The Startup Peter Principle

“In a hierarchy every employee tends to rise to his level of incompetence.
In time every position tends to be occupied by an employee who is incompetent to carry out its duties.”

You remember the Peter Principle, right?

When people working in large organizations do well in their current position, they get promoted to a higher position — where they are less qualified. We’ve all seen it, for example: A talented engineer who then gets promoted to manager, then to director, then to VP — despite the lack of people skills and management skills.

Dr. Laurence J. Peter observed: “Look around you where you work … you will see that in every hierarchy the cream rises until it sours.”

As you navigate up the corporate org chart, the people in the higher positions often seem less competent, more clueless and risk averse. They were long ago promoted away from the job where they were competent.

A cynical observation? Maybe, but The Peter Principle has stood the test of time. It is a management axiom supported by research, recognized by academics and industry experts, and taught in the top business schools all over the world.

The Peter Principle in Startups?

The Peter Principle describes behavior inside large organizations. For smaller entrepreneurial startups, however, the opposite is the rule: People become more competent as they are “promoted” to positions of higher responsibility — and when they are challenged in areas outside their expertise and comfort zone.

Popular startup wisdom says that startups should hire “A players” — the best of the best. But the majority of startups don’t have the resources to hire the best. And “the best” might not even exist. Many startups are working on breakthrough technologies, or inside emerging markets. They are creating new rules for new product categories, and they are understanding new customer behaviors in new markets. There are no experts yet; they must become the experts.

Founders and startup employees have no choice but to work in areas beyond their expertise. They have to wear many different hats, and most of them are new. The engineer is forced to learn about product-market-fit, pitching, the funding process, and financial terms like valuation, LTV, CAC and MRR. The non-technical founder quickly has to become an expert on cutting edge technologies, the nuances customer behavior, or on stock options and convertible notes.

Inevitably the day comes when an employee, or even an intern, is asked to help with a product roadmap, a funding proposal, AB testing or with some tech development. The employee has must become competent — fast. Working inside startups has that effect on people.

Always Competent?

Does everyone working for startups automatically become competent? Of course not. But if someone is incompetent within a startup, they won’t be there long.

Startup life is tough, and not everyone is cut out to be an entrepreneur. Those who cannot rise to the challenge “wash out”, and return to the safer, more well-defined corporate world — leaving behind the competent people in the startups. The cycle continues.

And the opposite is true in large organizations: The corporate hierarchy becomes more populated with the Peter-Principle driven incompetents who typically are slow moving, and place barriers to anything that upsets the status quo. The most competent employees become frustrated, and eventually leave — presumably to join faster moving, more entrepreneurial companies. Eventually the the larger organization is dominated by incompetent managers at the top.

Peter’s Lessons

The wrong conclusion is: competence=success and incompetence=failure.

What a wonderful world this would be if business were governed by those equations. In fact, it’s one of the great paradoxes of life: Success seems to elude some of the most intelligent and capable people, while the clueless and inept people sometimes stumble backwards into success.

But the Peter Principle helps set expectations. Entrepreneurs trying to work with large organizations often become frustrated, disappointed and bewildered when the corporation moves slowly, or when managers act risk-averse and clueless about innovations. On the flip-side, corporate managers are often distrustful when dealing with startups — particularly if they are run by younger, inexperienced entrepreneurs.

This isn’t really meant to disparage large organizations or their employees. The Peter Principle has been doing this quite nicely for decades.

The Peter Principle is not branding all people inside corporations as incompetent — it’s just that most are promoted to positions where their expertise is no longer relevant.

But if you think you’re up to the challenge, then join a startup or become a founder. Even if you don’t think you have the skills — chances are this “reverse Peter Principle” will apply: Working in the startup will quickly make you more capable, more qualified, and hyper-competent.

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CJ Cornell is a serial entrepreneur, investor, advisor, mentor, author, speaker and educator. As an entrepreneur, CJ Cornell was a founder of more than a dozen successful startup ventures that collectively attracted over $250 million in private funding; created nearly a thousand new jobs; and launched dozens of innovative consumer, media and communications products — that have exceeded $3 billion in revenues.

He is the author of: The Age of Metapreneurship — A Journey into the Future of Entrepreneurship

Image Credit: Incompetence by Nick Youngson CC BY-SA 3.0 Alpha Stock Images

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