30%
20% 20% 20%
10% 10% 10%
0% 0% 0%
Human Resource Evaluation Strategic Planning Product Development Management

100% 100% 100%
90% 90% 90%
80% 80% 80%
70% 70% 70%
60% 60% 60%
50% 50% 50%
40% 40% 40%
30% 30% 30%
20% 20% 20%
10% 10% 10%
0% 0% 0%
Sales/Marketing Management Partnership Management

100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
Years 1 2 3 4 5 Years 1 2 3 4 5
Note: Graphs are formed by averaging the top two most frequently adopted systems within each category in each year.

FIGURE 5. Percentage of Founders Replaced From CEO Position According to Management

System Adoption Intensity
80
70
Lowest Intensity
of System Adoption
Replaced from CEO Position
Mid Intensity
60
of System Adoption
Percentage of Founders
50
Highest Intensity
of System Adoption
40
30
20
10
0
Group 1 Group 2 Group 3
Note: Graph is formed by ranking the management system adoption intensity in year 2.
CEO Tenure and Management System Intensity

There are two negative outcomes resulting from failure to deal with the
entrepreneurial crisis. The first one is capping the company at a size that can be
managed through a personal style. The second one is management chaos. There
is an alternative way of highlighting the value of management systems and the
negative effect on a CEO’s personal career path of failing to invest in such sys-
tems as the company grows. Figure 5 provides evidence on this issue. We looked
at the tenure of the founders over the life of their companies and related it to
management systems intensity—up until the day we collected the data for the
company. Our measure of system intensity can also be interpreted as proxy for
the level of professional tools that the CEO has put in place. We assigned each
company in our sample into one of three groups according to systems’ intensity
in the second year of the company’s life—high, medium, and low. Then, we
followed each founder over the life of the company to see whether they had
been replaced.29 Finally, we looked at the percentage of founders that had been
replaced within each group.
Figure 5 depicts our findings: 53% of founders in the low systems’ inten-
sity group were replaced compared with only 31% for the highest systems’

TABLE 2. Alternative Management System Transition Paths at the CEO Position
CEO Path #1 CEO Path #2 CEO Path #3
Early Growth Days Personal Personal Professional

Management Style Management Style Management Style
(1-50 Employees)
Beyond Early Growth Days Personal Professional Professional
(51+ Employees) Management Style Management Style Management Style
intensity.30 It appears that those founders that put in place the systems infra-
structure to grow—either because they knew it from prior experience, their
advisers “strongly suggested” it, or they had the innate skills—are more likely to
survive at the leadership position.31 CEOs from companies that have lower adop-
tion of systems have a higher likelihood of not continuing as CEO.
Alternative Management System

Transition Paths at the CEO Position
Our interviews with many early stage CEOs show that one of the follow-
ing three transition paths for a CEO typically occurs as regards to attitudes about
the adoption of management systems. We use 50 employees as the dividing line
between the Early Growth Days Era (1-50 employees) and the Beyond Early
Growth Days Era (51+ employees). A personal management style in the cur-
rent context is one where the CEO relies on personal contact for communicating
and directing the organization. A professional management style is one where
respect for analyzing and investing in management systems architecture is part
of the CEO leadership. Table 2 summarizes the three different paths that we
observed.
Entrepreneurs who follow CEO Path #1 continue to manage Beyond
Early Growth Days Era as if their personality and interaction were sufficient to
provide the growth infrastructure. One marketing manager in our research who
reported to a CEO following Path #1 lamented on their many lost opportunities.
The CEO (Sam) was the founder and the pivotal technology innovator:
“After several lost years, the Board had to crowbar Sam out of the CEO job. It
was only after many quarters of missing agreed upon and then imposed upon
milestones that we were freed from his chaotic management style.”
A classic and at times ugly scenario with CEO Path #1 is that the founder
hires a senior executive from the outside and then that external hire subse-
quently is associated with the “removing” of the founder. One current CEO in
our study described with much “personal anguish” such a situation. The founder
and then first CEO knew he needed help in professionalizing the management
team and its systems but simply could not do it:

“I guess I made the assumption that they were using best practices up front
because the person who brought me into the company was the guy who runs all
of this. I ultimately had to remove him. Not because he didn’t believe in the pro-
cesses, he just couldn’t get it executed.”
Cisco’s example presented in the introduction illustrates such tension

when two successive external CEOs struggled with founders in the transition
from a personal management style to a professional management style. It is not
uncommon that struggles over the introduction of management systems are part
of a broader clash of very different interpersonal styles between a founder and a
newly appointed CEO.
Companies can follow CEO Path #2 (Personal Management Style in Early
Growth Days followed by Professional Management Style) in several ways. One
approach is that the CEO retains that role and both changes her management
style as well as builds up a professional management team. A second approach
is for the board of directors to appoint a new CEO who has a professional man-
agement style and that CEO then leads the management team buildup. In both
approaches, the “import-in” concept we encountered in many companies plays
a key role. Where a new CEO is appointed in CEO Path #2, the prior CEO may
or may not voluntarily resign. Most cases that attract media attention are forced
resignations. However, we encountered situations where the founder/CEO pro-
actively planned (and often led) the transition. In one case, the founder (Nor-
man Godinho of NetLogic Microsystems) remains an active and highly valued
board member eight years after he planned his exit from the founder/CEO role.
Companies following CEO Path #3 (Professional Management Style from
the outset and also in the Beyond Early Growth Era) are typically started by
serial entrepreneurs. These CEOs often bring along a small cadre of “tagalong”
senior executives from their prior ventures. CEO Path #3 does not require a
heavy adoption of management systems from the outset. Rather, the CEO uses
her prior experience to bring in pre-identified management systems in a timely
way as key milestones are achieved either in the market place or internally
within the company.
The Import-in Concept

