Axe The CEO!
By Gerry Langeler, Guest Author
Here is a sure-fire bet: Gather a bunch of entrepreneurs to talk about venture capitalists, and before long the conversation will turn to the issue of control. “If we take VC money, the next thing you know, they’ll be in control, and we’ll be out on our collective ears.”
Now, try the reverse. Gather a bunch of VCs and before long you’ll hear something like this. “If we invest in them and we don’t have the ability to take control, these young hot shots may run right over the edge of the cliff, and take all our money with them.”
The problem, of course, stems from the following: Entrepreneurs often have mixed goals in starting a business. They want to deliver on a product vision, want to grow a major enterprise and make money, and also want to be the boss. Venture capitalists have only one goal, they want to make money for their investors and themselves. Sometimes, if the company gets off track or is headed there, and management doesn’t seem able to fix it quickly, VC’s feel they need to be able to bring in people who they believe can.
So, if you are the entrepreneur-CEO, how do you avoid this potential conflict point? First and foremost – perform! The last thing a VC wants to do is change management. It is messy, risky, and often leads to a wash out of the previous round of investment. And no VC in their right mind wants to take the reins themselves. We know how hard you work!
Fail to perform, and no set of terms and conditions or ownership position can save you.
Perform, and you have all the control you’ll ever need.
In that spirit, here is a checklist that I’ve found useful over the years in serving as a Board member in a number of firms, both public and private. It doesn’t cover every situation, and covers some that only tend to appear as companies get beyond the startup stage, but you may still find it useful. If you, as the CEO, can put this list up on your bathroom mirror – and every morning tell yourself you aren’t running afoul of any of its tenets, then you have a long, successful career ahead of you!
With all due respect to Stephen Covey – here are the Seven (Deadly) Habits of Highly Likely To Be Fired CEOs.
1. Poor leadership
* Lack of confidence by key personnel
* Hires/retains weak people in key positions, lack of urgency or failure to fill key roles
* Fails to grow/retain key players (ultimately including a successor)
2. Poor vision
* Lacks clear understanding of where business is going
* Organization lacks focus and clear priorities
* Not able to strike key industry partnership relationships
3. Poor results
* Sustained poor financial performance or consistently missed operational targets
* Major loss of market share or competitive position
* Inability to forecast timing/nature of recovery events
4. Poor understanding of business
* Misses key industry trends and changes
* Lacks understanding of fundamental profitability factors
* Cannot crisply define what it takes to win
5. Poor work habits
* Does not put heart and soul into business
* Sets bad example/role model for others
* Is not viewed within industry as a key player
6. Poor management style
* Allows top management infighting, not working as a team
* Decision processes are unpredictable, leaving organization too scared to act
* Starves key programs, but spares sacred cows
7. Poor board candor or communication
* Controls flow of information/agenda preventing focus on, or sufficient time for, critical issues
* Does not allow ready access to VPs and other key individuals
* Keeps favorite non-strategic programs or perquisites out of board review/approval process
Significant evidence across any one of these categories should be enough to render a board wide-awake to the potential for trouble. Two or more should cause a responsible board to act.
Venture capital boards are like normal boards, only more so! They have little time to spend developing management in the face of fierce competition and dynamically moving markets. They are much more ready to act to change management to fix something that is broken, or to keep a rocket from coming off the rails.
So – avoid the Seven Deadly Habits for CEOs. You’ll find your venture capitalists supporting you every step of the way!
The tone of the article suggests that VCs behave rationally in the board room, in the sole pursuit of maximizing their return. They may very well believe that. The fact is, most VCs lack the operational experience to be a fair critic and a useful coach for CEOs in need. When something goes wrong, many are trigger happy, in part because they are scared and need to assert control, and in part because they prefer to use the blunt instrument of firing the CEO because it is easier than providing the right level of support and coaching. I hear many VCs in the valley who argue with machismo how you never fire the failing CEO early enough. In many cases, this supposedly tough decision (which in reality is an easy cop out) destroys shareholder value. To be complete, your posting shoud include the list of deadly sins committed by VCs everyday in the name of maximizing shareholder value.
Hi Gerry,
I also have another suggestion for a follow-on article topic, besides Eric’s “Deadly sin’s committed by VCs” above.
Your article begins at the point where an entrepreneur has managed to keep the CEO job. Often, very often, there is the preemptive strike. The CEO is demoted and replaced early on, without any opportunity to perform. Can you throw some light on the premptive strike?
Sramana
Eric raises some good points.
I’ll see if I can craft a corollary piece to address his request.
In the meantime….in my experience VCs largely do behave rationally in the Board room – although I have absolutely seen the opposite more than once.
Speaking as a VC who does have the kind of operating experience Eric would prefer, founder CEOs are not usually all that insightful about their own strengths and weaknesses.
