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Is It Time For Your CEO To Go? (Part 1)

Posted on Saturday, Mar 21st 2009

By guest author Tony Scott of ChampionScott Partners

I originally wrote a version of this piece a few years ago when success for most start-ups was defined as either an IPO, or an acquisition just before an IPO. While most of the core observations are still absolutely valid, I think a few things have changed since then, and I will discuss those changes in a new follow on to this article: “Is It Time For Your CEO To Go? – The New Rules” – to be published next week.

Here’s the original piece:

Studies have shown that Silicon Valley companies average more than three CEOs from start-up to IPO (or acquisition just before IPO). There are usually several additional CEO changes from IPO to hitting $1 billion or more in annual revenues. This isn’t just a Silicon Valley syndrome – the numbers are similar for companies around the world.

Why?

It isn’t that early-stage technology companies and their boards are somehow incapable of recruiting and retaining top talent. Venture capitalists consider recruiting talent to their portfolio companies among the highest responsibilities they bear as investors and board members.

The answer is that companies go through natural stages of development – from start-up to market penetration, to market acceptance and growth, and finally to maturity. Each stage has different business issues that define success or failure, and therefore require different human capital skills to achieve success. The most successful companies in each stage of development often have CEOs who tend to fit certain archetypal personalities that are quite distinct from one stage to the next, albeit with similar characteristics between adjacent stages.

Stage: Start-up
CEO archetype: The Visionary

At this stage in a company’s development, the key business issues revolve around defining the product. Typically, the team being built is almost 100% focused on research and development, engineering and product development.

The skills needed by a CEO for a company at this stage are creativity, vision, and the passion to attract others to buy into the dream. The CEO’s focus is on defining the market opportunity, product features and functionality.

Stage: Market penetration
CEO archetype: The Quarterback

Companies at this stage are facing commercial issues: launching first products and evangelizing those products in selected markets. The focus of the entire company at this stage is on launching the product, creating early sales wins, and developing partnerships and alliances.

The skills needed by a CEO at this stage are heavily weighted towards business development and sales. The CEO often is the most effective salesperson in the company – and a hands-on approach is critical to creating initial sales wins. The CEO at this stage must still have many of the qualities of a Visionary, particularly when it comes to being a “magnet for talent” to build out the team. Thus, the American football quarterback is an archetype: a great all-around performer who leads the team by example.

Market acceptance and growth
CEO archetype: The Coach

At this stage in a company’s development, it is no longer a question of whether or not the company will be able to achieve success – the question is how much, and how quickly. The key goals for the CEO are to build sales and services infrastructures, enter new geographies and markets and manage for rapid growth. The skills needed are experience in professionalizing sales, marketing and services to create repeatable processes, and building a corporate structure to support growth. The company’s growth is now usually not confined to only one geographic region. The CEO at this stage of development must have a global mindset, and must infuse that throughout the organization. While the CEO is likely to still be involved in critical sales approaches and partnership negotiations, at this stage the CEO’s role must evolve to one of coaching others, and making sure the best performers are given the opportunity to succeed – or fail – on their own merits.

Maturity
CEO archetype: The General

Companies that reach this stage of development face issues of managing for efficiency and profitability, extending or paring product lines, and defending existing positions. The skills needed are professional management, with a focus on managing to maximize the bottom line and delivering new products and services in a repeatable fashion. CEOs at this stage will ideally have merger and acquisition experience, and strong experience managing global operations. The CEO is likely to have strong “lieutenants” reporting to them – with the CEO responsible for devising the overall strategy and picking the right lieutenants to lead divisions or functional groups within the overall company.

When to change CEOs

The requirements of each stage of development are so different that it is very unusual to find one person who can effectively lead an organization through more than two or three of those stages. It is equally unusual to find one person who truly enjoys the issues related to leading a very early-stage start-up and managing a much larger, more mature organization. In addition to the skills required being different for each stage, the personality types that are attracted to different stages of company growth are quite distinct.

The only individuals who tend to remain passionately involved in a business across all stages of a company’s development are founders. Notwithstanding the relatively uncommon cases of Bill Gates, Larry Ellison and Steve Jobs, founding CEOs typically lack the critical skills necessary to be an effective CEO through all stages of a company’s growth. Those who do last as CEOs across stages typically bring on a strong number 2 to support them as early as possible. Even then, conflicts between founders and professional managers often flare out of control, particularly over operational issues. These conflicts are often over differences between the belief of the founder in the need for more vision and passion, versus pragmatism and drive for quantifiable results on the part of the professional management team.