Even if the entrepreneur adopts a manager’s mindset and is aware of the
need for management systems, she may not have the capability to design and
implement them on her own. Another consistent finding in our study is that
the design and implementation of management systems requires specific knowl-
edge about the systems themselves as well as experience in using them. In other
words, designing these systems is not something that can be done simply by
“following the instructions” in a book—it is not like a do-it-yourself bookshelf
that you take home and build yourself. Experience is an important ingredient.
This idea translates into the import in concept. A sizeable number of the systems
required to grow come with hiring a manager who brings this knowledge with

her. As a CEO described the hiring of a VP of engineering: “I brought him in

because I needed someone with the discipline to make all that happen.”
The CFO position illustrates this idea. Financial management embeds
significant specific knowledge that is hard to communicate—financial account-
ing, managerial accounting, relationship with the banks, cash management,
valuation, financial plans, and economic impact of decisions just to name a few.
Rather than training a person from the initial bookkeeping all the way to pre-
paring an IPO and managing the finances of a public corporation, startups may
hire a person at each stage that comes with the knowledge, implements the
systems required at that stage, and uses them effectively from the first day they
become operational to move the company through that particular stage in its
growth path.
For instance, financial systems such as budgets or profitability reports may
appear an easy tool to design. Actually, they require a lot of specific knowledge
that only experience can provide. A do-it-yourself approach—using a person
within the company with no experience or the entrepreneur herself going about
designing it—is inefficient. It distracts attention from other activities that may be
better suited to that person. The designer without the appropriate background
has to go through a costly learning-by-doing process. Not only because of the
mistakes that the company has to endure, but also the delay that it imposes
on a growth environment. The usual shortcut is to import in the knowledge
with a person. In the case of budgets and profitability reports, this knowledge
is imported into the company when a financial manager (or CFO) is hired. For
instance, a CFO in one of the companies described his hiring as:
“I brought a lot of things from a financial control, financial reporting, and finan-
cial planning perspective. For example, there was no three-month rolling cash
forecast until I arrived. Now, every week, we produce a rolling three-month cash
forecast. There wasn’t any multiple-year forecast until I got there. There wasn’t
any acknowledgement that we had large loss carry forwards that might be a ben-
efit at some point in the future.”
A manager illustrates this import in concept in describing the transition

into a professional company:
“Ultimately as entrepreneurs, we have to understand when systems are needed
and then we hire the people who are the more systems-oriented people and
delegate to them. So it’s not like we are initiating or driving the use of systems
as much as through experience understanding when systems are necessary and
building a team that can build these systems.”
The import in concept does not mean that every CEO has to be replaced
or that every system requires a new hire. We saw entrepreneurs that transi-
tioned into being professional managers (although a good portion of those had
larger company experience before founding their company) and companies
developing their own systems. However, importing this knowledge can acceler-
ate growth.32

Why Companies Adopt and

How They Use Management Systems
The previous findings raise two related questions. The first one is: What
drives startup companies to realize that they need to make this transition and
adopt management systems and processes to facilitate growth? The second ques-
tion is: What role do these systems play? If these systems are associated with
growth, what do they bring to the company and why some companies are more
efficient in adopting these systems. These two questions are distinct. While the
first one looks at the reasons that managers described as leading to the adoption
of the systems, the second reflects the roles that managers identified with these
roles once they were on board. The first is associated with events and settings
prior to the adoption, the second looks at these systems after adoption.
A fair number of entrepreneurs buy the argument that the “bureau-
cratic” nature of management systems kills the “entrepreneurial spirit” (possibly
because it fits their preferences for a personal management style). The previous
findings suggest that their relevance to company growth is relatively obvious.
Yet, the adoption of these systems varies a great deal across companies in our
sample.
Three different researchers analyzed the transcription of 234 interviews
(3 interviews for each of the 78 companies) with the purpose of identifying
reasons that managers identified as leading to the adoption of the systems.
Each researcher identified sentences within the transcripts related to both ques-
tions: the prior-to-adoption events and circumstances that managers associated
with the adoption and the post-adoption roles that they identified. Next, each
researcher grouped these sentences into categories based on their commonali-
ties.33 Finally, the researchers got together, compared the classifications that
emerged from their coding, discussed any differences in interpretation, and con-
verged into the categories identified. While, pre- and post-adoption categories
(reasons for adoption and use, respectively) are distinct, they share some com-
mon categories where the reason for adoption was not a particular event or cir-
cumstance but to fulfill a particular role. Table 3 summarizes the various reasons
for adoption, their frequency in our sample, and quotes illustrating them.
The six reasons-for-adoption are descriptive of the experiences of the
managers in this study:
6h Proactive: Manager Background—Senior managers at startup companies
with a larger company background often adopted systems and processes
because they were used to them. Their large company experience had
exposed them to the various systems and processes that are the backbone
of execution in large companies; they became second nature to those
managers. Systems were adopted because they were an integral part of
these managers’ working style. A different manager might have chosen
to use a personal management style that was still feasible given the com-
plexity of the company. Yet these managers chose to use a more profes-
sional management style and to adopt management systems.

