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How to Kill a Startup: Hire Executives instead of Entrepreneurs

September 4, 2009

vcmike

One of the most satisfying and challenging parts of a VC’s job is helping startup founders build their management team. It’s one of the areas where your VC can really add value. It’s also an area where we can really screw things up. Take it from me, because I’ve done it.

One of the hardest things about building a startup organization is that a successful startup is effectively 2 or 3 radically different companies between founding and achieving substantial commercial value.  And the people who will be great at one of those different stages often will be pretty lousy at the other stages. In particular, the proven senior executive who is fantastic at executing and operating during the scaling phase often is a great executive but a not-so-great entrepreneur.  So one of the mistakes we often are tempted into making is hiring that exec before the company is ready for him/her.

In one of the best posts on startup success I have read, Marc Andreesen wrote:

“The life of any startup can be divided into two parts: before product/market fit (call this “BPMF”) and after product/market fit (“APMF”).”

This dividing line is critical to informing many different aspects of what the startup needs to be doing, one of the more important being informing the right team that should be on the field. During the before product/market fit period, I would argue that it is critical that the startup be led and populated by highly entrepreneurial individuals — individuals who are creative, risk-taking, willing to change course quickly and decisively, all in the name of finding product/market fit. And, while this is a gross generalization, very often the executives who will become critical to taking the company the distance actually are not nearly entrepreneurial enough to excel during the BPMF stage.  Whereas later stage successful startups typically should be run by executives who excel at scaling a business and its organization, early stage BPMF startups typically are best off being led by highly entrepreneurial founders with great product sensibilities.

Ironically enough, what led me to this post is a conversation I had with a CEO candidate for one of my companies.  While the board felt that the company’s founder was excelling at many aspects of the CEO job, both the Board and the founder agreed that an experienced CEO would have a huge impact scaling the business. And, even though we weren’t yet an APMF company ready for the scaling phase, the board figured it made sense to go out and find a CEO now, especially considering we would need to raise another financing round next year and investors for that round would likely look for a CEO who could take the business “to the next level.”  So we launched a CEO search.

And last week I was speaking with a candidate who probably is the perfect candidate for this business, and had a fantastically refreshing conversation.  The candidate pushed me to articulate why I thought we needed a CEO now, and why we weren’t better off hiring some mid-level folks now to help the current team respond to a growing wave of customer interest, and put off hiring a CEO until the company had enough time in the market to nail product/market fit and really be ready to scale.

And he was exactly right. Duh.

So next time your VC argues for hiring a senior exec, make sure the spec for the job fits the stage of your startup.

40 Comments

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  1. Jim #
    September 4, 2009

    Knowing this, how do you ensure that the founding entrepreneurs do well financially? They may be leaving the company after years of working for below-market salaries, but before the final, dilutive rounds are raised and well before there’s an exit.

  2. September 4, 2009

    An executive search consultant will help guide this process and provide candidates that are the right fit and stage appropriate.

  3. Tommy #
    September 4, 2009

    Mike

    This is one of the most insightful VC posts I have ever seen. You can’t imagine how frustrating it is for company founders to have their VCs destroy a company by making hires inappropriate to the stage of the company. These executives are poison at the early stages and when the founders complain the VCs think that there is something wrong with the founders and side with the executive. The VCs also ramp the burn rate with a full executive management team when the company needs experienced, hands on, adaptable workers.

    VCs should take a lesson from doctors and pledge to first do no harm to their startups. In my estimation only 10% of VCs add value but 80% destroy value by bad hiring, increasing burn rate, lacking adaptability and being inflexible when the company needs to make a change. Kudos to you for realizing this, especially given than you have never been a founder yourself.

