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Is It Time For Your CEO To Go? (Part 2)
A New Model for Silicon Valley

Posted on Sunday, Mar 29th 2009

By guest author Tony Scott of ChampionScott Partners

For technology companies, the biggest change that has happened since the burst of the dot-com bubble is their likely path to exit. In the late 1990s, it seemed like any company with not much more than an idea could go public. Venture capitalists invested in companies looking for “100 Xers” – companies that would return 100 times their investment. The entire Valley was obsessed with the dream that any company could – and should – have an initial public offering. If you talked to any entrepreneur about the goal for their company, it was always, “We are going IPO”.

When the dot-com bubble turned into a massive dot-bomb, IPOs weren’t so easy to sell anymore. Investors in the public markets realized that the public markets aren’t actually appropriate for investments in companies that really need venture capital. After the tech bust there were still companies that went public, but the older public market models of showing six to eight quarters of revenue growth and profitability applied, so not many companies made it through the gate.

Over the past few years it has become increasingly difficult for any company to go public. With the advent of the Sarbanes-Oxley regulations combined with a decrease in the willingness of investors to buy shares in newly public companies, the IPO market for tech companies has come to a near standstill. The necessary threshold in terms of revenues to consider going public has skyrocketed. Many investors and investment bankers today would say that unless a company has well over $100 million and preferably closer to $200 million in annual revenues, it just doesn’t make sense to be a public company.

Venture capital investors still want to have an exit in any company in which they invest. They need to achieve liquidity from their portfolio companies so that they can return capital and gains to their limited partners, and go on to make new investments. Yet in today’s environment, the only path to liquidity for well over 90% of companies will be through an acquisition by another company.

If the board and entrepreneur realize that the path to liquidity is very likely going to be a trade sale, why not think about a different leadership model?

I believe that if the likely exit is going to be a sale, that founding entrepreneurs may not need to be forced out of the CEO role nearly as often. Of course there will always be entrepreneurs who can’t lead or delegate, and those whose personalities are destructive will have to go. But even founders who are serving as CEOs for the first time can provide a lot of value to companies as they grow.

While board directors can provide useful advice and guidance to an entrepreneur, most early stage company boards are comprised exclusively of investors other than one or two of the founders. Entrepreneurs typically never feel comfortable being completely open with investors, and vice versa, as their goals and interests are not always completely aligned.

Independent external board members are a great idea, and can be very useful as their interests are usually not aligned with either the investors or the entrepreneur. They should be able to look at issues from a more neutral and unbiased perspective. However, independent board members of early stage companies rarely receive enough compensation (either cash or equity) to make it worth their while to take on the task of helping truly mentor an entrepreneur.

What every first-time CEO needs most is someone with deep experience building companies to scale; someone they can turn to on an on-going basis for unbiased advice and coaching. That person needs to be someone the entrepreneur can open up to without fear of being reprimanded or possibly even fired for making a mistake. Even more importantly, they need to be someone who can tell the entrepreneur when they are wrong, and suggest a better way to do things – and someone to whom the entrepreneur will listen.

There are many experienced former CEOs in Silicon Valley who have had great success but no longer want to take on the challenge and burden of devoting 110% of their time to one particular company. Sometimes that is because they already have “made it” financially, and want to spend time with family or pursuing other interests. Other times it is because they realize that creating a portfolio of equity by working with multiple companies usually has a higher probability of some positive return than taking the chance that two or three years of hard, full-time work will come to nothing. After all, venture investors have a portfolio of investments to manage risk – why shouldn’t successful executives who don’t have to work for a living anymore do the same?

I think almost every Silicon Valley company with a newly minted founder/CEO could benefit from having an active, engaged senior advisor. Whether the advisor is engaged as a consultant to work with the CEO on specific issues, or serves as an executive chairman to help with all of the major issues the company faces, the basic parameters are essentially the same: an experienced former CEO who will devote one to several days per week helping the founder on issues where he or she has little or no experience.

If a founder has someone like that helping out, the founder, company and investors can benefit from a depth of experience that is highly unlikely to be recruited to the company otherwise. The founder can learn from the advisor through on-the-job, hands-on guidance, and not worry about asking questions or doing things that might make them look stupid to investors. The company overall will benefit by keeping the passion and vision of the founder in the leadership role, but with the added benefit of a highly experienced, successful former CEO watching over the founder’s shoulder to give course corrections as needed, and ready to step in to take the wheel if the founder gets off course. Investors will benefit by having highly capable “adult supervision” in the company.