TABLE 3. Reasons for Adopting Management Systems
Frequency
of
Reasons Observation Illustrative Quotes
Internal Reasons-for-Adoption
Proactive- 24 “Both of us had come from big company backgrounds where we had used
Manager project tracking systems, it seemed natural […], even though it was a very
Background small amount that we were tracking, we were just used to it. That was the
normal thing to do. I’d have to say that we’ve had project tracking systems,
red-yellow-green status reports, and so forth, from the very beginning.”
Proactive- 9 “Now we’re getting to the place where the return is lower compared to the
Need to investment, right? Because we’ve already taken up the low hanging fruit. So
Focus now we’re having to use stepladders to go get fruit. And now it makes more
sense to be measuring exactly how many grapes I am getting for how much
effort when moving the stepladder.”
Reactive- 11 “The original engineering team would give me dates when they were
Chaos going to have certain things done and never make the dates. They didn’t
communicate amongst themselves, so even when they released something,
it didn’t do what they said it was going to do. There was no QA process.
Often when they did release it, they would introduce more bugs than they
would fix.”
Reactive- 7 “Things became less ad hoc because of experience and documentation of

Learning process, retaining history of what worked and didn’t work, finally came to
place. […] By that time, we’d had enough experience with enough projects
to say, “Okay, now we get what works and doesn’t work. We can estimate
accurately.” And it just took doing it a number of times in this new industry
and both succeeding and failing to understand okay now we can generalize,
we can systematize, we can come up with methodologies that really work.”
“With the advancement of the offices, we started having 7, 8, 10 different
offices around the nation, so we wanted to standardize the process so that
an office in Los Angeles was pretty much doing the same type of project
management as our office in Chicago was.”
External Reasons-for-Adoption
Legitimize 2 “[Our customer] said “I want to see what processes have you instituted in
your system. We are going to buy version 5.0 of your product, I want to see
what you did from version 3.0, 4.0, 5.0. What were the milestones? What
bugs did you fix? What was testing that went through?” We had done all
those things but we didn’t have the documentation. So we had to show
them and to be candid [recreate it].”
“We’re also finding that the customers get a feeling of control when you
give them more data [...]. By seeing data that they’ve never seen before,
we look good compared to the internal IT, which is one of our strong
competitors.”
Contract 7 “When we won the Motorola contract, Motorola forced us to get our
act together and so that was a forcing function for all these [product
development] processes. Motorola insisted on proper program
management, proper change control, proper project reporting, monthly
business reviews, monthly project reviews, etc. and they sent audit teams in
to audit where we were and make specific recommendations.”

6h Proactive: Need to Focus—Managers in this group had managed relying on

the personal style but sensed the need to adopt these systems to enhance
execution and shifted to using these management tools.34 Rather than
implementing these systems because of their management preferences,
managers in these companies waited until it was clear to them that
having these systems in place would facilitate continued/new growth.
The particular needs that led to the adoption include coordination of a
geographically dispersed workforce, improve communication and coordi-
nation, or increase organizational efficiency.
6h Reactive: Chaos—System adoption was also associated with management
teams experiencing unexpected events, negative outcomes, or recurring
problems.35 A manager described it as: “Generally you find that a big
change occurs when something goes wrong. Something did with us, and
so big change occurred.” In most cases, the chaos is unintended and man-
agers were ill prepared to respond to it. Typical unwelcome “surprises”
include badly missing product development or financial milestones, unex-
pected liquidity problems, or failing to meet deadlines given to customers.
6h Reactive: Learning—Some of the companies in the sample adopted man-
agement systems to codify processes that up to that point had been run
informally. Once a process has been done repeatedly, managers realize
that it is much more efficient to formalize the knowledge in these infor-
mal practices through management systems. These systems do not come
from managers’ experience but rather from learning by doing. Setting up
a system can reduce the level of reliance on the one person with know-
how. Having a “manual” provides a roadmap for others in the company
to do it. It helps in avoiding mistakes every time that the process has
to be executed; but most importantly it liberates precious management
attention from ordinary routines. Formalized processes can be delegated
most of the time and be managed by exception—management needs to
devote attention only when unexpected events happen. A related ben-
efit of establishing a set of protocol is that it helps to minimize the level
of impact on the operation if that key personnel leaves the company.
Systems can be updated to incorporate new learning. Over time, they
become better than any single person in the company (of course, if they
are badly updated they can be as dangerous as having no systems). The
need to code learning not only goes across time, but also across geogra-
phy. Coding a process allows this process to travel around the geography
without having to move people around.36
6h External: Legitimize—Certain management systems are adopted to build
up the credibility of the company and signal to external parties that they
are reliable and well managed; the role of these systems is to legitimize
the company.37 In the same way that employee number five might be
a receptionist that answers the phone as if the company was a blue chip
or asks visitors to wait in a room before the vice-president comes, certain
systems give an image of the company as a professional, well-run, reli-