  4. September 4, 2009

    Mike–You have discovered something that we deduced in 2002 and have built on over the last 7 years although I will say most of your colleagues in the VC industry stsill dont “get it”. That is to say that it reduces everyones risk when the startup board can identify, evaluate and recruit a “been there and done it before startup CEO” however VC’s and the majority of executive search firms do not focus on nor have access to these kinds of “game changers” who have learned all the hard lessons of a startup on someone elses nickel and have built, led and scaled a previous startup to a successful liquidity event and are passionate and motivated to do it again. What most VC’s dont realize is that there is a talent pool of these executives that have co-founded previous startup companies and know how to get product developed and commercialized, raise capital (remember they have made previous investors money and VC’s are ready to invests in them again), build a team, manage a board without surprises, and most importantly get the company to a successful liquidity….which by the way is the “end game” and until a startup gets to the end game no one wins. The issue has always been that VC’s need to bring in a new CEO at different stages of the startup. That model is broken (almost as much as the executive search model which is part of the startup failure problem) yet when they changeout a startup CEO we have determined it costs the company $4-7m but what really kills the startup company when they do this is they lose 12 months of runway in the market place (as validated by us thru many tier 1 VC’s nationally). If VC’s thought they needed to get 1 out of 10 right in previous years, we see them having to get 3-4 out of 10 to a liquidity event in the future since most of the exit events are “singles and doubles” and in order to return high IRR’s to LP’s the old model of 1 out of 10 wont cut it wihch is why so many of the tier 2 & 3 VC firms will be out of business over the next 12-24 months. We have done lots of research in this area but more importantly we have been “practicioners” in the field working with VC’s, boards, entrepreneurs and other stakeholders of startup companies and clearly the old VC model is not only broken but many of the VC’s will be exiting that industry because they have never “been there and done it before” either and truly dont have the tools or knowledge of what it takes to build a successful startup company.
    Don

  5. September 4, 2009

    I believe this is a common mistake made by VCs AND entrepreneurs who find themselves at the helm of a rapidly growing business.

    I made the mistake more than a few times myself. Maybe I, an entrepreneur, should build a recruitment company that focuses on matching experienced entrepreneurs with high-potential companies?

    Can’t speak for other entrepreneurs, but my resume looks like %^&#! from a “corporate” perspective, but I’ve had tremendous success in entrepreneurial roles and knew twice when to hand business off to others to take them onto bigger and better things…

  6. September 4, 2009

    David—-There’s too many retained executive search firms in the world today (justs like there are too many VC firms) and after 25 years in the business I can honestly say they are a big part of the problem. Keep doing your entrepreneurial thing……if the VC’s dont “get it” eventually then they will be out of business which is not a bad thing as many of them do not have the proper background to be a VC to begin with. I just wish I had figured all of this out when I got into the business 25 years ago. Whats interesting is that the executive serch business has never been forced to change its model in the 60 years its been in business….how many other industries do you know that have not had to change its business model over that period of time? I dont know of any.

  7. September 4, 2009

    Really good point

    The issue is further confused by:

    a) executives that believe (claim) they are “entrepreneurs”.

    b) VCs that “dabble” in the management believing they have THE skills required.

    Identifying the actual need and then finding the right people at the right time is a true skill…..

    Sounds like your clients are in good hands!

  8. September 4, 2009

    Mark,
    Running a startup as a CEO is an extremely difficult role and is NOT for unproven startup CEO’s as it becomes “on the job training for them” doesnt it? VC’s and startup companies continue to hire unproven CEO’s or they want to bring in a branded executive from a Fortune 500 company thinking that with the branded name they will help scale the business which couldnt be farther from the truth…these branded names cant make the transition 90% of the time and are changed out in 12-24 months and the cycle repeats itself. If VC’s and everyone else involved in recruiting CEO’s were truly held accountable then things would be a bit different but they are not. Even executive search firms only give a 1 year guarantee on their candidates which means that if they are fired in the first year then they will conduct a replacement search for no additional fee except for expenses. Whats the problem with this 1 year guarantee you ask? The issue is that a startup company is all about long term performance and if the recruited CEO is found to be unable to perform and is changed out in year 2 then where does that leave the entrepeneurs, VC’s and all the employees? VC’s and executive search firms need to be held accountable for their recruiting actions and it needs to be long term…period! If LP’s knew about the poor evaluation techniques by most VC’s, the extent of CEO’s being changed out and the cost of those CEO failures to the startup company, we believe LP’s would want more oversight or at least beging to ask VC’s questions about their hiring practices (or lack thereof). Lastly, there is a reason why they call my business “search” and not “fetch”…most search firms are in the fetcch business (as are VC’s) who utilize their database and continue to churn and burn candidates or VC’s use their own network wihch they know the “good, bad and ugly” of each and know when to put them into a startup as CEO and when to take them out. Again, if you believe our research in 2002 and since that time that every time you change out a CEO it costs the company $4-7m plus 12 months of runway then is it any wonder why startup companies are having a difficult scaling and getting it right within 3-7 years?