Of course, all of this does come at a price – advisors aren’t going to work for free. However, highly experienced former CEOs serving in an advisory or executive chairman capacity will work with early-stage companies they find interesting for far less total cash and equity than would be required if they were to take on the full-time CEO role – if they could even be enticed to consider that at all.

If this model is implemented by more companies, I believe we’d see much lower turnover of founders/CEOs to “professional managers” – and perhaps higher success rates for start-ups overall.

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

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Give me a break. You suggest that I should take someone who has retired and be his entertainment between golf games?

Either the ‘successful former CEO’ should be willing to take on real deliverables or he should be willing to at least put in some ‘real’ money into the company. Ideally both, otherwise ‘advice’ is worth an hour now and then but little more.

I am sure these people could help if they rolled up their sleeves but there are lot of ex-CEO’s who have time on their hands (between golf games) who are willing to pontificate and waste your time. Take them to lunch.

Jagdambha Bilasia Saturday, April 4, 2009 at 11:59 PM PT

I think you are very, very wrong on this Jagdambha. I would say, you have remarkably little experience with the kind of people that Tony is talking about. This genre of people is one of Silicon Valley’s greatest assets. And it is a genre of people that doesn’t exist elsewhere quite as much.

A good Executive Chairman can be the determining factor between the success and failure of a startup, and can be an invaluable resource for a relatively inexperienced entrepreneur.

I will have to caution you about speaking in a tone and voice that makes ample display of the fact that you are way out of depth on what you are talking about.

I will let Tony answer you on the specifics.

Sramana Mitra Sunday, April 5, 2009 at 12:25 PM PT

Jagdambha,

I’m not at all suggesting working with anyone who is not, as I said in my article, an “active, engaged senior advisor”. If you need someone to help you as a mentor, then you might get someone to be an advisor for a few hours a week. If you need help with a specific problem or set of problems, then you can engage someone to work part or full time for a period with a very specific set of deliverables. If you feel you need on-going help with a broad set of issues, then engage someone as an Executive Chairman with clearly defined responsibilities.

I know many truly successful former CEOs who are not looking for “entertainment between golf games”, but who have zero interest in going back in to a role that requires 100 hours per week and their full commitment – which most early stage CEO roles require. If an early stage CEO has all the answers, then they don’t need this kind of help. If they think they do but don’t realize they don’t, then they are likely to end up pushed out by their boards, who don’t have time to deal with babysitting a founder, and never have the time and often don’t have the skills to teach the founder how to be an effective CEO.

Few people have all the answers themselves. I find the reliance on the CEO as the sole point for betting on the success or failure of a company by venture investors to be incredibly shortsighted. I also find the incredible arrogance demonstrated by many founders who think that they can “figure it out” as they go along on how to be a CEO to be equally destructive. This combination of shortsightedness on the part of investors and founders has destroyed many companies that had truly great potential.

Tony Scott Sunday, April 5, 2009 at 12:34 PM PT

To clarify just a bit further, the consultants/interim executives/executive chairmen I know typically work 2 to 5 days per week with a company, depending upon the needs of the company at a particular point in time. Many will only do so if they have co-investment rights in future fund-raising rounds. Part of their incentive to do this is financial – both short term and long-term, with the long-term incentives usually being the side of financial coin that motivates them the most. The other part of the incentive is being involved in building something exciting, and the satisfaction of working with and mentoring younger, inexperienced entrepreneurs who are open-minded and self-aware enough to realize that they can learn from someone more experienced and successful.

Tony Scott Sunday, April 5, 2009 at 12:46 PM PT

Tony: I agree that people with experience and insight, who have ‘made it’ and have the luxury or owning their time can be value additions to a team.

But even the truly successful CEO has to put themselves in position of influence and away from a position of control which is often hard for them to do. They also have to recognize that the formula that worked for them may not quite work the same today or the startup they are helping.

I think 2-5 days a week is a good amount of time to get some dirt under your fingernails. If they are willing to take on clear deliverables I would say they are worth a shot, especially if they put some of their OWN money in play. Sometime it may take some work to allow them to put some money into the company, but if I was getting a chairman or someone I was giving significant equity to I would make it possible.

The amount of advice that is available in Silicon Valley is staggering. There are mentors (some disguised as angels that MAY invest) around every corner. It is cool, feels good. Most (not all) are not worth the time.