That is why we usually engage an organizational development firm early-on to help the CEO measure his or her own skills against those needed to be successful through the stages of growth. That takes the trigger-happiness out of the equation – and also helps the CEO see the process as one of driving to “company success” versus his or her personal success.
The same can be said of the “preemptive” decisions going into a new deal that Sramana questions.
One of the most telling conversations I have with entrepreneurs is to go around the room and ask each person what their role is in the new company. When I get to the founder-CEO it often goes something like this:
“I’m Charlie Technohound and I’m the CEO.”
I ask, “Why are you the CEO?”
Charlie responds, “Because I’m the founder!”
I reply, “So?…….(long pause)….What does a CEO have to be good at? ….. Are you good at those things?”
Charlie, “…..(deer in headlights look) ……”
Most founder CEOs have not measured themselves against any reasonable criteria for CEO-ness. It doesn’t mean they can’t be CEO, it just means they have no clue as to what that means. Yet these very same people have a rock solid notion of what their VP Development, etc. need to bring to the party.
So, usually the preemptive “strike,” as Sramana puts it, is a judgment call by the VCs that the founder CEO does not have the right skills and experience to play that role from the outset. It may not seem “fair” – but the goal isn’t fairness, the goal is to lower the risk of company failure (which is the default outcome for every startup).
Surely, there are times when younger, promising yet unproven CEOs could make the grade but were not given a chance. But usually, the mistakes those folks make are mistakes the young company can not afford.
It’s a tough call. We all enjoy seeing a first-time CEO perform well and make us proud while they make us money. It is one of the psychic benefits of this business that is rarely discussed. It is akin to the joy of coaching a kid who achieves greatness in some sport or other endeavor.
However, the reality is that we know the names of the Bill Gates and Michael Dells not because they are the norm, but because they are not.
Where we do take the chance on a first time CEO is when we see the skills there, and see the experience there from having been say a VP in a prior startup where some learning by osmosis has already occurred.
Gerry
Where to start?
This is a great topic, and how it’s handled is one of the ways that venture firms differentiate themselves. Some observations:
When on a Board, I have a moral, ethical and legal responsibility to do what’s best for all shareholders, not just me. In the case of a venture-funded startup, most of the other shareholders usually work for the company, which makes it even more complicated. I also have a responsibility for my customers, i.e. my LPs and GPs, which makes the conflict that much more acute. Walking that line is hard, but necessary. Selecting the right CEO is the single most important responsibility of a Board member. A founding CEO, in particular, is also often a significant shareholder. If I think that replacing the CEO will maximize the value of his/her shares, as well as mine, I won’t hesitate.
Ah, but would that it were simple to figure out if a CEO upgrade will actually help. Half the time (in my experience), the Board finds a replacement CEO who’s (even) worse than the original. That’s not good. Most of the time, Boards wait too long to replace a CEO, but the flipside of that is that it’s hard to tell that (s)he needs replacing until it’s too late.
From the CEO’s viewpoint, (s)he should be happy to be replaced with someone who’ll create a better outcome for the company. But, of course, emotions and ego play a significant part in clouding this viewpoint and, besides, most CEOs have sufficient, er, self-confidence to believe that they’re the best person for job. Sometimes they’re right.
To me, the only viable approach is to be completely up-front with the CEO before and during the investment. If I think that (s)he won’t cut it in the long run, we discuss it. If that puts them off, then we both win: they avoid taking money from someone who’s going to push them out, and I avoid the pain of a forced CEO replacement.
Oh, by the way, almost EVERY CEO, when asked about being replaced in the future, will give you the line about “of course, I’ll step aside for the right person, want the best thing for the company, blah, blah”. The trick is figuring out who really means it. I have grudging respect for those who tell me that I’ll have to prise their cold dead hands off the wheel, and that I should go pound sand. They’re always 100% sincere
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Having been on both sides of this issue, I’ll submit that both Eric and Gerry are right and that Alex captured the reason why in the second sentence of his posting. Specifically, that Board contribution is one of the ways by which venture firms differentiate themselves.
If you as an entrepreneur pick investors (Board members) who have no operational experience and can add no value to your business other than to give you money, then you shouldn’t be surprised if the Board member’s only creative thought upon encountering operational difficulties in your business is to fire you. I’m sure that one of the chief reasons why Eric, Gerry and Alex are such effective Board members is because each of them has a long (and successful) history on the operational side.
Entrepreneurs would do well to remember that equity investments are like a marriage: if you pick your partner solely for the wrong reasons (“s/he has a lot of financial assetsâ€) then you’ll have an excellent chance of a stormy and unhappy relationship. Similarly, if you pick your investors solely for the wrong reasons (“they offered me the highest valuationâ€) then you may be setting yourself up for some difficulties down the road. So pick carefully and wisely, and do your best to hook on with experienced operators like Eric, Gerry and Alex.
Good one Gerry.