able company. The presence of these systems signals to potential inves-

tors, customers, and partners that management is professional, reliable,
and knows what it is doing. These systems range from financial planning
when dealing with financial investors, product development when deal-
ing with large partners, or sales when working with large customers.
6h External: Contracting—Finally, some companies adopt management infra-
structure because a partner, customer, or government regulation imposes
the systems. Biotechnology startups are good examples because they
often get early “revenues” (cash infusions) from contracts with large
pharmaceutical companies. For instance, one of the companies in the
sample put in place well-structured systems in product development
because “Pfizer, as part of the agreement, put in place milestones that we
had to achieve.” These contracts require a disciplined management of the
research efforts. Biotechnology startups also work in a tighter regulatory
environment that requires careful documentation of their development
efforts. Having these systems imposed from outside the organization is
not exclusive to biotechnology companies. Companies such as Cisco and
Hewlett-Packard are known to require early stage companies to have a
systems’ infrastructure before becoming certified vendors.
We further examined the association between speed of adoption38 and the
categories described. Managers’ background was the category related to fastest
adoption. Thus, when managers are aware of the need to start using manage-
ment systems, these systems are adopted earlier. This observation is consistent
with these systems growing behind the actual needs of the startup company;
those managers that are not sensitive to this transition challenge are driven into
these systems as a reaction to chaos or routines or as a demand from external
parties.
The previous classification lists reasons-for-adoption that managers identi-
fied during the interviews. The interviews also allowed us to understand how
managers used these systems. Certain reasons for adopting management systems
fit into a particular role that these systems fulfill such as legitimizing the com-
pany to external constituencies and contracting. Yet other reasons are associated
with particular events that map into important roles that these systems have.
Table 4 provides illustrative quotes for these additional uses identified:
6h Making Goals Explicit and Stable—Management systems in uncertain envi-
ronments such as high-growth startups make goals explicit and stable.39
Sharing goals has several benefits in these companies. It has everybody
on the same page, facilitates discussion within a shared view of the
future, and provides the stability required to execute. When goals are
not discussed or explicit, they may mean different things to different
managers. Vivid examples often come from the software industry. Cus-
tomers continuously identify new needs. In a company with a few dozens
of customers, the amount of weekly requests on software developers can
be very large. Without a system that freezes the specifications to those

TABLE 4. Using Management Systems
Roles Illustrative Quotes
Making Goals “As a result of commercial development, myself and a couple of the other folks thought
Explicit and we’d better put a structure in place where at some point we freeze that and then we
Stable develop against that specification. We also have an approval process that goes through and
decides who clears that to be released. It’s a challenge because you have a moving target
most of the time, but the reality is if that specification changes on too dynamic a basis,
there’s no way really a technology team can execute against it.”
Help with “[Informal communication] worked okay when we were 20. Now we’re 160 and the
Coordination same thing doesn’t happen. Before, we could communicate in a certain way. We almost
and Plan the did not have to communicate. Everyone always knew everything. We didn’t have to worry
Sequence of about communication. As a bigger company we need to worry about communication.
Steps Does everyone know? Everyone is not as well integrated as well as we were when we
were 20. When it was 20 people we didn’t have a lot of emails necessary. Now we think
about whether we should send an email to everyone to communicate this issue. Or we
have weekly company meetings. Now we’re more diligent about using those as means of
communication. Now, there are weekly company meetings, and people are required to
come.”
Facilitate “Financial planning forces the company, the whole executive team, and the board to get on
Decision Making the same page—here is what we’re trying to do. If you didn’t have that, there could be some
and Resource ambiguity on what the goals are.”
Allocation
Promote “The benefits of [product development processes] formalization is that you get more
Accountability accountability. I think it is very easy from an engineering perspective to say I can do that. […]
and Facilitate What you get is (a) you can hit that expectation in a timely manner, and (b) develop features
Control that meet the market on time. […] As the company matures, people get more accountable.”
that these engineers are working towards, specifications would change

too fast for them to be able to deliver to an ever-changing set of requests.
6h Help with Coordination and Plan the Sequence of Steps—Management systems
facilitate coordination within the company. A plan provides a sequence of
actions to achieve a goal. A sales person can promise a certain feature to
a customer because she knows that the product roadmap plan indicates
that the feature will be available at an indicated date. Smaller companies
can coordinate through direct interaction. But the number of channels
of communication increases in factorial proportion with the number of
people.40 Coordination without any management infrastructure quickly
becomes unfeasible as a company quickly grows.
6h Facilitate Decision Making and Resource Allocation—A significant challenge
facing managers of high-growth startup companies is to obtain timely and
accurate information generated within the company for decision making.
Management systems can help compile and categorize detailed operating
information into an aggregated level. This systematic treatment of infor-
mation greatly enhances the timeliness and efficiency of communication
between business functions and with top management as everyone is on
the same page. It also increases the quality of information available to

managers for decision making. Management systems also allow managers

to see the big picture and identify easily where the bottleneck is, where
the improvements can be made, and/or where the resources are most
needed.
6h Promote Accountability and Facilitate Control—Management systems liberate
managers’ attention from routine activities. Once formal procedures are
in place to execute a certain process, managers do not need to constantly
monitor it as long as it behaves within expectations. They can devote
their energies to pursue new opportunities. Only when there are devia-
tions—and the system will alert management if it happens—is attention
required. Without these warning signals, control by exception is not
feasible. Furthermore, employee motivation requires aligning incentives
between employees and the company. This in turn requires performance
measures where everyone is accountable for his or her actions and their
consequences, and is rewarded or punished accordingly (the perfor-
mance-pay link). When the company is small, performance evaluation
is relatively easy as the entrepreneur works closely with every employee
and is well aware of each individual contribution. However, as the com-
pany scales up in terms of headcount and product lines, it becomes much
harder to “fairly” evaluate and compensate employees without using
some formal systems that document each individual’s scope of responsi-
bility and outcome levels.
Which Systems to Adopt First?

