Mike Bloomberg Returns

Mike Bloomberg did no favors for his friend Mr. Doctoroff who left  his role as CEO rather than succumb to political pressure from insiders imbued with power from Bloomberg. This pressure was apparently enough to thwart any changes that Doctoroff attempted. Trends like this follow most founder returns.  And this one hits pretty close to home.

Cook at Apple is much better off (and performance shows).  No one around to second guess him. No wonder he is smiling.

Back to School

Last Thursday I made what has become an annual pilgrimage to Cambridge, Massachusetts for a set of MBA classes at Harvard Business School and MIT's Sloan School.  In the classes, a combination of professors lead by Noam Wasserman present the Les is More X 4 case that was created several years ago.  Each year is both humbling and invigorating.  Humbling in hearing these smart students pick apart my actions at the various CEO engagements that I've had. (I sure wish I had carried around a pocket sized HBS class with me before I did some of the things I did.)  Invigorating, in that I get energized by the exuberance of the students and their intellectual prowess and innovative thinking.

This year however was a bit different than the four years prior.  First of all I was set up to do five classes in one day at the two Universities -three at Harvard and then two at MIT.  Even just physically, it is difficult to get "up" for each of five classes in about 8 hours of duration, as well as navigating through Cambridge across the river (Charles) and between these two schools.  But perhaps more interesting is how the day started and ended.

Typically I arrive on the Harvard campus about an hour before the first class.  This was no exception.  I was greeted by Matthew O'Connell, Professor Noam Wasserman's assistant.  He ushered me into Noam's office where we touched base about the logistics for the upcoming day.  This year, Magnus Thor Torfason, Assistant Professor of Business Administration, was joining in the fun and has been teaching a 3rd section of Founders' Dilemmas at HBS.  Our cordial conversation started off as usual with Noam mentioning innocently along the way that a partner from Northbridge Venture Partners would be attending the class as a guest.  Apparently Noam had not put together the name, Michael Skok with the case itself and was unaware that Michael was actually the Board member at Active Endpoints that had at the end of the case been the lead board member who fired me.  Awkward was an understatement.  Noam asked whether we should make different plans.  We both agreed that we would proceed as usual with Noam making me promise not to change anything about the way we had gone about presenting the case in the past.  For the uninitiated, the case ends with me playing the role of Michael as the student plays me, negotiating his role as CEO.

In any event, the class went on as planned.  I was quite aware of trying not to hold anything back and when it got to the time where I played my board in a mock phone call with the student, I gave as real a rendition of what actually happened as I could.

So how did Michael react?  He paid what perhaps could have been the ultimate compliment to me and to Noam the author of the case.  He said that he emphatically believed that what we had portrayed was completely authentic!  In the event that I have not, over the past 7 years, been able to vent my emotion over what happened that infamous spring,  I now am over it!

And so you ask, how did the ending top that?

In the last class which took place at MIT, I was finally and comfortably situated in the classroom in advance of the class.  Professor Matt Marx and I had decided that I would not be introduced to the class until about half way through when the students had (incorrectly as always) voted on what they expected the outcome of the Active Endpoints case would be.  Shortly after the class started, while interrogating my actions at Metaserver, my first venture as CEO, one of the students who was exasperated by the stupidity of one of my actions blurted out: "Les needs to put on his big boy pants" in order to become more mature in my approach.

When it came time for the vote and the class all voted as usual that I would save the day, Matt innocently points to me in the back of the room and asked whether or not the class was correct.  When I answered, I suggested that I would have to pause for a moment in advance and "put on my big boy pants" first.  The class erupted in laughter.  And the student who had made this statement was embarrassed.  But it was all in good fun and education as I took the floor and answered the eager questions from the students.

Afterward, by the way, I told the student to make sure he never backs down when he has thoughts like he did.  Because, although it might have been awkward to hear, he no doubt was correct!