  9. Christy Daniels #
    September 4, 2009

    I think this is a very basic lesson for anyone who has ever worked at a startup. This is what happens when we get lawyers who have never worked at even a big business try and do startup work. This concept is pretty basic for anyone who has actually worked at a startup and faces real challenges..not try and lecture from an ivory tower with no actual business experience.

    lawyers=arrogance.

  10. Tommy #
    September 4, 2009

    The other problem is forgetting that real humans run these companies and blindly applying a blanket MBA formula of when to swap out CEOs and other executives doesn’t work either.

  11. September 4, 2009

    A very wise entrepreneur once told me that a start-up should build structure into it’s operations at stair-step intervals. There will eventually be a place for a “corporate atmosphere” but if you start, essentially in the “wild west” you have the ability to add structure as needed. The mistake is adding too much structure early on and drowning the idea and culture in over-bearing rules and notions of “how to do things”. Knowing when to implement structure and how much is often the difference between a good CEO and a great one.

  12. September 4, 2009

    I have enjoyed reading all the comments. As an entrepreneur on my second business my advice to novice entrepreneurs is to stay away from VC for a few years until you really understand your business (what works, what does not work.. SWOT). That way you are not bullied into setting unrealistic goals for your organization and growing faster than you can handle. A wise entrepreneur will have a very thorough understanding of the business (SWOT), this will enable them to know when and what type of CEO would be the right fit for their organization.

  13. njoyinghim4vr #
    September 5, 2009

    Thanks for seeing the unique value of both…it is nice to see such a balanced perspective articulated so well.

  14. September 6, 2009

    Mike, when Bob Metcalfe was making his first investment as a VC in 2001, he knew the type of CEO his new company needed — in 18 months time! He did not need — nor would he have been able to attract — that “name brand” CEO now. But he needed more than the technical founder to run things. Bob needed someone to come in on an interim basis to figure out — and hire — the team that would take the company from just-formed startup to that “18 month picture.”

    I was asked to do just that, going in for four months as interim COO, working for the founding, technical CEO. I put the team in place that could build the company to the point when the company could attract the “name brand” CEO that would take them to great things.

    Since that assignment for Bob, I’ve done 10 such hands-on interim assignments (sometimes as COO working for a founding CEO, sometimes as CEO) both here and in Europe. Some assignments are at “just-formed” startups, others at “turn-around” startups. Sometimes the VCs ask me in, but half the time the founder asks e in.

    I’m lucky to have in a few prior lives been in the product manager role; it is the hands-on experience in those product manager roles of year ago that I rely on most as interim CEO / COO.

    • bj caragher #
      October 8, 2009

      My reply is to desmond pieri’s reply. I am a founding member of a technology start-up that is currently seeking funding. The “angel investors” we are working with are pushing us to get a ceo in place. We came to the exact conclusion that you explain in your reply. We described the position as a strategic business advisor at first, which stemmed from the fact that everyone in the company to this point are engineers with very little business experience. We have since changed the title to interim ceo to satisfy the “angels”. It is very encourging to me that we are on the right track with how we are aproaching our start-up. Thanks for giving us the confidence that we are making the right choice.

  15. Alan #
    September 6, 2009

    Glad to see a reference to Marc Andreesen’s post, which also includes the statement “I’ll assert that market is the most important factor in a startup’s success or failure.” [More than product or team] Required reading for any entrepreneur.

  16. September 8, 2009

    Refreshing attitude!

  17. Dave #
    October 1, 2009

    If the executive doesn’t mind linoleum and second-hand furniture, had a cash stake in the business relative to their means, agreed to have their equity tied to performance (good or bad), and took a lower salary in exchange for that equity, seems to me that’s a good sign.

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  19. fmode #
    October 18, 2011

    “The candidate pushed me to articulate why I thought we needed a CEO now, and why we weren’t better off hiring some mid-level folks now to help the current team respond to a growing wave of customer interest, and put off hiring a CEO until the company had enough time in the market to nail product/market fit and really be ready to scale.

    And he was exactly right.”

    …. and you didn’t hire him. Typical. Most people seem to need to make everything a box to think within and can only figure things out from within boxes. You just spoke to someone with a track record that was also willing to kill his opportunity for the right answer … something hard to find. And you let him go.

    That’s why there are so many failures … the essence of what makes things work is not in a box nor in a bunch of deterministic metrics. Building and growing something is heavy art steeped in much information and science. As long as you focus on the information and the science and your deterministic conclusive guidance bites, you’ll never get the art.

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  21. Parker #
    January 9, 2012

    CEO

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