Sequencing Management Systems’ Adoption
A final question that emerges from the analysis of the eight categories and
46 individual management systems is whether there is a more effective sequenc-
ing of adoption associated with their relevance to future performance. To address
this question, we traced the adoption pattern of the various systems across our
sample companies since their founding. The thrust in the data is that there is no
“one size fits all” solution and the sequencing of adoption varies with the needs
of the company. Nevertheless, various patterns do emerge.
First, as illustrated in Figure 4, venture capita backed companies give
higher priority to financial planning and evaluation categories. Interview data
indicates that these companies need to formalize this information to manage
their cash burn rate and negotiate a new round of financing with enough time
for the negotiation process. They also facilitate communication with venture
capitalists that closely monitor firm performance. Startup companies in the
investment phase where cash flows are negative benefit from adopting finan-
cial planning and evaluation systems early on. These systems facilitate resource
allocation and allow the entrepreneur to set priorities and focus on what is
important so she can plan her subsequent activities accordingly. This is particu-
larly crucial in the startup phase when the entrepreneur still wears multiple
hats and manages many aspects of her workplace by herself. These companies

can effectively structure their strategic thinking within the company, with board
members, and with investors through these systems. The dialogue around the
financing needs and expectations brings together ideas around the business
model and the cost structure of the company. These systems often behave as
substitutes of strategic and human resource planning systems because the infor-
mation exchange structured around these latter systems can happen through the
financial plans.
Statistical analyses confirmed this observation. Evaluation systems are
implemented after planning systems are in place, as common sense predicts.
Interestingly, however, within the three planning systems’ categories—financ-
ing, human resources, and strategic—the statistical analysis identified a substitu-
tion effect between financing system and the combination of human resources
and strategic systems. Specifically, companies that adopt financial planning tend
to delay the adoption of human resources and strategic planning, while those
adopting human resource planning systems also adopt strategic planning systems
and delay financial systems.
Second, the adoption of human resource planning and evaluation systems
was not linked as much to events or circumstances of the company as to the
management model of the founding and management team.41 Certain managers
give a strong relevance to managing the “soft” side of the company. For instance
a CEO described his view as: “You have to have a goal, a purpose. Before we
even opened the door, there was a mission statement and core values in place.
Core values are extremely important in terms of client relationships and how
you’re going to present and hold yourself.” When should a company define
its recruiting policies, its values, or its evaluation systems? While the need for
financial systems is heavily associated with negative cash flows and the presence
of external investors, human resources systems are often not driven by the busi-
ness structure but by the founder’s management philosophy.
Third, our analyses also suggest that firms with longer R&D cycles, such
as biotechnology and hardware firms, adopt new product development systems
sooner while delaying marketing and sales systems. Our interviews with bio-
technology companies indicate that these systems are put in place early because
of the large number of scientists that need to be coordinated, the high regula-
tion requirements coming from the FDA, the large number of contracts with
established pharmaceutical companies, and the high visibility that investors and
partners demand.
Fourth, the go-to-market stage has a significant effect on marketing and
sales systems. Their adoption is delayed until this turning point. Companies that
adopt a direct sales strategy are more likely to bring in sales and marketing sys-
tems earlier than those using an indirect sales strategy. The go-to-market stage
happens at different time frames across industries. In biotechnology firms, this
stage happens late, if at all (these companies are often sold before they try to
sell their products in the market). Information technology companies experience
this stage on a time horizon between one and five years. Only then, these sys-
tems start to have a significant role. Other industries see this go to market very

early in their lives. For instance, a consulting company in our sample quickly
adopted and used these sales and marketing systems intensively form very early
on in its life. The company was selling from day one. Customer relationship
and sales pipeline management were crucial to their business model. In contrast,
financial planning and evaluation were much less relevant as the company was
cash flow positive and cash was not a significant constraint to growth.
Finally, the data indicate that there is a high positive correlation between
time-to-adoption of a new system and the number of systems already in place.
This is consistent with the “repetitive momentum hypothesis” in the organi-
zational change literature. That is, change is considered to be a self-reinforc-
ing process; prior changes increase the likelihood of a subsequent change. In
the context of this study, prior implementation of management systems likely
reduces organization inertia and the marginal cost of setting up another sys-
tem.42 This observation suggests a consistent view of managers in each company
regarding the relevance of management systems to growth as if these systems
reflected a particular management philosophy rather than a preference for cer-
tain systems at the expense of others.
Conclusions
This article reports findings consistent with the following main ideas.
At some point in the growth of a company, somewhere between 50 and 100
employees, the management style need to change from a personal manage-
ment style typical of many early-stage entrepreneurial companies into a more
professional style. Some companies and their CEOs are unable to make these
transitions and fail in what is called the entrepreneurial crisis. Putting together
the management infrastructure is associated with higher growth and lower
CEO rotation. The presence of professional investors (such as venture capital-
ists) is associated with higher growth—most likely because these investors have
a vested interest in growth and will force the transition at the CEO position
when the entrepreneur is unable to transition into becoming a manager. These
systems are adopted proactively when the management team has the relevant
management knowledge or reactively when bad outcomes or mistakes happen
that highlight the limitations of the entrepreneurial management style. These
systems have multiple roles that they can fulfill in providing the adequate man-
agement infrastructure. Finally, the sequencing of adoption is contingent on the
particular needs of the company.
APPENDIX A
Research Sources
The insights that we report in this article are based on various sources
that we have developed over the last decade:

