Building technology companies, Forum

Founder CEO Challenges

Anik Bose shares the BGV team’s perspective on the CEO challenges faced by Founders and Venture Capitalists in building technology companies Today’s complex, volatile and fast-paced start-up environment places extraordinary demands on Founder CEO’s.  While many Founder CEO’s bring the comprehensive domain knowledge and the passion/commitment pre-requisites needed for start-up success they sometimes lack the experience and skills required for longer-term company building which can undermine performance.    We believe that this issue is further amplified in the Enterprise IT/B2B space (unlike the Consumer Internet space). In the early stages of a start-up (Seed/Series A) a Founder CEO must be able to: a) Understand how their company fits into the overall competitive eco-system; b) Create a “must have” product that delivers specific value to customers, partners, and potential acquirers; c) Persuade investors to invest in the company; d) Convince potential customers to test the product and; e) Persuade proven executives to join them in building the company.  On the “soft” skills side a Founder CEO must have sufficient inner peace to not panic when faced with the inevitable crises and ambiguities of a start-up.  He/she must project enough confidence to be an effective fund-raiser.  It also means being more proactive than reactive – at least a step ahead of everybody and anticipate what lurks in the future before others have thought about it. Furthermore rare is the Founder CEO who can take the company from seed to IPO – in these situations the Founder CEO must possess the self-awareness and listening skills to know if or when to step aside and bring in the a new CEO, one more suited to a later stage in the company’s life cycle.  Noam Wasserman of Harvard Business School studied 212 startups and found that it was rare for Founder-CEOs to run their companies in the long term; less than half were still CEO after 3 years, and less than a quarter of the CEOs of the companies that reached an IPO were Founder-CEOs.  Noam’s study also indicated that Founder’s do not go easily – four out of five entrepreneurs are forced to step down from the CEO’s post.  Most are shocked when investors insist that they relinquish control, and they are pushed out of office in ways they don’t like and well before they want to abdicate.  If not managed well a leadership change has the potential to be damaging when employees loyal to the founder oppose it. In his academic paper, “Rich versus King”, Noam analyzed 460 American startups from the 2000s. His statistical analysis showed that, paradoxically, founders maximized the value of their equity stakes by giving up the CEO position and board control.  Noam’s study also revealed that founders often make decisions that conflict with the wealth-maximization principle.  The reason behind the conflict is simple – apart from the motivation to become wealthy, Founder CEO’s are also driven to create and lead an organization.  This is a trade-off that Founder CEO’s will face at every step – those who cannot figure out which is more important run the risk of ending up neither “rich” nor a “king”. The BGV team’s experience indicates that previous experience in CEO like situations enables the Founder CEO with pattern recognition – being able to process tons of disparate data, reach the right conclusions, be able to see the forest from the trees and learn from new situations and people.  We also believe that the mastery of the art of leadership comes with the mastery of the self.  So developing leadership is a process of developing the self, which is first an inner quest to discover who you are and what you care about – through this process of self-examination the Founder CEO finds the awareness needed to lead.  Some Founder CEO’s are passionate about developing new technologies and solving interesting problems and perhaps not as excited about scaling a company, managing large teams, making resource allocation decisions and establishing policies and procedures.  As a founder it is good to practice self inquiry – what am I exceptional at ? What do I truly enjoy doing ?  The above combination of experiences, skills and awareness can enable a Founder CEO to take a company successfully from seed to IPO/M&A exit or step down gracefully at the appropriate time if required. To address the Founder CEO critical success factor BGV makes Founder CEO capability evaluation an explicit part of it’s investment evaluation.  Post investment BGV implements a set of best practices which includes: a) A mentoring process to enable the Founder CEO to become aware of and to develop the missing skill sets in a constructive manner; b) A formal CEO evaluation process as part of the Board’s responsibilities with a clear set of milestones and objective criteria; c) Working with the Founder CEO proactively to bring in a new CEO if appropriate instead of reacting to a crisis.   At the end of the day BGV believes that addressing the Founder CEO dilemma is not a simple choice between grooming the founder to become a successful CEO OR replacing the Founder with a professional CEO.  Instead it is about selecting the right leaders with the right skills at the right time.  Through a start-up’s life cycle the skill requirements evolve and change – sometimes the Founder CEO maybe the entrepreneur who can learn and scale with the company and other times they may not be able to – the solution therefore has to be situation specific.