Press coverage of tech companies can make it seem like long-running founder-CEOs are the norm. They’re not. People like Mark Zuckerberg and Jeff Bezos are notable because they’re so exceptional.
While I REALLY wish it were different, the reality is that long-lasting founder-CEOs are exceedingly rare. Research (published in 2008) from Noam Wasserman, author of The Founder’s Dilemmas, Anticipating and Avoiding the Pitfalls that Can Sink a Startup, shows that four-out-of-five entrepreneurs are forced to step down from the CEO role. By year four, only 40% of original CEOs are still on the job.
This means that investors and board members are more likely than not to grapple with the question of whether to gently or not-so-gently coach the founder-CEO into another role. My view on best practice is for the board to do this in partnership with the current CEO and ask her or him to take the leadership role in the transition and to stick around in an appropriate role, if possible. The involvement from a founder-CEO is invaluable, even if the person is no longer the best top person for the more established company.
How to keep the founder and ex-CEO engaged
As a company evolves and grows, the founder-CEO is less likely to have the kind of experience needed to scale with the organization. Signs of decline include a lack of new products in the pipeline, slowing sales, increasing customer attrition, and increasing difficulty recruiting and retaining the best people. Many times there is also an overly compliant board that fails to challenge the wayward leader’s ideas and a tendency to underreact to challenges emerges.
Since this is pretty much an inevitability, the best way to avoid getting to this point is to help surround the founder-CEO with very talented people in each of the functional head slots. Between those execs and an engaged board and investors, the founder-CEO stands the best chance of professional growth.
Intervention is difficult, but the move should be presented as a step up for the company. Ideally, the founder will fill a role in which (s)he’s allowed to pursue a passion (like Product Management or R&D) without the management responsibilities of the chief executive role and the CEO role will be filled with someone who can take the company to the next level.
Why it’s important to keep the founder and ex-CEO around
This, of course, is the softest landing possible. Investors and board members should do all they can to keep the founder-CEO engaged as (s)he switches roles. That’s because from an investor’s view, breaking ties with the founder-CEO is usually a bad idea.
There are a few reasons why. Founding CEOs tend to have deep institutional knowledge. If you’re wondering why your company has always done something a certain way, then the CEO likely knows the reason. More importantly in a lot of ways, the founder generally tends to have the best understanding of the customer, their needs, and how the company addresses those needs.
As Ben Horowitz has also written, founder-CEOs also have moral authority and total commitment to the long-term success of the company. In other words, they’re not hired guns; the business is their baby. This advantage can be quantified: A 2016 USA Today analysis showed that the 19 companies in the Standard & Poor’s 500 with current CEOs who were founders or cofounders gained 97.5% over the previous three years versus 31% for the S&P 500, on average.
If founder-CEOs are so capable though, why do so many of them fail? The reason is that in the early stage of a company, being the CEO is all about product market fit and shepherding an idea from the theoretical to the actual.
Being a CEO of a more mature company requires a different skill set, including setting long-term strategy, hiring and aligning senior managers, finding growth opportunities, creating a palatable office culture, all while continuing to develop relationships with the capital markets and larger companies for financing and liquidity. It’s a different job, in other words, one that’s less about innovating and more about the prosaic tasks involved with running a larger business. Expecting a founder-CEO to have all these skills is often expecting too much.
Unfortunately, it can be tough to explain this distinction to someone who understandably feels that this is “their” company. One solid argument is that doing so will make them richer. Wasserman’s analysis of 457 private tech firms has shown that founder-CEOs who give up some control – either by leaving the CEO role or giving up some control of the board – tended to maximize their equity compared to “kings” who kept control.
The choice then is whether to continue to rule like a king or to live like one.