TABLE A. Characteristics of the SEMAS Research Project Companies
Std.
Mean Dev. Q1 Median Q3
Number of CEOs 1.65 0.78 1 1 2
Years of total experience 18.42 8.48 12 20 25

of CEOa
Age of the company 5.47 2.44 3 5 7
Number of employeesb 118 62 71 113 155
R&D intensityc (%) 39.57 26.08 19.66 37.78 60.56
Revenues (‘000)d 10,923 11,853 2,437 7,300 15,000
Income (‘000)d –9,455 15,668 –12,469 -4,700 29
Number of rounds 3.43 1.78 2 3 5

of VC funding
Systems’ infrastructure -0.05 0.88 -0.78 -0.26 0.68
International firms 0.60 0.49 0 1 1
CEO MAS model: planning (%) 17
a. Estimated for all CEOs in the sample.
b. Number of employees is calculated at the peak of each company’s size.
c. R&D intensity are estimated as a percentage of total employees defined as the sum of R&D employees for each of the years reported
divided by the sum of total employees for those same years. Only companies that reported R&D employees are included.
d. Revenues and profits are for the last year of data available.
Source: A. Davila and G. Foster, “Management Accounting systems Adoption Decisions: Evidence and Performance Implications from Early-Stage/
Startup Companies,” The Accounting Review 80/4 (2005): 1039-1068.
6h The SEMAS (Stanford Entrepreneurial Management Systems) research project.

This study looked at 78 startup companies located for the most part in
Silicon Valley. We focused on startups that have grown to more than
50 employees and were less than 10 years old. Table A provides more
detailed information about this study.
6h The Stanford EPGC (Executive Program for Growing Companies) and its busi-
ness challenges component. EPCG has been a successful executive program
offered at Stanford for many years. Over the last 15 years, the school has
developed a rich database on the challenges that startup companies face
as they move forward in their lives.
6h Business cases. Over the years, we have been fortunate to work together
with a lot of different companies, writing case studies with them or sim-
ply sharing their successes and failures. These cases contain the experi-

ences of these companies and the learning that can be extracted from
these experiences.
6h The pre-IPO valuation research project. This study used various sources
(including companies SEC filings and the Venture One database) to
understand how to value pre-IPO companies.
6h The employee growth study looked at the different growth path of venture capital-
backed versus non-venture capital-backed startup companies. Figure 3 illustrates
the very different growth path of these companies; it plots the mean
number of employees over time.
6h Enterprise Ireland Stanford program. This year-long program funded by
Enterprise Ireland brings together 25 to 30 CEOs of Irish growth-oriented
companies.
The aim in carrying these various projects was to study companies that
had growth aspirations and had achieved at least a minimum size. These types of
startups contribute a significant percentage of the economic value that entrepre-
neurial endeavors bring to society. Not surprisingly, the most frequent source of
funding for most of the companies that we worked with was venture capital and
the companies clustered around technology—telecommunications, information
technology, and biotech.
Notes
1. This definition is widely used in the literature and comes from R. Simons, Levers of Control:
How Managers Use Innovative Control Systems to Drive Strategic Renewal (Boston, MA: Harvard
Business School Press, 1995), p. 5.
2. We use “founder” as a generic term. In some cases it is a single person. In other cases, it is
two or more people. Our conclusion relates to the collective effect of decisions made by the
founder(s).
3. Innovation is often associated with entrepreneurial companies and the blocks to innovation
are often extended to entrepreneurial companies, see for instance J. Freeman and J.S. Engel,
“Models of Innovation: Startups and Mature Corporations,” California Management Review,
50/1 (Fall 2007): 94-119.
4. Early empirical evidence is consistent with this argument, see for instance, F. Damanpour,
“Organizational Innovation: A Meta-Analysis of Effects of Determinants and Moderators,”
Academy of Management Journal, 34/3 (September 1991): 555-590.
5. The classic reference to the entrepreneurial crisis is L.E. Greiner, “Evolution and Revolution
as Organizations Grow,” Harvard Business Review, 50/4 (July/August 1972): 37-46.
6. “Cisco Systems,” Stanford Graduate School of Business Case S-SB-124, March 3, 1992.
7. “Cisco Systems,” op. cit., pp. 5-6.
8. “Cisco Systems,” op. cit., pp. 7-8.
9. “Cisco Systems,” op. cit., p. 9.
10. Research studies that have illustrated this alternative are L.B. Cardinal, S.B. Sitkin and C.P.
Long, “Balancing and Rebalancing in the Creation and Evolution of Organizational Control,”
Organization Science, 15/4 (July 2004): 411-431; P.M. Collier, “Entrepreneurial Control and
the Construction of Relevant Accounting,” Management Accounting Research, 16/3 (September
2005): 321-339.
11. The limitations of entrepreneurs as managers has often been referred to in the entrepre-
neurship literature and has been associated with the characteristics of the entrepreneur,
see G.E. Willard, D.A. Krueger, and H.E. Feeser, “In Order to Grow, Must the Founder Go:
A Comparison of Performance Between Founder and Non-Founder Managed High-Growth
Manufacturing Firms,” Journal of Business Venturing, 7/3 (May 1992): 181-194.
12. A more detailed description of Salesforce.com early days can be found in “Salesfoce.com:
The Evolution of Marketing Systems,” Stanford University case number E-145.

