Friday, November 14, 2008

Changing of the Guard

Just to be clear, this was stimulated by all the emails about recent events in Oz, but still relates more to startups than public companies ;-)

When the CEO leaves or is replaced, it’s a big deal and can really alter the company’s DNA. I’ve replaced myself several times as CEO, and have been replaced once by an acquirer (and a crazy founder). I think its always better to replace yourself. Most of us are good at only one thing--in this case either starting a company and nurturing it when its small, growing it until it becomes a real business.

Businesses change dramatically in their strengths and focus as they grow, and it’s a rare CEO who can change their characteristics to lead such a dynamically growing organism. Tech companies usually lead with technical excellence and unfair advantage. After a while they gain real traction with their customers and begin to create true customer focus and intimacy: some CEOs run out of horsepower at this transition. Generally, if they started the company because they had domain experience in an industry and realized that things were being done in the wrong way and they could fix it, then they usually fly through this transition (this is one of the reasons that VCs prefer these types of founders vs. the get rich or pure techie).

When a company really gets cranking its all about execution, and at this point a very different type of operational CEO or COO can really help. If they have this operational excellence and great market vision or instincts then they are likely to do much better than the startup CEO type. Usually you can't attract this type of CEO to the business until it is cranking, because such CEOs are in high demand in large well paying established companies. So anyway, you should always know when to replace yourself – its like “to thin oneself be true”.

The previous CEO really should get out and off the Board to let the new guy take charge completely--unfortunately, this rarely happens. I’ve seen the old guy hang around and undermine the new guy several times. I swore I would never do this, but in a recent experience I began to understand why this is so hard to avoid. I got completely out of the company, but I stayed on the board. Firstly, all the investors and employees trust you as the prior leader, so the authority of knowledge and trust tends to dominate all formal titles. The investors are always calling you to find out what's going on and what you think. This is worse when the new CEO wants you to stay, and you want to move on and do new things, so you end up saddled with twice the work and headaches. As a board member, even as prior leader, you have extremely limited day to day contact and little visibility into what actually goes on inside the company--especially if it's doing business internationally.

Like most other board members you know what you are told. Clearly, you know the history and strategy that you formulated intimately, but as the company grows new strategies are needed and markets change. If Eric Schmidt had held to the original Google strategy, they may never have gone public, but the foundation that he inherited was instrumental in facilitating that IPO. So you are also human, and you resist change, you don’t like it when the new guy wants to change strategy to adapt to a changing market climate, and you pretty quickly get at odds with him. This is bad--there can be only one leader. As a startup CEO I have always fostered a culture of questioning authority--this is critical in a startup, other people are always smarter than you, and the more brains you can get looking at a problem the less likely you are to screw up.

As a company grows and becomes public this startup approach doesn’t work anymore.
Now the worst of all scenarios is when the new strategy fails, and the investors all call you and say “you were right, come back and replace this guy.”

You have no right to do this, you are still the wrong guy to run this business which has grown beyond you--you need to bring in fresh blood, genetically engineered to deal with this situation. So this time, once I found the right CEO, I got completely out of the way but let the new CEO come to me whenever he wanted to get whatever he needed, but not at a board level--this was far more effective because I could focus on helping the new guy without affecting his authority.

The other scenario I am recalling now was with my US public company where the new guy made a wrong move, was undermined pretty badly by the old guy, and the board quickly brought the old guy back in, even though they had fired him after almost 10 years of pretty average growth. This was about 18 months ago, and that company is almost back where it was when the previous CEO was fired the first time--i.e., nowhere. Little wonder? You cant go back, there is only forward. Never be afraid to replace yourself, its your duty to get the best people running your company, its not about you its about success ;-)

Answers to Questions:
David has left a new comment on your post "Alignment":
Larry - I sometimes wonder if the standard VC approach to risk - comes predominantly from addressing risk as one dimensional - i.e. put in less money you reduce risk. Is in not true that sometimes putting in less money increases risk? For example - a start-up is looking to solve some problems occurring in a market that is in a cyclical change - if you miss this cycle your business dynamics will change. In such start-up's a very large risk may be missing a window of opportunity or not capturing sufficient market position to be the leader. There are many other examples. Perhaps it is more a risk/return bias shift - will VC's accept less return for lower risk in this type of environment. We also here often of VC's suggesting that returns are not reduced by reducing the capital invested - I expect there are many examples of where this is the case and many where this is not - where capital must be invested to capture an opportunity. There is also an issue of return on investment at various times - when is the time to be greedy? When is the time to be aggressive? Many famous investors would argue that the best time to be aggressive is when you can achieve much more with your invested dollar (valuations, market share obtained etc). This does not appear to be the attitude of many VC's.

David, you have hit right to the heart of the matter. I know many European VCs who take this approach, and quite a few here as well. Risk is clearly multi-dimensional--team, technology, market, financing, to name the main four (there are at least seven ofcourse). Most startups want to raise too little money, either to minimize dilution, or because they believe it will be easier to raise less than more. Good VCs want to ensure the company has enough cash to reach the next key milestone to trigger a step up in valuation. The fact is, the amount of money invested cannot fundamentally change the risk except to make it worse, i.e., to your point, not enough money means you miss the milestone and risk increases, but also too much money screws up the valuation structure for the next round and increases financing risk.

In the current market, there is a false perception that VCs can hibernate their tech companies-–technology has a shelf life--the market a definite cycle, again to your point, when you miss the market window there is very little you can do. I think the best thing is not to hibernate but rather to shift markets so you can continue to grow. Startups are a lot like the Roman Empire: they either grow or die. The growth stimulates the critical transition from technical leadership to customer intimacy that is essential to avoid the technology shelf-life problem. Of course, this continued growth allows you to survive long enough to be there when your original market comes back, but beware that in the interim, newer solutions will have been spawned and it will be a whole new ballgame.

Thanks for the comment, and ideas for at least two new BLOGs ;-)