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Navigating the “CEO Question”

May 28, 2009

vcmike

One of the most nettlesome questions for both VCs and entrepreneurs is when a founder should be the CEO and when he/she shouldn’t.  Particularly when, as now, so many of the best entrepreneurs with the best ideas are very young, the question comes up with great frequency.  And, it ends up being the source of tension and conflict with nearly equal frequency.

One lesson I’ve learned over 10 years worth of mistakes is that one of the best ways to smother a small young startup is too quickly bringing in either a senior “been there done that” CEO, or  a host of VPs.  There are a whole bunch of reasons why during its first two or three years a startup should remain really lean, focused and hungry, where the primary driving force should be the founders’ vision, passion and energy.

But the very founders most likely to possess that vision, drive and energy are also likely to be inexperienced in a whole bunch of areas that are crucial to going from a great idea and perhaps initial product to a ramping business that either is profitable or able to attract later stage funding.

What to do?

As it turns out I have been having this conversation recently with no fewer than three of my portfolio companies, (probably as a result of a spurt of very early stage investments during the back half of 2007 and first half of 2008). Each of these conversations is taking place in a very different context than the others, so it is hard to generalize; but I thought I’d share snippets from each which I find instructive.

Company 1 was one of those rare cases where I woke up six months after investing to observe that the company actually was ahead of the projections they made while fundraising; in fact way ahead. This tiny pre-adolescent startup was spinning off cash at a greater rate than many of our mature “growth equity” portfolio companies. That said, both management and the board had a foreboding sense that the factors allowing this might not be sustainable, and that the company had to develop a strategy to convert their early growth and success into a model we felt would be more durable and protectable. While we agreed on the objective, the founding team struggled mightily with the task of finding a longer term model, in the process prompting the board to conclude they should hire a CEO who could help with the task. To their credit, the founders pushed back, and instead made a “first business hire” not senior enough to be a C-level exec, but who had great experience as a PM at Google, got along very well with the founders, and was a good “athlete” who would be able to help across a number of areas during this next phase of the business.  It is early days, but the initial results seem to be exceptionally promising. At a recent board meeting the team did a fantastic job articulating the next phase of the business, and a previously skeptical and nervous board is now excited.  Over a drink the night after the board meeting, I gave the founder/CEO kudos for pushing the board back on the CEO search idea…and meant it.

Company two has taken a different tack. When we invested, the founding team had built and launched a very compelling product and was experimenting with the right long term model.  Neither the team’s intial business model, nor the model which supported our investment thesis, ultimately panned out. In the meantime, we had an ongoing dialogue with the founder about management team needs; and also recruited two stellar industry execs to the board.  Both of these execs had attended our Digital Media Summit in January, and, much to the founder’s credit, he hunted them down, pitched them on his business, and recruited them to his board. And, even before they had joined the board, both became drawn into the challenge of figuring out how to turn a really compelling product into a really compelling business. Over the course of the ensuing four months, armed with insights from two of the smartest guys in the biz, the founder honed in on a really exciting model, hired a sales guy, and has been able to claim some very impressive early customer wins with marquee names. With clarity around the model, we now understand much more clearly what the company’s needs look like; these needs, though, are in areas very far from the founder’s skill and experience set, and so with his support we have decided to launch a search to look for a very specific CEO candidate who can help the company achieve scale.  And, the entrepreneur in this instance properly views this decision as the ultimate (albeit backhanded) compliment: his success has earned him the right to be replaced. The good news, for the entrepreneur, is that he will be able to focus on what he views as the fun of the business, driving the product and evangelizing the market, while the CEO is stuck with the operational tasks of hitting the numbers and making all our stock more valuable.

My third instance currently has less clear resolution. Here, the company had a fairly bad miss on the runway from its first funding round, with the founding CEO miscalculating on some product and product leadership fronts. That said, the founder/CEO recognized the mistakes fairly quickly, took all the right steps to effectuate a reset, including what appears to be a great new product lead, and successfully persuaded his insiders to provide another year’s worth of capital. I recently had a long conversation with the founder about what his “2.0” team should look like, including the question of whether he should be the long term CEO. Particularly on the CEO question, we had a surprisingly candid, unemotional conversation. The great thing about this conversation was that we were both able to lay all of the relevant considerations on the table, then discuss the different dimensions of each consideration in a really open and, I thought,  objective way.  There is nothing more refreshing than when a founder/CEO really thinks like a shareholder. In the end, I think we both came out with a clearer sense of what the path to success looks like, and a clearer sense how to jointly evaluate along the way whether he is the best CEO to lead the effort.  Rather than forcing a decision before either of us knew the right answer, we agreed to set up some checkpoints along the way to revisit the question.

The biggest lesson I take away from these vignettes is that there simply isn’t a “textbook” answer. The knee-jerk VC response of bringing in a hired-gun been-there-done-that CEO often is far easier in theory than in practice (what isn’t?), and needs to be thought through pretty closely and, frankly, resisted in some instances. Most importantly, the crucial thing is the conversation along the way. The odds of success go way up, I think, when both founders and investors/board members can really listen to each other.

10 Comments

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  1. June 4, 2009

    Mike you have made a very valid point. It is not a text book answer. Much depends upon how the founder and investor would like to take it forward and then how the market situation really is.

  2. TS #
    June 11, 2009

    I recently read a comment from a CEO of a Boston start-up and he believes that one of the reasons we have missed out on the huge wins or sell before the companies becomes a $billion dollar anchor company, is that there is a tendency to replace the founder CEO with the professional CEO too soon. Thereby stifling breakout innovation for the more conservative route.

    Your post was a good view into the analysis of this Knee-jerk tendency and the thought process behind the scenes.

  3. June 15, 2009

    Hi Mike.

    So many of the big, sustainable tech success stories featured unprepared founder ceo’s, including Apple, Oracle, Salesforce.com, Amazon, Microsoft, etc. I think vc’s (particularly on the east coast) are too impatient with young founder/ceo types.

    I’m on a Ceo Forum now with 9 ceo’s. The two companies that are worth the most amount of money in the forum are the ones with founder CEO’s — in fact, one just was acquired for $250million. They might not be as polished as some of the other hired gun types on the forum (i.e. they don’t play golf), but they make up for that with smarts and deep passion for building a sustainable success.

    My two cents.

    Bh.

  4. vps #
    August 22, 2009

    Waov very interesting. This article got to show me a few friends.

  5. October 18, 2009

    Mike, I know your post is a bit old, but I hope you’ll still accept a comment. A great discussion on a difficult topic. Thanks. You noted one company where you delayed the decision, revisiting it at certain checkpoints.

    I’d suggest that in some cases there is a third alternative (vs. replacing the CEO now, or delaying the decision to replace the CEO) and that’s to put in an interim COO to help out the founding CEO. I’ve done this many times in the last 10 years (sometimes at the request of the VC, sometimes at the request of the founding CEO themselves.) Check out my post on this subject at http://bit.ly/cOh4q

  6. vps #
    August 25, 2010

    You have created a very nice article. Thanks

  7. December 10, 2011

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  8. February 7, 2012

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  9. vps #
    June 13, 2012

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