There are no shortcuts to intelligent Founder – CEO transitions



 Founder transition is one of those tense topics that holds limited upside for the writer, especially when said individual is a venture capitalist. However it’s also very often one of the defining moments in a startup’s life; a moment that, because of its complexity, has a tendency to be managed really badly. People (and investors in particular) always strive for expediency and efficiency. As a result, they often try to find shortcuts to performance, including making poor decisions about founders and their ability to scale.

First, give yourself a chance to scale
I am big fan of letting entrepreneurs rip. I know of too many examples of well-meaning investors, whether angels or VC’s, who insist on “having someone who’s done it before” run the company, only to find out that said individual has nowhere near the level of talent or passion that the founder brought to the table, and that in the process of importing “mature management” everyone destroyed the magic. The reference writer on the topic is of course Ben Horowitz; read him.

All in, for the win
Self awareness is one the defining characteristics of happy, well adjusted people. Probably for that reason, it’s rarely one of the defining characteristics of entrepreneurs. You clearly have to be a bit self-delusional, angry, passionate and/or crazy to ever think you can make it as an entrepreneur; suspension of disbelief, including in one’s self is the necessary ingredient in every startup project.

It does not leave a ton of space for careful introspection. This is in part why it’s so hard for entrepreneurs to know when they need to raise their hand and ask for help. “Hey hey, my, my, it is better to burn out than to fade away”. It’s also why smart and experienced mentors can make a difference.

VC shortcuts: founder = forever VS. founder = never
VC’s are strapped for time. We all have a tendency to look for expedient ways to solve problems, and that often means looking at the team that’s on the field to figure out which players you need to upgrade. It’s impossible to “fix” a company from the outside so the maximum leverage point is to find or replace talent, starting of course with the CEO.

When you apply shortcut thinking to the founder as CEO question, it can express itself in one two ways:

  • “We always back the founder no matter what”
  • “We always look for experienced management [as soon as a company starts to scale]”

At Atlas we clearly err on the side of the first option, and that is because

  • (a) yes, we fundamentally fall for the myth of founder as hero :-)
  • (b) we hate to lose the “magic” that comes from having an original founder run the business
  • (c) our big successes are generally correlated with founders scaling (e.g. Liautaud at BusinessObjects, Patel at Isilon, Moroos at Moo, Moseley at Globoforce, Kosciusko-Morizet at PriceMinister, Chesterman at Zoopla; to name a few)

I have had discussions with VC’s in the past along the lines of: “we’re thematic investors, we look for decent vehicles that fulfill our themes, we bring in our own people anyway so we don’t mind if the team is a B team”.    That’s anathema to me, but it remains that the extreme stances of “we always back the founder” or “we always bring in experienced management” are both shortcuts to doing the real work.  

Another variation on the same theme says: most venture backed companies end up replacing the founder, so let’s have the conversation very early.  Sounds reasonable and professional, right ?  I believe that two thirds of venture backed companies end up with a CEO who was not the founder; I have of course no idea what this means as it is unclear to me whether VC’s starting from this viewpoint (that founder transition should be envisaged from day one) becomes a self-fulfilling prophecy.  Once the worm is in your head … 

Reframing the founder transition discussion
From the investor standpoint, the real work of understanding whether a founder is scaling (preferred route) or needs help (fallback) or needs to leave (fallout) is slow, detailed and time consuming. It’s about long discussions on the evolution of one’s role inside an organization, the nurturing of culture, the careful addition of talent and of course the challenges of execution.

Most of the founders I work with tend to be “product led” CEOs. They own vision and product, they thrive in that honeymoon period of the lean startup, when it’s just them, a few engineers and a market to be conquered, a client to be seduced.

Of course as organizations grow, their role gradually evolves. Can you manage salespeople ? Do you enjoy recruitment and are you good at it ? Are you able to delegate ? Can you reshape the organization as it grows ? And most importantly : can you continue to make decisions in conditions of extreme uncertainty ? Can you make the really hard decisions and follow through ? Do you have what it takes ?