So my advice to entrepreneurs is to be careful, look into the motivations and what the person will do for you now (in the stage you are in and the stage he is in). Check out their track record in helping out companies like yours. See what they actually did for them, and if there is a fit with what you need then great go for it. Don’t get star struck.

Finally if you do find a gem don’t be stingy, given them a good deal and value them and their advice and help.

Jagdambha Bilasia Sunday, April 5, 2009 at 11:34 PM PT

You make the point about an Executive Chairman putting some of their OWN money in play, and that typically happens. However, more important than their money is the investment of something that is much more precious and impossible to ever replace – their time. If someone who is successful and can add value to an organization is willing to invest their time with your organization in exchange for equity – with that equity awards tied to tenure and performance in an advisory, board director or executive chairman role, then a smart entrepreneur should jump at the opportunity. Many people won’t invest hard cash until they are able to peek under the covers for a while to see whether what the entrepreneur is claiming they have is real, because as I’m sure you know, many entrepreneurs live within a reality distortion field.

Tony Scott Monday, April 6, 2009 at 8:37 AM PT

That’s right, and also, I would not put a penny of my own money in a venture until I figure out whether the entrepreneur listens.

Think about an Executive Chairman or a Consultant offering advice and money, and the entrepreneur takes the money, disregards the advice, and basically all we have set up is a completely dysfunctional situation.

Entrepreneur very often have the bad habit of not listening to good advice because they’re too stubborn. While in some cases that works out to be in their favor because they are right, more often than not, inexperienced entrepreneurs who don’t take good advice end up shooting themselves in the foot. And that is a risk experienced executives will not and should not expose themselves to.

My point is, if you are entrepreneur looking for guidance and can entice someone really good to engage with you, better take the advice and prove to him/her first that it is possible for him/her to work with you.

Entrepreneurs by nature are independent people. This relationship that Tony is suggesting is one in which an entrepreneur consciously agrees to invite someone more experienced into a relationship that will require that some of that unbridled independence is contained.

I would submit that most entrepreneurs don’t like this compromise.

And most executives know that.

Sramana Mitra Monday, April 6, 2009 at 8:52 AM PT

As Tony remarked, the time of people who can truly help you build a business is more valuable than their money. For just that reason, if they believe in you, it is usually easier to get their money than their time.

Given the experience that these ‘advisors’ have they should be able to read an entrepreneur well and fast and avoid the risk of the entrepreneur not listening to them.

The other way is much harder. How does the entrepreneur know if your ‘advisor’ is seriously going to help?

The advisors are usually polished and have track records so getting their helps seems a straight forward decision. But practically it doesn’t work that way most of the time. They may be just not be willing to get their hands dirty enough to be of real assistance.

A simple way to find out is to get to have some skin in the game. They will have to think a lot harder about taking you on and it will give you a good sense of the probability they ascribe to your success with their help.

But there are many many people out there who think their advice is valuable, but in reality their money is more valuable than their time.

One way to find out is to let the advisor invest. It will take a lot more effort to find a good advisor. You will have to sell them on your business and yourself but if your are successful you may get some real help.

Jagdambha Bilasia Wednesday, April 8, 2009 at 11:23 AM PT

Reading people is extraordinarily hard. I think you are arguing for something that I would personally not participate in. If you think I am a potentially valuable advisor, you then have a data point contradicting your argument.

I happen to have many more.

Sramana Mitra Wednesday, April 8, 2009 at 5:24 PM PT

Jagdambha,

Turn your argument around – why would anyone invest as a minority shareholder in a privately held company without the protection of at least a board seat? When venture capitalists invest, they get that at a minimum, and often have control of the company. If an entrepreneur who I don’t know very well – if at all – wanted me to invest, why would I do that before I was able to peak deep under the covers of the company and see what is really going on. I don’t have the time to do that level of due diligence unless I am making a substantial angel investment. More typically, I will just piggy-back on the due diligence of the lead venture investor, who I most likely have worked with previously.

It is easy for the entrepreneur to say he or she is going to use the advisor/consultant/interim executive/executive chairman in a good manner, but that frequently doesn’t turn out to be the case. Then the advisor would have invested their money, had a falling out with a stubborn entrepreneur who thinks they know it all, and be in completely losing position – both of time and money.

If an entrepreneur is sure of themselves and their company, they should have no problem letting an advisor work with them for a while to see the whole picture of the company. If the company is as great as the entrepreneur thinks, the advisor will be begging to invest. If the advisor is as good as they believe, then the will not have any problem tying the earning and vesting of equity to specific milestones and/or passage of time. If they don’t perform as advertised, the entrepreneur can sever the relationship – no harm, no foul.