Say Hello to Uncle Fred

Some people call it the Uncle Fred factor. A Transition CEO comes into a founder-based business only to find a close friend or member of the family - Uncle Fred. He may be a do-nothing freeloader or a know-it-all who stays on the payroll simply because no one can fire him. Usually his (or her) tenure is dependent entirely on the good will of the founder.

New CEOs who can't accept such a quirky practice will have a really difficult time operating in this kind of environment. Uncle Fred can't do much good, but he sure can do harm. The cycles the new CEO will spend trying to neutralize Uncle Fred or trying to rid the organization of their uncle, will be time that could have been spent more productively elsewhere.

I learned the hard way that Uncle Fred is often a cost of doing business. If you can just keep paying Fred and shuffle him out of the way, that may be fine. Otherwise, if he causes chaos, you may need to take more drastic action. Savvy board members, including venture capitalists (whom I would have thought would be too cheap for this practice), will often advise that Uncle Fred should be treated gently. His departure should be handled gracefully and sensitively, often paved with more than a few dollars and continuing benefits. This, I have found, is a very inexpensive way of dealing with a tricky issue.

Focus your attention

I often come across early stage ventures that are pursuing three or four different alternative products or strategies. When I inquire how they plan to win at several of these simultaneously, I get the same answers. We are pursuing multiple paths because we are not sure which one will be the winner. Or, Our investors are happy to have a portfolio of opportunities to reduce their risk. This causes me pause. On one hand, certainly in this early stage they are right, its difficult to pick a winner before their products are complete or the market has had a chance to vote. But, can they really afford to be pursuing multiple strategies?

Making tough decisions is always a difficult proposition. But not making them sets you up for much more certain failure. The word decide is made up of the Latin roots de- "off" + cædere "to cut"as in cut off other alternatives.

What entrepreneurs and investors who allow the pursuit of multiple alternatives do not understand is that without cutting off several of their multiple alternatives they are giving management permission to fail. That's right permission to FAIL!

Human nature is such that if you have a "fall back" position, an alternative if your pursuit fails, then you tend not to take success to its limits. Somewhere in the back of the homo sapiens' mind, we keep the glimmer of a trap door alternative to failure. Contrast that with the very powerful survival instinct that each of us carries. In the face of utter failure, we are able to call upon super-human capabilities to make the impossible occur.

If you study enough start-up ventures that had everything to lose by failing, you find a long list of very successful entrepreneurs who accomplished the impossible. Again, contrast that with many corporate ventures where the person leading the charge had a cushy job to fall back upon if their intrapreneurial venture failed. Is it any surprise that entrepreneurs create many more important ventures than corporations who have many times their resources are able to create from within these large entities with gracious safety nets?

Entrepreneurs who are pursuing multiple paths take note. Cut off your alternatives and your chance of success will increase! And investors who advise their early stage management teams to retain a portfolio of opportunities should instead capture their portfolio safety from multiple investments rather than diluting the focus of any individual management team!

Time to Replace Yourself

Fortune Small Business recently posted an article with this title. While I believe the article is a pretty good rendition of what founders go through when they determine they need some help, the issues touched upon are just the tip of the iceberg and are probably only appropriate from a founder’s point of view. But having been the replacement CEO for four different founders, as a successor to a founder you are often fighting an uphill battle trying to do things differently than the founder - especially when the founder is still peering over your shoulder. Often the founder/CEO may decide they need help, but not know how to accept it. In one of these companies, I used to joke that the founder encouraged me to initiate any changes that I thought were necessary as long as he agreed. This was a difficult charge, since doing only those things that the founder agreed with potentially doomed us to relive the past and not improve the business.

It is a unique founder indeed who is willing to leave a successor alone and let them make what the founder may feel are mistakes in order to take the business to the next level. In my experience, the founders who figured out how to get out of the way and give the new CEO the same full reign they maintained when they were running the show, are the ones who ultimately were able to reap the rewards of a successful liquidity event. The others were drastically different outcomes.