A founding CEO is typically better suited to move into a CTO, Product Visionary or Board role once a company achieves commercial scale. Board roles enable the founder’s passion and vision to continue to benefit the company, and also allow a CEO with more experience in the next stage of development to grow and manage the company without having to “learn on the job”.

A key tenet in changing CEOs is that sooner is typically better than later. Most boards change CEOs too late. Experienced board directors will confirm that as soon as questions arise about the competence and ability of a CEO to take a company to the next level, it is probably already past time to make a change. The ideal time is often just prior to or just after a company moves from one stage in the lifecycle to another, and done in a planned fashion.

Of course, a change should be made immediately if a CEO doesn’t show passion for leadership – and unfortunately, this does happen with some frequency. Sometimes their passion wanes because the CEO becomes burned out from the pace and challenge of building a company; sometimes it is because they are personally motivated by building, rather than managing. In either case, a quick change is critical.

Changing CEOs is difficult under any circumstances, and has the potential to be either massively disruptive or a motivating shot in the arm. The best way to minimize the potential for disruption to discuss the potential for change with the incumbent CEO, board and management team from the beginning, using a company’s potential lifecycle issues as the basis for those discussions. By applying the lifecycle needs of the company against the human capital skill sets needed to make the company successful at each stage, everyone involved can realize that success is measured by achieving the goals of one or two of the stages – not by tenure.

At the start-up stage, it is important for founders to understand that they can have an important role in the company other than CEO, and that their success will be measured not by their own title, but by the success of the organization they created. Or to put it more bluntly, founders often have to decide if they would rather be rich, or be the king – history has shown it’s rare to be both.

How to change CEOs

The board and CEO should always have a plan for succession in place well before a change must be made. Unfortunately, boards all too often avoid succession planning and an evaluation of a CEO’s skills agains the needs of the company until it is too late. Early buy-in and planning on the part of the board and executive team that changes likely will be made as the company evolves makes changes infinitely easier when they inevitably do happen.

Sometimes CEOs just need the right lieutenants to backstop them with skills they don’t have. With the right team, a change may be able to be avoided. Unfortunately, the tendency of boards is simply to shoot the CEO if things aren’t going well – without examining why things aren’t working out as hoped for the company. It is important to make sure the entire management team is assessed for suitability to drive the company to the next level, not just the CEO.

If change is inevitable, the board should evaluate whether or not the current CEO should be kept in the organization in some capacity. This is often best in the case of founder/CEOs, as long as the founder truly wants to make the company successful and can set aside their ego enough to let go of their baby. The board and outside consultants should work with the founder to help them understand how they can take on a new role in the company. The goal in all cases is to make the incumbent CEO – founder or not – part of the solution of how the company can advance to the next level.

Even though few people have the skills and personality to take a company through all the stages of its lifespan, an incumbent CEO should never be viewed as the root cause of all problems in a company, and a new CEO should never be viewed as a messiah who can save a foundering company all by themselves. Building a successful company is always a team effort.

This segment is part 1 in the series : Is It Time For Your CEO To Go?
1 2 3

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Comments

Excellent article and overview. I'd like to hear more about when boards decide to replace the CEO – and not just for the 'growth' reasons above, but also the 'failure' reasons – lack of product strength, channel miscues, financial problems, etc. What is the process, and how are the decisions about CEO, VP engineering, VP marketing, VP sales, etc., that typically go with this regime change? Rely on the new CEO to fix the problems? Do new incoming CEO's demand the changes be made ahead of time? It's more a political question as process.

Scott Tuesday, January 4, 2011 at 2:52 PM PT

Removing a CEO often sends different signals to the employees – who interpret it as a change in direction for the business. In a start up, the CEO plays a very important role as the leader. How is this to be handled ?

Sum Thursday, January 6, 2011 at 6:35 PM PT

1, Gordon Bell and Heidi Mason have good wisdom in High Tech Ventures (1991) on CEO succession.
2. The CEO phases typically are (a) engineer to get to first ship (b) sales to increase revenues quickly (c) financial to rein in expenditures after aggressive sales cycle
3, Boards usually do a poor job of coaching CEOs and making them stars.

Angela Hey Monday, February 21, 2011 at 2:32 PM PT

great article as usual

jake Tuesday, February 22, 2011 at 9:54 AM PT
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