13. The sample was built as follows. The selection criteria were for companies to have between
50 and 150 employees at the sampling date (to be going or have recently gone through the
transition that a group of CFOs for startup companies identified to be on this range), be less
than 10 years old (to be able to reconstruct the history of the company), and be indepen-
dent (to avoid having them adopt systems from their parent company). We used different
databases such as CorpTech Internet Directory of Technology Companies, Rich’s High-Tech Business
Guide to Silicon Valley and Northern California, BioScan, or U.S. Business Browser to identify
companies. To each company we sent a letter with a description of the project and called
them to arrange their participation. Those companies that did not answer the phone were
dropped from the sample. From an initial sample of 624 companies, 213 were eligible and
78 participated. The data was collected through questionnaires and interviews to the CEO,
CFO, and business development manager.
14. Additional references to the growth of startup companies include I. Adizes, Corporate Life
Cycles: How and Why Corporations Grow and Die, and What to Do about It (Englewood Cliffs, NJ:
Prentice Hall, 1989); E.G. Flamholtz and Y. Randle, Growing Pains: Transitioning from an Entre-
preneurship to a Professionally Managed Firm (San Francisco, CA: Jossey-Bass, 1990).
15. Because we are interested in the transition around the entrepreneurial crisis, we sampled
companies that had reached a certain complexity as measured by headcount. Thus, the find-
ings are conditional on companies reaching a size where the entrepreneurial crisis becomes
relevant. Our findings do not address whether early adoption of management systems are
associated with increased failure at smaller sizes. However, these systems are typically not
present (or present at a very simple scale) in smaller firms [see G. Cassar, “Financial State-
ment and Projection Preparation in Startup Ventures,” Accounting Review, 84/1 (2009): 27-
51] and thus failure is not likely to be associated with them.
16. Recent theoretical developments have provided the tools to understand when the previous
arguments may hold. See, for instance, R. Simons, Levers of Control: How Managers Use Inno-
vative Control Systems to Drive Strategic Renewal (Boston, MA: Harvard Business School Press,
1995); P.S. Adler and B. Borys, “Two Types of Bureaucracy: Enabling and Coercive,” Admin-
istrative Science Quarterly, 41/1 (March 1996): 61-89. Empirical evidence has started to emerge
consistent with these arguments, such as L.B. Cardinal, S.B. Sitkin, and C.P. Long, “Balanc-
ing and Rebalancing in the Creation and Evolution of Organizational Control,” Organiza-
tion Science, 15/4 (July 2004): 411-431; M. Granlund and J. Taipaleenmaki, “Management
Control and Controllership in New Economy Firms—a Life Cycle Perspective,” Management
Accounting Research, 16/1 (March 2005): 21-57.
17. From our interviews with three managers in each of the 78 companies, we only identified
one company where systems were implemented ahead of the needs. In all other companies,
managers indicated a management infrastructure that was not as strong as they would like it
to be.
18. For further evidence supporting these arguments over a large number of venture capital-
backed companies, see C. Armstrong, A. Davila, and G. Foster, “Venture-Backed Private
Equity Valuation and Financial statement Information,” Review of Accounting Studies, 17/1
(March 2006): 119-154.
19. Figure 2 illustrates the argument. More advanced statistical testing can be found in A. Davila
and G. Foster, “Management Control Systems in Early-Stage Startup Companies,” The
Accounting Review, 82/4 (July 2007): 907-937.
20. This variable does not capture the complexity of the system. However, most of the systems
were simple and comparable. If the bureaucracy argument affected our sample, we would
see the highest intensity not growing as fast (being dragged by the bureaucracy). As we have
argued, most of the companies had systems that trailed their needs.
21. We appreciate the specific comment of one of the reviewers to clarify this point.
22. It is important to reinforce that systems’ intensity is a necessary but not sufficient condition.
Thus, adopting systems will not lead to growth per se, but sustained growth without systems
is much less likely.
23. The growth profile of startup companies varies across industries. We focused our research
on information technology, biotechnology, and non-technology companies with venture-
backed funding. In all our statistical tests, we controlled for the potential effect of industry.
24. For instance, see A. Davila, “An Exploratory Study on the Emergence of Management Con-
trol Systems: Formalizing Human Resources in Small Growing Firms,” Accounting, Organiza-
tions and Society, 30/3 (April 2005): 223-248.