Of course you’ve got to have the courage and the foresight to hire the right successor. I am an advocate of “try before you buy” - hiring a successor CEO as a consultant or in a less invasive role before making a final succession decision. But continuing to hold tight on the reins after making that decision can compound the issues rather than solve them.

I’ve often considered that the best prescription for a founder who has determined that they need to hire a new CEO, is to get completely out of the way - which may require leaving the company - in order to empower the new CEO to make the necessary changes.

Large companies tend to understand this when replacing a CEO. Take the example of GE. Welch engaged in an extensive process to identify the appropriate successor. But when Welch stepped down from the role, he quickly extricated himself from the business altogether to enable Immelt to lead the company in an entirely new direction.

The Five Most Important Founder Issues

Just ran into this posting that hits several critical founder issues right on the head. Take a look at Roger Anderson's Modern Magellan post entitled: Founder Issues - New wine in an old bottle Part 4. Roger lists the 5 most important founder issues for a new company:

1. Control
2. Communication
3. Personal value
4. Short-sightedness
5. Salary

"It could be argued that they all exist in most founders, regardless of the level of experience. A founder with prior experience may feel that they know more about business than anyone around them. Such over confidence can lead to errors that amateurs do not make."

His posting is a good read.

Make Yourself Dispensible

Where would your company be without you? Better off?

Most Founders don't even consider where their companies would be without them. In fact, founder organizations often require intimate and frequent communications with the founder. This is the natural result of a driven founder with intimate knowledge of the marketplace and the solution being produced . Founders tend to take few vacations that allow them to become untethered from the organizations they created. Founders make many (most) of the critical decisions for their companies. Founders hire people who execute on the founder's decisions - usually not decision makers themselves.

But have you ever thought about whether this is bad or good for your company? While it may feel good to the founder - no decision gets made by some bumble head who doesn't know as much as the founder - and it may make the early stages of a company function efficiently - no bureaucracy, in the long run this poses an undue constraint on the organization as it grows beyond double digits of employees.

Founder decision making is just like the days of time sharing computers. For those of you who are not old enough to remember, time sharing computers gave multiple people access to a single computing resource (usually connected via a slow dial up line and acoustic coupled modem) by slicing the time the processor was dedicated to each individual task. Usually this was done fast enough to make the user believe she had unfettered access to the computing resource. However, when enough people tried to access the computer all at the same time, the response times suffered. (We actually are spoiled now - we accepted these delays as normal - such lack of responsiveness even under the best of conditions would not be acceptable today.)

Similarly, as the load increases on the founder with more and more employees clamouring for access to the founder, decisions get slower and slower - sooner or later bringing the organization to its knees.

It is the unique founder who "gets this" (before her board steps in) and begins to decentralize decision making. Often founders feel uncomfortable taking this step - allowing the bumble heads to make the decisions. They are too used to being the "go to" person for all major issues that anything short of that leaves them numb. But as soon as a founder realizes that she can hire smart people and permit them to make some of their own decisions, the organization gains a whole other level of potential and cycle times can begin to reduce.

So next time you revel in the idea of your indispensability - think again! Maybe you need a vacation?

Sticking around too long?

I recently was referred to a blog post on Fred Wilson's Musings of a VC in NYC. Fred suggests that keeping a founder around post his replacement - moving "up" as he calls it - is an important positive development. I think Fred may not realize that while it may have positive implications for the right personality founder, it may pose some significant issues for the hired gun CEO who steps into a position which perhaps may have been previously filled by a "legend." Forcing a newly hired gun CEO to operate in the shadow of a large personality who has accomplished the impossible of starting and building a substantial company from scratch, while someone remains to look over his shoulder, can be an undue burden that hinders rather than helps the company. The fact that many founders return to their old jobs years later may not be as good a prescription as Fred leaves us to believe.

