Shooting the CEO

Many investors have a systematic approach to gauging the performance metrics of a startup, and fairly formulaic methods for influencing the company through its various growth phases. One of the most painful phases is the transition from startup CEO (and often founder) to a more experienced "hired gun." This is dangerous because the founding CEO's DNA will have permeated the company’s and the new hired gun will not have the same sense of ownership, responsibility, and DNA around the company. Done well, it can take a company to a whole new level, done poorly it causes cancer.

There is no doubt that the CEO of a Venture-backed startup has a target on his back, far more so than one in a public company. When a CEO misses targets and milestones, they are likely to be replaced. If they start shooting executive team members they will often be seen as shifting blame or be criticized for making bad hires--it's hard to win when you're the boss ;-)

There are generally three sure-fire ways to get fired:

1. Fail to meet plan
2. Don’t follow BoD decisions
3. Make bad hires, or have a lot of exec turnover

These are easy ones to catch, but there is a fourth that's more nebulous, but it's often the question foremost in your investor's minds--can you scale?

Very few CEOs can scale from founder to IPO and beyond--even fewer should! The sign VCs watch for is lack of a decision, which is of course a decision in its own right. If you have a lot of balls in the air chances are you will have trouble deciding which one to play with--indecision; or inability to focus will get you fired and it will look very much like your company simply outgrew your ability. Typically founders like to do everything themselves, and this is a guaranteed way to NOT scale, but it's also a very lovable characteristic of founders.

Now any good entrepreneur knows you succeed by getting others to share your vision and help you succeed by doing what you can’t do yourself. We also know that in order to have one successful strategy we need at least two alternates--sometimes it takes five irons in the fire to get one hot. So a certain amount of parallel processing is necessary--the critical step is quickly culling the paths that won’t work and focusing everything on the one that will. It is this focus that leads to success. It’s the willingness, determination and drive to bet the company on the path that you believe will win. Your VCs can help in this decision. They see a lot of companies and have a perspective on many markets--but beware, if it's not your decision then it's unlikely to be the right decision, and even if you listen to your investors, success has many generals but failure has only you ;-)

Shooting the founding CEO is a very risky move in startups because the company’s DNA is invariably the founder’s. If the company is too embryonic it can stunt or kill the growth or give it cancer. Generally it's better to surround the CEO with strong partners who can overcome shortcomings and build the strongest team from there--maybe the future CEO may be among them, but if not the DNA will be enhanced anyway and a new CEO can come in later if needed. My personal preference is for the first-time CEO, and to find a way to help them find success. Some of my investors did that for me, and I think it's critical that VCs do this in order to nurture the entrepreneur and grow more valuable CEOs and companies. At the same time, it's our job to create superior returns for our LPs so we had better not be teaching on their nickel unless the result is a superior one. I argue that this is more often the case than not, since the founder CEO who gets this treatment forms a far better working relationship with the investors and avoids hiding the ball but shares the problems and weaknesses so they can be fixed.

It’s a shame that entrepreneurs don’t get to shoot their investors, but please don’t shoot me, I’m just the piano player…..



Comments:

Suhas Krishna said...Hi Larry, Long time reader of your blog. Very interesting and educational. Being part of a startup in this field from ground-up and a budding entrepreneur, your viewpoints present great insight on the bigger picture.



Krishna - Thanks for the comment – please post questions or propose topics anytime!