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Do You Want To Be Rich, Or Be the King?

Posted on Sunday, Mar 15th 2009

By Guest Author Tony Scott

Over the past twenty-plus years I’ve been working with and advising start-ups, I have often been asked by boards to have “a talk” with entrepreneurs about “potentially” bringing in new leadership. Yes, even experienced boards often run from confrontation with entrepreneurs, because building consensus is typically how boards work – not direct confrontation. So, it’s often easier to use an outsider to be the messenger to bring that bad news, in case the messenger gets shot!

I start the discussion by asking what the entrepreneur’s motivations were for beginning their business. Sometimes an entrepreneur will talk about how cool the technology is that they have developed; or how a product or service is going to change the world, make life better; or how they wanted just beat the pants off incumbents who had become fat, dumb and happy.

Those are all admirable motivations and goals, but a key question usually remains to be answered: “What motivates you personally? If you had to choose, do you want to be rich, or do you want to be the king?”

Often my question is met with dumbfounded silence. Usually I’m asked what I mean by the question – often to buy time while the entrepreneur can try to figure out what answer they should give – the real answer, or the one they think I (and their board) want to hear.

Most entrepreneurs know exactly what I’m asking of them. If they are smart and self-aware at all, they’ve probably asked the question of themselves, or at least know that some variation on the question is going to come up one day, particularly if they have outside investors.

Quite a few will respond by saying, “Why can’t I be both?” and cite examples such as Steve Jobs, Bill Gates, Larry Ellison, or a few others.

Of course those entrepreneurs have been wildly successful – but they are also extraordinarily rare cases. The reality is that very few entrepreneurs have the personality and skills to take a company through multiple stages of development. The kind of personality needed in a leader in a very early stage of a start-up – an incredible devotion to creating the best new product or service – likely won’t work very well when a company is at the stage where it needs to focus on ramping sales in a repeatable fashion. When a company gets to that stage, it’s not about building the better mousetrap, or continuously spending most of your resources on development, it’s about building a sales and marketing capability, and being able to make tough tradeoffs in terms of where you spend your money to get the most bang for the buck in the marketplace.

Almost every company reaches a critical inflection point in their development when the founder’s personality and skills are no longer the absolute best choice to run the company. And, just like a classic bell curve, as the company moves further and further along, the founder’s skill sets typically become less and less relevant, and in fact can turn to an active negative for the company.

That’s often when boards finally ask the question: “Does the founder/CEO have enough juice to take us to the next level?” But, by the time the question comes up, it is usually already past optimal time to make a change. Typically the question is raised when the founder has made some serious mistakes, and it is no longer possible for the board to ignore the founder/CEO’s lack of experience in areas the company may desperately need.

Of course founders usually have visionary ideas and lots of passion around their ideas. Board members, and particularly investor board members, love passion in a founder/CEO. No investor would invest in a company where the founder was only “wishy-washy” about their vision – and no one in their right mind would put in the effort that is required to make a start-up even modestly successful if they weren’t true believers in the vision. But at a certain point, vision and passion aren’t enough – and in fact, can be detrimental to rational evaluation of alternatives and impede hard decision-making.

If you have venture capitalists on your board, they have to be completely dispassionate at a certain point. A start-up is no place for a CEO to learn on the job, and venture capitalists shouldn’t have someone learn through trial and lots of errors how to be a CEO on their investors’ dimes. VCs have a fiduciary duty to the entities that gave them money to invest. No matter how much they may like an entrepreneur, they have a legal and moral obligation to make sure that they have the best possible CEO in place to lead a company in which they have invested to minimize risk and maximize the potential for success.

Since no venture investor is likely to invest in an entrepreneur they fundamentally don’t like, that conversation is just as hard to come to for a venture capitalist delivering the news as it is for the founder hearing it. That’s one reason we frequently see sub-optimal management structures such as “co-presidents” or “COOs” in early-stage companies. The investors and independent board members are trying to placate or soft-pedal the hard news that leadership with a different set of experiences and personality are needed – to someone they genuinely like.

Savvy board members and investors realize that one of the most valuable skills experienced CEOs have is pattern recognition: the ability to see things that will turn into problems quickly because they’ve had a similar experience before. It may not be exactly the same situation, but an experienced CEO is much more likely than a novice to not only recognize potential problems, but also have a good idea of how to fix them before they turn into disasters. There’s a lot to be said for passion and “smarts”, but experience can trump passionate inexperience – particularly in tough times.

So, back to the question for the entrepreneur – “Do you want to be rich, or be the king?”
If an entrepreneur has attached all their ego and sense of self-worth to the definition of being the CEO of the company, regardless of whether or not they may be the best person to bet on to achieve success, then they want to be the “king” (or queen, as the case may be). Someone who strongly believes that they always should be the CEO can be dangerous, because they may not be able to face reality in difficult times about what needs to be done to insure the company’s survival. Doing what’s right for the success of the company may mean abdicating the throne. If the transition is done well and a great new leader is chosen, there will be a greater chance for riches for all involved.

Think of a start-up in the same way you would think of a patient in surgery – a very complex mechanism that is living and breathing, with all sorts of unknowns that can happen during the operation. No one would suggest that an aspiring heart surgeon be given the task to perform open heart surgery without having studied under the guidance of experienced surgeons for years. Even when they do take on their first surgery as lead surgeon, there will be other experienced doctors, anesthesiologists and nurses on the team and observing, all to give the patient the best possible chance for survival.

Why should a start-up be any different?

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Comments

Nice article Tony.
I agree to what you have mentioned in the article, that if at one stage company demands are more than what founder CEO can give then he should give chance to someone who is more capable and experienced.

