Every Founder Must Understand His or Her Inevitable Transition Out of the CEO Role
Diamonds may be forever, but the role of a CEO, even when you are the company founder, can be a precarious one. Most CEOs of venture backed companies are replaced by the time they reach their “C” round of funding, according to Noam Wasserman, author of The Founder’s Dilemmas. And even at large cap companies, the average tenure of the CEO has fallen to five years, according to Equilar, Inc.
Of course, there are two things you can do to ensure your tenure: 1) avoid accepting outside investment and 2) don’t establish a board of outside directors. There is nothing wrong with a self-funded company that is formed solely for the benefit of the founder and his family. Lifestyle companies, as these are sometimes referred to, abound and are a great outlet for entrepreneurial zeal. They can often be a platform for perpetuating family legacies, multi-generational wealth accumulation or just to establish your own kingdom. But if that is not your choice, read on!
When founders start ventures they understandably don’t often consider their own exits. There is enough to worry about in an early stage organization and most founders assume their own immortality. As their ventures grow and gain traction, the reinforcement of the leader’s capabilities is naturally nurtured.
An important consideration for every founder is whether their ultimate priority is to be the boss or to grow their personal wealth (rich or royal). Investors would prefer you focus on the latter. Most founders expect to accomplish both. But, according to studies of venture backed companies, this is a critical dilemma; you can’t have both. Making this choice early can help you pursue the optimal path.
If your objective is to accelerate the growth of your company using OPM (other people’s money) then no matter how important you are to the venture or how secure you feel, your tenure is not a certainty. Gaining an early understanding of this reality is a healthy prescription for both your own sanity and the ultimate success of your organization. That is why it is important to consider these seven ideas early in your company’s growth.
Most investors bet on the jockey – that’s YOU! They know that no matter how good your business idea is, it will change, morph and have to adapt to the reality of the market. With that understanding, investors expect you to stay ahead of what is required and lead the company through the necessary changes. These investor views don’t change… until they do. You may have become friends with your investors or perhaps they were even your friends before they invested. Either way, most investors don’t let friendship get in the way of a return on their investment. At some point every successful venture gains its own traction. The organization takes on a new complexion. Different skills are required of the CEO and if an investor decides you are the one standing between them and their money, they usually don’t hesitate to do what is required. If you want a friend, get a dog!
If you do bring in outside investors, introduce this tough discussion with them early. No investor wants to risk pissing off a founder before you cash their check, making it unlikely to be a pressing topic. Despite what you hear, most venture capitalists would prefer you lead the company forever. But things don’t always go as planned and it won’t hurt to have an open and honest conversation about what events or performance might change an investor’s mind. Conversations initiated by founders are well received and can disarm an investor. In fact, if you want to negotiate an exit, do it now while you have the power. For example, you might want to insist that a future exit include some personal liquidity. No matter who brings up the topic, it's a healthy discussion to have early, document and revisit when required.
Believe it or not, you are not immortal. Like most entrepreneurs, you likely have a good portion of your net worth wrapped up in your venture. If you were to go away, you probably have other people, perhaps like your family, that would prefer that wealth not to disappear along with you. Your employees also have an interest in the perpetuation of your venture and their jobs even if you become unavailable. Unfortunately, tragedy can happen. Of course, you could always purchase insurance for such an unlikely occurrence. However, the best (and probably cheapest) insurance you can acquire is someone who can step in if you are not available. Even if that unavailability is just temporary – like perhaps taking that all too infrequent vacation. Having someone you can rely on and who might someday become your successor, is a great indulgence most entrepreneurs don’t pursue.
It’s going to be hard to find someone to replace you. Long runways can be used to your advantage when trying to find the right person. Hiring someone when you are about to depart (or having your board do it after your departure) is a disaster waiting to happen. Venture Capitalists joke that in these situations they recruit two potential replacements at the same time. One who will fail and then a second to fill in for that replacement. We know the traditional hiring process is flawed. Resumes contain lies, interviews are just performances, and references are setups. The only way to really evaluate a CEO candidate is to see him or her perform in a role that is similar under stressful situations over an extended period of time. Anything short of that is but a mere guess. Even if you are not planning on leaving soon (most founders never do), bringing someone through the ranks and testing their mettle while you still have time (optimally for several years), is what every thoughtful company should do.
When considering your potential successor you should probably consider someone who is not like you. Not that there is anything wrong with you! As humans, we tend to be attracted to others we are like. But, your successor will very likely be dealt a very different hand than you encountered when you started the company. Different challenges require different skill sets. When considering a successor, founders are often advised to choose a fighterover a lover. What that means is that in the earliest stages of founding a company the organization takes on a familial feel – like one happy family – perfect for a great cheer leader. Reaching the next plateau however, likely will require a steely objective outlook. The discipline of scale requires a tough and steady hand.
When you do bring in a successor be sure you have a very clear demarcation line of your and her responsibilities. Put it in writing. Share it with your Board. Revisit it often. And do whatever you can to stay out of her way. Rather than depart, most founders (nearly three quarters) try to find a new role within the company that reports to the successor CEO. This is really hard and it usually doesn’t end well. It’s challenging for a founder who ran the show up until then to abruptly fade into the background. Most organizations can’t pivot that quickly to report to someone new when the old leader is still present, no matter what their change in title. But if you feel compelled to stay, picture yourself on a tandem bicycle with you in the backseat. That’s the stokerseat; your job is to peddle hard and keep your balance. The new CEO in the front seat is the captain.
When it is time to leave, leave. That time may come sooner than you think. Don’t hang around. Don’t take retain your board seat. Don’t continue to casually stop by the office. Seagulling in (swooping in, droping a white gooey load and flying away again) only leaves more of a mess for your successor to clean up. You may not realize how hard it is to fill your shoes. Your impact on the organization has been extraordinary. Breaking that connection is hard to do, especially if your successor has to impose new processes, hire (and fire) executives and change the culture. Publicly endorse the new CEO. Make yourself available to the new CEO when she needs your help. Share your legacy knowledge of where all the bodies are buried. Avoid offering gratuitous advice.
It’s probably hard to visualize your organization without you as its leader. But founding a company is very different than running a company at scale. Doing so may be beyond your skill set but perhaps more importantly, may not be as fun as you think. Consider life after founding early. Careful planning for that inevitable transition can smooth out a difficult process, enabling you to take full advantage of your accomplishments and organize your talents for whatever comes next.