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.

Since this is graduation time, I thought it might be appropriate to highlight one of the highest profile founders, Steve Jobs. He gave what may have been one of the the most meaningful and relevant commencement addresses at Stanford University several years ago. If you haven't heard or read it or had your soon to be high school or college graduates read it, I recommend it. Steve is one founder that gets it (albeit he may not have earlier in his career and certainly hit some bumps along the transition he did at Apple). His address is also available from iTunes in both audio and video free of charge here.

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.