Good CEO's are not puppets. Moving the founder "up" to become the puppeteer to manipulate his strings (unfortunately what it appears happens with some founders who stick around), is likely not what you hired his successor for. When change is required (which often is the reason for replacing the founder to begin with) keeping the old guard around and still "in charge" as Chairman, can be a sea anchor on the successor's ability to implement change. It is a unique founder for sure who does not try to perpetuate their own ideas even when moved out of the CEO role.

Witness what may go down in history as one of the best performed transitions (albeit not of a founder, but the analogy certainly still holds) with Jack Welch giving way to Jeff Immelt. Jack carefully picked his successor after years of scrutiny (may be a big lesson there too on the care taken to select the successor - See my posting on Try Before you Buy) and then left the company entirely, in order to enable Immelt to do the right thing and not be encumbered by Jack's legacy. Jack clearly was quite a successful CEO. By all rights he could have stuck around and "helped" Jeff transition the company into its next stage. Instead, Jack felt it necessary to get out of the way. In fact, Immelt undid many of the well worn strategies that made GE successful during the Jack Welch era. But Jack was smart enough to realize that change was necessary and chose a capable successor, gave him the keys and waved him goodbye.

Is Jack available if Jeff needs him? Sure! But he is careful not to have his shadow restrict the vision that Immelt requires to take the company to the next level.

A very bad Transition

A good friend of mine in Austin, TX, Hank Jones (Henry W. Jones, III Esq.) who is an industry pundit and expert on Open Source issues, sent me information on a founder transition that really went awry. According to allegations filed by the company in the Superior Court in Orange County, California, Medsphere apparently twice tried to find a CEO to take over from two founder brothers ( Why CEOs Fail?). The first ended abruptly less than a year into the new CEO's tenure when the brothers forced the Board's hand. A second CEO was recruited with even more egregious consequences. According to the company's amended complaint, the two founder brothers got so angry at the direction the new second CEO put in place (only three short months after he took over), they clandestinely published the source code for the company's proprietary software as open source. That certainly put a crimp in the new CEO's plans (see his letter regarding the company's open source stance). Wow! Talk about a bad transition! Boards everywhere should be paying close attention to how dire the consequences of a bad transition can be and what an awkward position they can be put in when founders join together to counter a new CEO.

2-Feb-07 --> The story continues to develop.

Try before you Buy?

Most of us who have been through or witnessed a founder transition would agree that this is no doubt a tricky process fraught with potential disaster at nearly every turn. Yet the process most companies and boards engage in with the potential CEO replacement is one that is set up for failure. And failure is what too often results.

Several interviews with various members of the management team and board, some surface level background and reference checks, discussions with some "insiders" who know what this candidate has done in the past, can never be sufficient to really know whether the most important criterion for successful founder transition will be met. That criterion is the chemistry and relationship that is required between the founder and the newly hired CEO.

While most of the "hard" criteria for founder/CEO transition can be learned using a time tested recruiting and interview process, the "soft" skill compatibility can probably never be really understood without trying it out. In-the-trenches interaction between the potential candidate and the founder and team might actually be the only way to really know if this transition will work.

Any organization that can avail itself of the opportunity to try-before-they-buy should take full advantage of that by engaging the CEO candidate as a consultant in advance of a final hiring decision. While this can be awkward for the candidate (confident and experienced candidates will relish this opportunity) and potentially a delay in the final decision for the recruiter, board and the team, finding out early that this relationship is not going to work is a small price to pay to avoid making a bad decision.

Founder adoption

There is no closer analogy for the hired gun CEO taking over a founder run business than adoption. Founders "baby" their startups, spending inordinate time and attention nourishing them during their early years. Mistaking taking over for the founder (especially one that remains involved in the business) for anything less than this level of emotional attachment is a fatal mistake.

So when I made the decision that we needed to change the name of our company as we positioned ourselves for market expansion, I knew I was in for a difficult process. The founder of my company had been its leader for almost 18 years by the time I took over. He had painstakingly bootstrapped the company and had done so quite successfully. Deciding only after this time that he was finally ready to take on some institutional capital in return for a partial cash out, he agreed to replace himself as the CEO.

