03 October 2006

Why are founders surprised?

It happens all the time. Hard working capable and uniquely qualified founder of an outside funded company is abruptly told by his board that he is no longer needed as CEO. Founder is surprised!

Most entrepreneurs know that when they accept outside funding they are now subject to a whole new level of scrutiny. Certainly they know that after several rounds of fund raising, when their ownership gets diluted down below 50%, they likely don't have sufficient voting power to override their investors. They also are very much aware, and sometimes have been directly told, that as a founder/CEO they may sometime need to be replaced. And in fact, funding agreements for VC's often include the explicit right to replace the founder CEO.

So why in so many situations that we've seen, when a CEO is told she will be replaced, is this such a startling occurrence?

In my experiences and discussions with founder CEOs I've come across several understandable rationales for this type of behavior:

1) The immortality theory - I know this happens to most founders, but it won't happen to me.

Many founders have the view that they are different from the pack. While others may suffer as less capable, they are different. They will be able to grow, scale and lead the company forever. Didn't they already start a successful company? Weren't they divisional managers leading large teams in their prior lives? This confidence in themselves is what made them great founders to start with. Unfortunately, confidence can turn to hubris, leaving the founder less aware of the reality of the situation.

2) The I'm critical to the organization theory - they wouldn't know what to do if I wasn't running the company.

Certainly in the early stages of the venture the founder is most critical to the success of the organization. But in order to grow there needs to be a knowledge transfer to a increasing number of others within the organization. Technology changes occur; existing knowledge gets outdated; other smart people join the organization. The organization matures. Other functions like marketing and sales take over for technology as the critical constraint. Often times the singular focus of the founder can insulate him from the changes going on around him.

3) The timing is wrong theory - sure I know it will happen someday. But that someday isn't today.

According to research described by Noam Wasserman in his article "Founder-CEO Succession and the Paradox of Entrepreneurial Success," Organizational Science/Vol 14, No. 2, March-April 2003., the timing for replacing the founder can often coincide with the successful completion of a prototype or commercialization of their offering. The experience of successfully meeting a milestone stands in stark comparison to the idea that the founder would be replaced... at least NOW!

So surprise it does. And the consequence of surprise often is the awkward and uncomfortable process of transitioning to a new CEO at a time when the founder is just not prepared to have their heart in the process - all things that make a tricky transition all the more delicate.

Organizations and certainly boards of directors would be well served if they ensured that they maintain high bandwidth communication with the founder, beginning well in advance of a forced transition, in order to reduce or eradicate the surprise factor and its consequences.

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