Only thing which i can see is that some human element will come into picture. As a founder or a father/mother of the startup baby, you have to give your child to somebody else because you are now not capable enough to take care and ful fill demands of your baby. This human element is something which today’s founders/entrepreneurs should work on from early stages only. This will allow them to have a rational thinking at later stages and would be beneficial for the company and for them.

Rajesh Singh Sunday, March 15, 2009 at 8:07 AM PT

Tony, Can you also discuss some of the mechanisms of a successful CEO transition, please? This is one of the most risky events in the history of a startup. I personally had an absolutely horrible experience with it at Intarka. So please, if you would, give us some nuggets of what a CEO should do, and what a founder should do, to make this go smoothly, and successfully, recognizing that there is a humongous amount of emotional / psychological challenge in this. Sramana

Sramana Mitra Sunday, March 15, 2009 at 9:48 AM PT

Ramesh,

You are absolutely right – to a founder, a start-up is like a child, and it can be very emotional indeed to give up even partial custody. I always tell founders and investors that the time to discuss the transition is during the very first conversations they have with each other – even if that transition is years away, or may never happen. It’s always best to plan for when it should happen rather than be blindsided later.

Sramana, over the next couple of weeks I’ll write about how to tell when it is time to change CEOs, and how to make the transition work (and what I’ve seen that doesn’t work time and again.)

Tony Scott Sunday, March 15, 2009 at 11:08 AM PT

Tony,

Your article strikes a cord with me. I have recently joined a late-stage startup with $30M in revenues. All indications are that this is a success and is on it’s way to a bigger and better tomorrows…

I come from a Tier-1 Global IT Services leader with extensive sales management experience to take on a new challenge – to head this company’s sales in US Northeast and Canada. The goal is to get to $100M within three years.

After having spent all of two quarters, I find it shocking that the founder and CEO is so much involved in the day to day activities – that he has become a bottle neck.

This is still a reletively small (private) company – but has disciplined itself to act as if its a public company. Revenues projections are submitted and thus budgets are approved by the Board, etc…

Does the board have a process that it would typically follow to ensure that at a certain stage, a formal review is conducted to ensure that the CEO is still the right person to lead them to the next level?

RJS Sunday, March 15, 2009 at 7:45 PM PT

RJS,

Unfortunately, few (if any) boards in pre-public company have a formal review process to evaluate when a CEO (founder or not) should move on. That’s a big dilemma for early-stage companies. Typically boards only act when it is already too late – when the founder becomes much more than a nuisance.

Your experience – the micro-managing founder that becomes a bottleneck to growth and in many cases an active negative for the company – is regrettably all too common.

Tony Scott Sunday, March 15, 2009 at 8:31 PM PT

The founder typically drags on till there is irreparable damage and when the new CEO comes in, his maximum time is spent on fire-fighting. This delay in implementation of growth KPAs is deferred and the Board / Investors become edgy.

All startups should have a time line of 15-18 months to be defined by the Board of Investors as a milestone and beyond this the Founder should not persist. The new CEO would then have a clear quarter for damage control in which he / she can assess the pressure points and respond. After this corrective actions, he can proceed with his growth targets.

Sudhir Deva Monday, March 16, 2009 at 4:51 AM PT

Interesting to see that no one in the discussion represents the point of view of the founder.

Not all CEO transitions turn out to be successful, and often, in hindsight, leaving the founder in the job would have been much better than recruiting a CEO who is insensitive, incompetent or both.

I have a problem with this discussion presenting the point of view that founders always need to be replaced.

Sramana Mitra Monday, March 16, 2009 at 9:00 AM PT

You are absolutely right Sramana – changing out the founder/CEO too early can be just as damaging as leaving a founder/CEO in too long. Unfortunately, the typical pattern of boards is the latter, not the former. The other problem – and this is a huge problem – is that most boards – particularly VC dominated boards – often have no real clue as to what kind of CEO skill set really is right for the company at a certain stage of development. Boards are as guilty of falling totally in or totally out of love with a CEO’s personality rather than their substance, as voters are with politicians.

Tony Scott Monday, March 16, 2009 at 9:07 AM PT

My recent experience says that VCs are very nervous about needing to make a CEO change, and are therefore looking for “fundable CEOs” in the entrepreneurs they finance, these days.

A CEO change after Series C is one thing, but if a deal requires a CEO change right after Series A, the risk profile of the deal goes up significantly.

Now, for entrepreneurs who know that they need a CEO change right away, this creates a chicken and egg situation. It is very difficult for an entrepreneur without funding to attract a quality CEO (or even an experienced search expert like you, Tony to help recruit one). On the other hand, VCs won’t fund unless there is a fundable CEO in place.

In such circumstances, my recommendation is for the entrepreneur to try to build up some revenue first, and not chase VC funding.

Sramana Mitra Monday, March 16, 2009 at 11:24 AM PT

A founder depending on the goal can still be part of the company and nurture the idea and build upon it as he/she conceived it in the first place and adjusted over time.

A founder typically is passionate about the idea and product and some value system he/she believes in building a company and drive and motivate the early employees or the core team towards those and build a small team who shares the same passion and ideology and values. Now you change the CEO (founder) and those values and ideologies and passion are gone or not fulfilled makes the ‘team’ demoralized and at times they ask the founder ‘can we do something else… ‘these guys’ don’t know what they are doing!’ I believe a company should use the best resources in the best places they are required. A founder has a lots of value in a start up till the goal is achieved and the funding company should find a way to support him/her to be able to achieve that instead of changing the CEO. I strongly believe cutting the head if somebody has hair problem is not a solution and rather we should put medicine to cure it with due respect given to the head.

Santanu Tuesday, March 17, 2009 at 1:47 AM PT

Tony, Good article, great thoughts. Thank you.

Ron Mabry Tuesday, March 17, 2009 at 2:17 PM PT