The transition from founder to hired gun CEO actually went pretty well. We worked closely together, he as a mentor and me as a change agent. I made no material changes without a detailed discussion and rationale with him and ultimately, if I was passionate about a change, my direction was adopted. If not, and we disagreed, he often was able to talk me out of it.

This arrangement worked quite well. The company grew quickly during the first few years of the transition, culminating during the heat of the market runup in 2000 with us taking on some strategic investors (two of our clients) and our founder being able to cash out even more of his holdings at a very nice multiple. It was at this time, that we decided to expand our business. As our team reviewed the alternatives, one of the ideas that became clear is that we needed a bit more expansive name than the TLA (three letter acronym) that we had adopted as our call letters. So after much painstaking process, and many rejected attempts at renaming the baby, we all agreed (founder included) that the change would go into effect.

We positioned the name change to be announced at a gala affair we had arranged in conjunction with the San Francisco Giants baseball team. We had rented out (then called) PacBell field to invite some of our largest customers, partners, and investors to play ball with Vida Blue and Mike McCormick - two former Cy Young award winners, in a charity event. The idea was to make a big splash with our marketing repositioning.

The founder and I dressed in our best baseball garb in the visitors' club house and began the long walk out from the clubhouse through the dugout onto one of the finest baseball stages in the world. As we were coming up the steps of the dugout onto the field, the founder turned to me and matter-of-factly told me that he had changed his mind and that he was withdrawing his support for the change of name.

Fortunate for me it was too late. I pointed to the scoreboard out in center field that glowed with a welcome message with our new name and logo. The deal was sealed. The baby was renamed, and we all lived happily ever after. (By the way, four years later we sold the company for a slightly lower multiple than the heady valuations of 2000.)

The moral of this story? Don't take lightly the responsibility and emotion that is involved with adopting a founder-based early stage company. There is much more involved than meets the eye.

Rich or King? A founder anomaly.

A phrase often used by venture capital investors when investigating the motives of a founder entrepreneur is: "would you rather be rich or king?" This arguably gets at the crux of whether or not the founder would give way to the greater good and relinquish his CEO role in return for the riches of success without him leading the way. Savvy founders looking for capital from these deep pocketed venture investors have learned the right answer from the VC's perspective is Rich!

It's not clear whether the Venture Investors are really seeking the truth or just want to see if the founder is savvy enough to answer this inquiry "correctly." But virtually every founder that I've interviewed has a good deal of king (or queen) in his (her) plans. Sure, founders may be seeking riches and financial rewards for their sacrifices and hard work. But ultimately, most founders found companies in order to run their own show (translate into rule their own kingdom).

And doesn't that make sense? Many of these founders were very successful corporate executives, earning good salaries, receiving nice perks, and enjoying the supporting casts of their established employ. Founding a startup involves leaving most of that behind, starting over from little, doing it mostly on your own, and usually getting paid very little for the effort. While founders may dream of some day hitting it rich, that may be a long way off. But the very day they start - they start as duke, albeit over what may be a very small duchy.

The transition to professional CEO usually occurs (is forced upon them) well before they begin to enjoy the promised riches. So the choice for the founder is more appropriately: "would you rather be king or would you rather bank on someone else to lead you to what might someday be the riches you originally envisioned." Not quite the same choice originally posed by the VC during the courting ritual.

So VC's will most often hear the answer that they desire. And founders who need the capital, will continue to answer expeditiously, no matter what their actual motivation.

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.

An Ounce of Preventive Medicine

Venture Capitalists are often the impetus for the charge of bringing on a new CEO. And almost as often, the founder/CEO is reluctant to accept the change. However, typically the founder is in no position to object. He really needs to close that round of capital! An expensive retained search ensues. The Founder studiously interviews multiple candidates. Board members, recruiter and Founder have regularly scheduled sessions to vet these candidates. Leading candidates attend second and third interviews with a selected few meeting the staff. The Founder is usually given the final veto which results in making an offer to the candidate that they feel will do the "least damage."