What you are suggesting is that the advisor take a giant leap of faith on the basis of what the entrepreneur says – with no effective recourse. I doubt many people would take that leap in the manner you are suggesting.

Tony Scott Wednesday, April 8, 2009 at 6:57 PM PT

I think the advisor should consider his investment of time with the same due diligence as he would an investment of money – – IF their time was truly valuable. The reason I push on some money being part of the deal is that it is the only way to make sure that the due diligence is done and the advisor — the investor of time — is the real deal.

From your (and Sramana’s) comment it seem that the minute money is involved, a whole new level of diligence is required. Why would this be true if time was more valuable than money?

We are not talking millions of dollars invested. 50-100K is just fine. I would contend that ‘advisor’ with experience in the space should be able size up the entrepreneur/team and business rapidly. If they need to work with the team for a bit before investing (time/money) then they should do it without any gain if the investment is not made. They should not expect to be paid for due diligence.

This may not seem good for ‘advisors’ but it will works better for the ones worth their salt who should be disciplined about who and how many positions they take on.

For the entrepreneur even with the money in they have to make sure that the advise is going to be valuable. If they take on an advisor for just his money they will waste a lot of time dealing with him. Taking a bad advisors money is worse that taking on a bad advisors.

Finding good advisors who will put their money where their mouth is, will not be easy. But does happen all the time.

Jagdambha Bilasia Sunday, April 12, 2009 at 9:08 AM PT

Look, no one gives out money in a cavalier fashion, which is what you are asking for. And many, like me, monetize their time as well, forget about giving out money.

So good luck with trying what you propose above. Just know that your success will be rather limited.

Sramana Mitra Sunday, April 12, 2009 at 9:43 AM PT

No one gives out time in a cavalier fashion either Jagdambha, but the difference of an investment of time is that one can cut one’s losses by resigning from an advisory role, but if you put your money in, you can’t get it back out – so you are not married to this entity whether you want to be or not. Advisors can’t tell whether or not an entrepreneur is willing to listen and work with them until some time has passed and the advisor and entrepreneur have worked together on some issues. That can’t happen during normal due diligence.

If you have great examples of situations where senior advisors agreed to put in money before working with the entrepreneur in an advisory capacity and it worked out well, I’d be happy to hear about them However, I could almost guarantee that I could provide 3 or 4 failures of that model for every success you might be able to come up with.

Tony Scott Sunday, April 12, 2009 at 10:08 AM PT

I made a typo in my sentence above – it should read “…but if you put your money in, you can’t get it back out – so you are now married to this entity whether you want to be or not.

Tony Scott Sunday, April 12, 2009 at 10:10 AM PT

There are clearly many people who label themselves as angels who do this. Give you a little bit of money and a lot of help.

Some of these are organized like Y combinator, Tech Stars and dozens of others like that all around the world and then there are folks like Paul Buchhiet, Aydin Senkut, Steve Blank, Ram Sriram and so many others that do this regularly.

Yes not everyone of their investments (of time/money) work out, but I suspect that the biggest reason for failure is not that the entrepreneur refuses to listen to them. And some have worked our real well like Google, which put Ram into the billionaire category.

In any case we have all made our views clear, it is up to the entrepreneurs to choose his path. It is never black and white.

Jagdambha Bilasia Sunday, April 12, 2009 at 6:38 PM PT

Angels investors are a very straight forward category. Most of them don’t do Executive Chairman jobs. Few do. Few even do Interim CEO jobs. But few.

You are confusing the categories.

Sramana Mitra Monday, April 13, 2009 at 12:04 AM PT

With the lower amounts of capital that startups require it is making it much more attractive for those that would previously would have been just advisors to become angels. There money actually is meaningful and they have real influence as well. So I don’t think I am mixing things up and in reality the best advisors are also angels. Some do it in more visible manner and other do it without networking 2.0.

I am not sure if the new breed of startups with less than a couple of million raised from individual investors, need a chairman. Any title you want is fine as long as you get stuff done.

Maybe you guys are talking about the VC funded variety – in which case the VC should serve as advisors early on.

Jagdambha Bilasia Monday, April 13, 2009 at 9:24 PM PT

Depends entirely on the skill-set and experience level of the founder.

Sramana Mitra Tuesday, April 14, 2009 at 10:09 AM PT