In my experience, some people derive positive energy from these added challenges, whilst others clearly learn to loathe many of the aspects of managing a larger organization.

When your startup is 100 people strong, you do almost nothing operationally; you spend your time shaping and communicating a vision, making sure everyone knows in which direction we’re all rowing, helping your managers do their job better, “helping out” with top clients and partners, and dealing with the likes of me.   And then of course, you have everyone clamoring for salary increases, threatening to leave for Google, complaining about burgeoning politics, carefully managing the information they’re presenting to you, and occasionally suing you because, you know, they can. Not everyone likes that.

I highly recommend you spend ten minutes reading this great post from @marcbarros and his from the trenches experience as the “founder that did not make it”. He does a fantastic job of dissecting Founder and CEO roles.

For a founder it can be particularly hard to be told by investors “you’re not the right guy” at exactly the time the company is scaling.   For investors it’s really difficult to determine whether underperformance requires patience (as the truism goes, “every company takes twice as long to get off the ground as everyone thinks”) or swift action.   I suspect that, too often, investors applying “pattern recognition” (and often reinforcing each other’s anxieties) only achieve flawed group-think around the inability of a founder to “scale”; hence they get into CEO replacement mode based primarily on hunches.  You can also read Read Noah Wasserman on the so-called Founder Paradox (the more successful the company, the higher the chances of founder replacement).

Are you energized ?
I tend to boil it down to a fundamental question that is at the heart of how well you can scale: do you derive energy from being a CEO, or does it deplete you ? I don’t want to push too hard for self-awareness in entrepreneurs, but I do want to guide them in understanding whether they’re sustainable as CEOs.

Don’t Be Normative !

The point is, there is no right stance.   As a VC to say you’ll always back founders all the way is great marketing to entrepreneurs but probably neither true nor right.  To say you always bring in experienced management smacks of private equity but works surprisingly well with Limited Partners (i.e. our own investors).

But both are shortcuts that trivialize the complexity of building a startup.

Fundamentally you have to write your own story, and have the fundamental honesty to learn what you’re really good at. There is no right way to do this. All that matters in the end is that you defy the odds and become that 1 in 10 company that hits the big time.

  • Take Eric Mosley at Globoforce. He made the jump to Boston, built a management team, decided to try for scale. And he’s doing really well. Founder all the way.
  • Take Christopher Ahlberg at Spotfire.  He smartly brought in an experienced exec to partner with (COO Rock Gnatovitch) as he realized that as 26 year old PhD student, he did not have all the skills.  At Recorded Future, the company he started after leaving Spotfire’s acquiror Tibco, he’s running the show.
  • Take Bruce Journey at DataXu. He brought in one of the best operators in the field in the person of Mike Baker, took the role of Chief Revenue Officer, is now heading international and continues to be the spokesperson for the firm. On to a big win that he probably would not have achieved without Mike. Mind you, we’ll never know :-)
  • Take Veracode. Big play, big customers, high level of complexity in execution. Veracode needed and deserved an experienced hand and found one in Bob Brennan. The “drive hard and fast” culture on which the company was built simply could not scale.

The problems we face are always the same and usually not rocket science. It’s the unique alchemy of teams and the unique journey of every founder that makes it both hard and so endlessly fascinating. It’s also the reason why there are no shortcuts to spending time and carefully figuring it out, together.

Alchemy Circle by Alchemist Pac
Alchemy Circle by Alchemist Pac

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  • LIfeSciFounder

    great post . . . do your colleagues Bruce and others on the life science side agree with the points made above and in particular with regards to riding the founder?

    • http://www.freddestin.com freddestin

      I think the way super early stage biotech companies are built is quite fundamentally different (as they will regularly play the role of founder) though they would certainly pay as much attention to talent as we do.

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  • http://www.hollyip.com/ Suleman Ali

    Perhaps also ousting founders can be understood in terms of the power dynamics and politics of a company. A founder may be great at running a company, but does not toe the line with other decision-makers, such as investors. Founders may not be as ‘corruptible’ as they need to be to survive such things.

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