All too often, damage is what occurs. Several venture capitalists have somewhat jokingly stated that to save time and money they should do two searches at once - first for the transition CEO who will fail and then for his/her replacement. While I am not aware of any situation where two searches have taken place simultaneously, it is clear that making a bad hiring decision wastes not only tens of thousands of dollars of search fees and costs, the time and opportunity cost taken by the senior management team and the board to do the search, but also the months when the company founders (pun intended) while this transition CEO struggles with the duel charge of leading the company while establishing a comfort level with the Founder.

This disconnect can sew the seeds of months or years of below the surface conflict, lack of productivity, adding up to a very costly mistake. While a good process may have led to the decision to hire the "right" CEO, even the perfectly suited CEO may not succeed without sufficient advance spadework.

Experienced boards know that the process of hiring a successful transition CEO is based on much more than a good recruiting process alone. Many have found that a good fit depends even more on ensuring the Founder is clear on the roles and responsibilities of the CEO and the Founder - a task that is not as simple as it sounds.

So rather than making that expensive mistake, some preventive medicine may be in order. Here are some "commandments" that will ensure the success of your Founder Transition:

1) Before engaging in the search, get the Board, the Founder, and the senior management team together to talk about WHY a new CEO should be hired; what are the challenges that the company is or will be facing that the existing team is not alone capable of accomplishing? While board members are always busy, be sure there is at least one designated "friend" to the Founder that dedicates sufficient time and maintains a close connection to keep the Founder informed and interested in the process.

2) Discuss openly how the role of the Founder will change when the new CEO comes on board. How will other members of the management team be impacted? Be specific. Discuss roles and responsibilities that will shift from the Founder to the new CEO. Now is not the time to placate a Founder just to ensure they go along with the recruiting.

3) When engaging the recruiter, be sure he or she is aware of the special challenge that the new CEO will face in order to effectively replace the Founder. Recruiters can play an important role in ensuring a smooth process. Experienced recruiters are familiar with the potential problems in having the Founder either intentionally or not chase off potential candidates. If the recruiter is not sensitive to this issue - find another one.

4) Be sure the CEO and management team is using some type of structured interviewing process - Like Topgrading: How Leading Companies Win by Hiring, Coaching, and Keeping the Best People. (Often Founders and the management teams are not experienced in the appropriate techniques for identifying the right hire.)

5) Create a transition plan, ensuring that there is a specific plan for how the new CEO will be indoctrinated, what information needs to be transferred, who will be engaged in the process and a time line for reaching certain transition milestones. (I suggest you get the new CEO to read the book: You're in Charge--Now What? before he/she arrives for their first day at the new company.)

6) Founder and Board in advance of the selected CEO coming on board, work out the tactical details of titles (a new one for the founder), office location, support staff, etc. in order to avoid the first awkward moments of the new CEO's tenure.

7) When the new CEO comes aboard, be sure that Board members are personally present when the new CEO is introduced to show the support that the Board has for the new CEO. Hold an all employee meeting to introduce the new CEO. Be sure the CEO and Founder have coordinated their "statements" so that the company gets the message that these two are working together.

8) Reinforce this process several times with joint Founder/CEO/Board discussions, measuring progress against the transition plan.

Everyone involved in the success of the transition (recruiter, Board, CEO, management team) should know in advance that not all Founder/CEO transitions work. The founder will no doubt go through the standard "grief" cycles of shock, disbelief and anger prior to either accepting or at least convincing the board he or she has accepted the inevitable shift in his or her role.

Even with sufficient preparation, not every hire is a good one, and not every Founder is capable of sticking around while a new CEO reconfigures his/her baby. So be honest, be clear, be attentive, and be sure that the board and the Founder have a high bandwidth communication channel throughout the process.

