From founder to CEO: the growth equity dilemma

Here and here is a good exchange of ideas from Nic Brisbourne and Fred Wilson on the challenges of transitioning from founders to professional CEOs.  The key part of Fred's analysis relates to how quickly the role of the CEO changes from entrepreneur to manager:

The CEO’s job goes from managing the product, writing a little code, doing customer support, and raising money to managing people and teams, processes and priorities. It’s not a job that most people enjoy doing and it’s a job where experience really does matter.

In the growth equity world where we invest -- ie where the founder-CEO has built a company to €8-15 million in sales -- the situation is even more nuanced.  First, the founder's success to date is often a strong proof point that he can run a viable, commercially successful business.  Second, he will have hired a team of lieutenants along the way who are good in-between managers and who are fiercely loyal to the founder's vision (and perhaps style).

My cousin, who is an entrepreneur that took his company public, once described two management transitions during the growth phase: (1) one day he was standing at the office urinal and he didn't recognise the guy next to him (about 100 employees); (2) a year later he was standing at the office urinal and the next guy didn't recognise him as the CEO (about 200 employees).  At each milestone, the way he managed the business had to change completely.

The first phase of a company's establishment requires vision, tenacity, evangelism, enthusiasm and an ability to duck and dive, to be opportunistic, hungry and creative.  The second phase requires a devoted, close-knit team that drinks the Kool-Aid, is flexible, willing to get its hands dirty and do all jobs, and has just enough gravitas and spunk to capture the low-hanging fruit of customers and turn them into referenceable believers. 

The third phase -- which is where we tend to come in as investors -- is all about achieving scale.  This is the hardest part because suddently creativity and tactical opportunism can be a liability.  Now the important thing is to figure out what sells best, to narrow the focus, simplify the product, optimise the sales and delivery process to squeeze out efficiencies, and to repeat that formula over and over again, often in new and unfamiliar territories.  Unless you like the minutiae of process design, and day-to-day people management, this part is boring.  They key here is to take best practices from elsewhere and adopt what works, not invent new ways of doing things.  This is why outside experience is critical.  For most start-up entrepreneurs, it's an impossible transition to make.

I've written about this phase before in The value of FOCUS.  It's not a given that founder-entrepreneurs cannot grow into this phase, but it is rare. 

With the right mindset and support, entrepreneurs can become less opportunistic, can learn to say no to customer requests that don't fit the product roadmap, and -- most important -- can recruit new, experienced executives (usually older than themselves) for key roles like sales and product management.  To succeed, the founder must be able to weigh his contribution to the business as CEO against his role as shareholder, and to assess honestly what the right management structure for the growth phase is. 

The best a board of directors can do is to lead the discussion with the founder early on, to provide concrete examples and references of both successful founders who have grown into the CEO role and those who have benefited from transitioning to a professional CEO at the right time.  Most important, the founder needs to know that the company will always need his DNA in the business in whatever operational role he ultimately chooses.

Comments

[Nic Brisbourne]

Thanks for the link Max, and nice post.

I agree with the requirements you list for effective phase three management, but even with mature businesses you often still need a bit of magic that it is difficult to capture in process. I was told a story over breakfast this morning about a very substantial business that brought in professional management last year and had a very successful transition in many regards (largely better process and more focus) but dropped in profitability at least in part because they lost some of the artistry in the way they acquired traffic.

[FFD]

What about the "COO model", i.e., transferring only the more operational duties to such an experienced professional? Transition might be much smoother. Though I could imagine that there is too much friction between the COO and CEO, or that it is easier too find a strong candidate for the top job.

[maxbley]

Good point Mike - I'm hearing more exec search firms promoting the COO model. I think it's a great way to keep the founder engaged as CEO while giving a lot of the process/management work to a professional. But the chemistry between them has to be perfect, which is difficult to find.