25. The argument does not imply causality. Moreover, growth and the adoption of management
systems are endogenous variables simultaneously determined. In our statistical tests, we
use a simultaneous equation model to address endogeneity to the best extent possible. The
argument coming out of the test is that the association between growth and management
systems goes both ways.
26. See Davila, Foster, and Gupta (2003), op. cit. The monthly headcount information in Figure
3 is based on payroll data from Trinet, a third-party payroll service provider.
27. For the effect of venture capital funding on management systems’ adoption see Davila and
Foster (2007), op. cit.
28. For additional evidence on the impact of venture capital funding on the adoption of
professional characteristics see T. Hellmann, and M. Puri, “Venture Capital and the
Professionalization of Start-Up Firms: Empirical Evidence,” Journal of Finance, 57/1 (February
2002): 169-198.
29. Statistical tools support the argument and include alternative variables to make sure that the
pattern is not explained by other variables such as industry, CEO startup experience, and age
of firm; the association was there. See Davila and Foster (2007), op. cit.
30. The association between the presence of management systems and CEO replacement does
not imply that a CEO is replaced because she failed in trying to implement the systems (we
do not suggest causality). It might be the CEO is replaced because she is perceived to be
unable or unwilling to do so or any other reason correlated with the presence of manage-
ment systems.
31. To make sure that the finding was not an artifact of some unique event in year two of a
company’s life, we ran the same test grouping companies by systems’ intensity in year one
and again in year three. We found the same pattern.
32. A process known in the literature as grafting. Background is closely associated with congeni-
tal learning, where “individuals . . . have knowledge about . . . the processes the organiza-
tion can use to carry out its creator’s intentions.” G.P. Huber, “Organizational Learning: The
Contributing Processes and the Literatures,” Organization Science, 2/1 (February 1991): 88-
115, at p. 91.
33. This process is often referred as grounded theory as categories emerge from the data.
34. This reason for adoption is typical of entrepreneurs who are able to transition into becoming
managers. These entrepreneurs sense the need to change their style and implement these
systems through importing in through new hires or because they have large company back-
ground.
35. See R. Simons, Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic
Renewal (Boston, MA: Harvard Business School Press, 1995).
36. On the topic of procedures helping innovation by coding learning from past experience see
C.C. Lundberg, “Learning in and by Organizations: Three Conceptual Issues,” International
Journal of Organizational Analysis, 3/1 (January 1995): 10-24; B. Levitt and J.G. March,
“Organizational Learning,” Annual Review of Sociology, 14 (August 1988): 319-340. Coded
routines facilitate the diffusion across the organization and over time of organizational capa-
bilities, see R.R. Nelson and S.G. Winter, An Evolutionary Theory of Economic Change (Cam-
bridge, MA: Harvard University Press, 1982).
37. See for example W.W. Powell, “Learning from Collaboration: Knowledge and Networks
in the Biotechnology and Pharmaceutical Industries,” California Management Review, 40/3
(Spring 1998): 228-240. For a traditional description of the relevance of the external context
in explaining how firms are organized, see J. Pfeffer and G.R. Salancik, The External Control of
Organizations: A Resource Dependence Perspective (New York, NY: Harper & Row, 1978).
38. We ran this test on a particular product development system, project milestones, to examine
innovation-related systems. We found similar patterns for planning and evaluation systems.
39. For the importance of stable goals in the broader innovation literature see T.M. Amabile,
“How to Kill Creativity,” Harvard Business Review, 76/5 (September/October 1998): 76-81.
40. A related point in new product development is made by A. Ditillo, “Dealing with Uncer-
tainty in Knowledge-Intensive Firms: The Role of Management Control Systems as Knowl-
edge Integration Mechanisms,” Accounting, Organizations and Society, 29/3-4 (April/May
2004): 401-422.
41. The idea of the influence of management and founders models on how the company is
organized is documented in J.N. Baron and M.T. Hannan, “Organizational Blueprints for
Success in High-Tech Start-Ups: Lessons from the Stanford Project on Emerging Companies,”
California Management Review, 44/3 (Spring 2002): 8-36.

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Building Sustainable High-Growth Startup Companies: Management Systems as an Accelerator

Author(s): Antonio Davila, George Foster and Ning Jia

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Building Sustainable High-Growth Startup Companies:

© 2010 by The Regents of

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CALIFORNIA MANAGEMENT REVIEW VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU 79

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Yet, alternative views argue that management systems are detrimental

80 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU

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pany needed a more formalized, experienced management structure. As a result,

In 1988, Bill Graves, an executive at Schlumberger, was brought in as

From October 1988 onwards, Morgridge brought in a new disciplined

1986 1987 1988 1989

Cisco went public on February 16, 1990. Tensions continued both

CALIFORNIA MANAGEMENT REVIEW VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU 81

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82 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU

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The Relevance of Management Systems for Growth

CALIFORNIA MANAGEMENT REVIEW VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU 83

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FIGURE 1. Rate of Adoption of Eight Types of Management Systems by Early-Stage Growth

Financial Planning Financial Evaluation Human Resource Planning

Human Resource Evaluation Strategic Planning Product Development Management

Sales/Marketing Management Partnership Management

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TABLE 1. Management Systems Examined in the SEMAS Research

Category of System Individual Systems Within Category

Financial Planning Operating budget

Financial Evaluation Capital investment approval procedures

Human Resource Planning Core values

Human Resource Evaluation Written performance objectives for managers

Strategic Planning Deﬁnition of strategic (non-ﬁnancial) milestones

continued on next page

an inverse relationship between proﬁtability and valuation at successive rounds

CALIFORNIA MANAGEMENT REVIEW VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU 85

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TABLE 1. Management Systems Examined in the SEMAS Research (continued)

Category of System Individual Systems Within Category

Sales/Marketing Management Sales targets for salespeople

Partnership Management Partnership development plan

intensity group—more than three times bigger. We grouped companies in years

86 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU

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FIGURE 2. Company Growth Path in Years 1 to 5 According to Management System Adoption

This evidence conﬁrms the argument that the adoption of management

Venture Capital Investment as a Stimulus

CALIFORNIA MANAGEMENT REVIEW VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU 87

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FIGURE 3. Growth from Starting Month of Venture Capital–Backed vis-à-vis Non–Venture

Venture Capital–Backed Non–Venture Capital–Backed

imperative for a sample of 194 venture capital backed companies vis-à-vis a

88 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU

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FIGURE 4. Rate of Adoption of Eight Types of Management Systems in Years 1 to 5 –

Venture Capital–Backed Non–Venture Capital–Backed

Financial Planning Financial Evaluation Human Resource Planning

Human Resource Evaluation Strategic Planning Product Development Management

Sales/Marketing Management Partnership Management

CALIFORNIA MANAGEMENT REVIEW VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU 89