A clear willingness to fail

Founders are typically strong willed individuals who focus on a goal and don't let much get in their way. "Driven" is a word often used to describe them. Founders typically are true entrepreneurs in every sense of the word - undeterred by lack of resources, stubborn, won't take "no" for an answer, and unwilling to follow norms and traditions. However, along with that comes a lack of willingness to fail - actually to allow anyone within the organization to fail. Often that means attracting individuals who "listen" rather than take initiative on their own and reinforcing that behavior by maintain themselves as a central point for all decision making.

At an early stage organization, this type of management by autocracy sometimes works well. Even small mistakes in the very early stages of a venture can be catastrophic. But as the organization grows, this type of behavior stifles (or perhaps strangles as one transition CEO put it) the organization. Single point decision making can work with a small team. However, as the team grows past the point of the founder's direct sphere of control, this type of management breaks down and likely will retard the organization's growth.

Letting go, or perhaps handing someone else the reins, is contrary to this type of behavior. And of course, letting go is a prerequisite to allowing someone else to fail. But just as all of us parents have found in raising our kids (perhaps the most challenging management task any of us will ever encounter), unless we are willing to let go, to let our kids try their own limits, make their own decisions, and perhaps fail - sometimes incurring direct physical pain as a consequence - they will never grow, flourish or reach their own potential. So founders who are not willing to allow their prodigy to fail ARE NOT READY TO TRANSITION TO AN OUTSIDE CEO!

While founders are often the most capable among us, one great person will find it tough to compete with a team of empowered individuals who can think, make decisions, and learn from their mistakes. Edison was often quoted as saying the secret to his success was increasing the number of times he failed. A founder who just can't stand to let a new CEO come in and fail (or perhaps do things that the founder views as a prescription for failure) will constantly be taking the baton back from the new CEO's hands - neutering the benefits that might have accrued to the organization.

Not all transition CEO's get this concept either. So the idea of handing off the organization from one autocratic leader to another, provides no benefit to the organization. On the other hand, if the new leadership is based upon a decentralized and employee empowering strategy, the benefits to the organization can be immense.

A founder's willingness to fail may be a key indicator of the potential success of a transition CEO.

A Factor Impacting Successful transitions

Some recent discussions have led me to to believe that a critcal factor that impacts the success of a CEO - founder transition may be the prior cashing out of at least some material portion of his or her ownership. Arguably, cashing out enables the founder to take some of her risk off the table. By doing so her replacement is more likely to be given the freedom necessary to make the decisions required to successfully lead the company.

Noam Wasserman writes on his blog Founder Frustrations, that "Bridge CEOs" are most times not successful and that VC board members have suggested that companies be prepared to hire two, since the first CEO who replaces a founder will not be successful. I've lived through both situations where founder successors have and have not been successful. A differentiating factor seems to be a pressure relief valve that is at least partially opened by cashing out.

It's all About Change

In three of the four situations that I personally engaged in as a replacement for the founder, I ran into a similar theme. In each situation I was asked to help transition the company to the next level. In each case, I carefully studied what was working, what wasn't and what was missing before acting. And then ....

I found what many new CEO's find. Change is painful for a founder. Several of the founders I succeeded even went so far as to translate change into a personal indictment. Almost any change I wanted to make was thwarted - "that's not the way we do things here," You don't know as much as we do about this market niche, so it's premature for you to make that decision," and "let's talk about that first". Each leaving me with the question of why they hired me in the first place?

What I found was that unless the founder had a good reason to agree with change, they are predisposed to oppose it. A good reason to change often takes the form of a close encounter with failure pointed out by a well meaning VC who just saw her million dollar investment turing to saw dust. Oddly enough, "successful" ventures, that need to hire a new CEO with experience and knowledge to get the venture to the next level, are often missing that "good reason." So companies that are doing ok, have a harder time integrating a new CEO than ones that are failing.

A good board and smart investors can make all the difference. Setting expectations early with the founder, the board can begin to process of transition way before a new CEO is ushered in the door. In fact, many VC's who I've talked with make it very clear to the founder that they will likely be replaced when the appropriate time arises and a new skill set is required. As the time nears, they reinforce that message - being sure the founder "gets it!" And during the transition process they back up their message by directly eliciting the "change" agenda from the new CEO.

Contrast that with the less experienced investors who convince and cajole the founder into believing that the new CEO will be their "partner" rather than their boss, just to get past this tough transition issue. Once introduced on the scene they expect the CEO and founder to work out the change relationship themselves. There are very few situations where this type of approach works.

As Tracey Goss pointed out in her book entitled: The Last Word on Power, everything that got you to the success you enjoy today will hold you back from success in the future. Founders can take a lesson from Tracey. It isn't about them and the change required is not about their inability or incompetence. Success at the next level is about using a new set of tools to tackle and new and different job. Installing a new CEO when then game has changed from start-up to later stages of commercialization requires the company (and founder) embrace these kinds of change.

The challenge facing any new CEO is to get the existing team, which may have a long history of working together and who were no doubt more comfortable before the CEO got there, to engage in a team building process to embrace change, accept diversity onto the team, and leverage the team’s existing talents. This always proves to be much harder that it appears.

If you ever joined an organization where the founders give up the CEO role but stay on with the company in functioning roles, you already know this is a difficult challenge. If you haven’t experienced it first hand, or perhaps read about some notable failures, if should suffice to say that it is very hard for a founder to give up control of his or her “baby.” This is a company that they have birthed, named, nurtured and financed. Giving up “control,” just because some investors say it will be for the greater good, may be acceptable in theory, but it is not easy to do. Even those founders who actually believe it may be good for the organization, historically have had a very a hard time actually giving up this control.

Many new CEOs make a precondition for their joining an organization the removal of the founders. While you lose the talents and the institutional knowledge by doing so, it often is the only way to get a clear change in direction, loyalty and leadership accomplished. Keeping founders around almost always leads to fragmented loyalty, back channel conversations, distrust of the CEO, and second guessing of the new CEO’s decisions. In fact there probably has never been a founder-CEO succession in which the founder has not believed that many of the new CEO’s decisions were flawed, misinformed or misdirected.

Organizations (both for profit and not-for-profit) are started by a unique breed of individuals who often are driven by passion to solve a need or promote a cause. The characteristics of successful entrepreneurs are often antagonistic to the needs of a scalable organization.

Founders are passionate, driven, smart, opinionated, and capable. They often hold unique knowledge of the particular solution they are developing. Often founders find it more expeditious to “do” rather than “teach.” As such this centralized knowledge source can become a strangle-hold on a growing organization. Founders often seek out people to join the organization who believe in them or their cause and often maintain “blind faith” in the decisions of the founder. Early hires are usually people who can execute on the direction of the founder rather than managers who are empowered to make their own decisions.

The growth of a founder-based organization may plateau when the centralized control structure expands beyond its founder-capable sphere of control. While some founders are able to grow a company with several hundred staff without relinquishing control, more often the organization begins to suffer from his or her micromanagement.

There are several documented high-profile success stories of founder entrepreneurs who have shot past this phase of business expansion, typically by understanding their own limitations and taking action to expand the central authority through good hiring or through a personal metamorphosis. However these are the unique cases. More often it is an outside influence (from investors or stake holders) that forces this confrontation.

Bridging this phase of the business is not easy. If not handled correctly it can be the downfall of a potentially great organization. The effective process of changing leadership – what I call founder transition – is not well documented. While it is critical for an organization, most transitions are handled with gut reactions by financial people who are not necessarily skilled or experienced with this process and often do not set appropriate expectations or develop an effective structure. This blog is intended to create a conversation that will enable organizations to gain from the experiences of founders, investors, and hired-in CEOs who have succeeded and failed in this critical transition.