CEO Succession Challenges – Aztec Software

Posted on December 15, 2004

Founders of companies display a passion that their successors may not.  Partha Sarathy of Aztec Software had to deal with just such an issue as he chose to bring in his own replacement.

Back, way back in the beginning of this century (2000), the Silicon Valley was still wild, with companies rising and falling with the twitch of an index finger on the keyboard.  Aztec Software followed the high growth model. But when high growth didn’t materialize as planned, the founder had to saddle back up, and the ride just wasn’t the same.

Partha Sarathy is an intelligent, disciplined founder and entrepreneur.  Aztec Software is his third business, a contract software development firm.  Founded in Bangalore, India and headquartered in Santa Clara, the business flourished, taking full advantage of connections in both countries.

With a record of strong growth, they planned to build a major national firm.  Partha decided he’d rather have a small interest in a big business than a large stake in a smaller business.  In exchange for 51% ownership of the business, an angel invested in 1999, and a year later, Aztec became part of the angel’s holding company.  With the dilution and the ESOP, Partha’s personal stake fell to 18%.  Aztec went public on the Bombay stock exchange in India in 2000 as a stepping stone to NASDAQ.  In anticipation of sharp growth, in April, 2001, Partha recruited and hired Dennis, a president who had run a much larger business for a major national IT corporation.  Partha’s peers in his Alliance of Chief Executives group told him that the most likely and common reason such successors fail is the lack of support or interference that comes from a founder who is reluctant to turn over the reins.

Partha became Dennis’s friend and primary advocate, but difficulties quickly arose.  The software market peaked just as the leadership changed hands, and growth was elusive.  The top team at Aztec didn’t bond with the new leadership, and resisted.  Although it was personally agonizing, Partha stuck to his guns and continued to actively support Dennis with the executive team and the board.  As planned, after a year, Partha stepped down as CEO and handed over the full reins of control.

After Dennis’s second year, with internal discord threatening the company and declining volume and headcount, Partha stepped back in as the company’s leader and Dennis went his own way.  The board was delighted to have Partha back at the helm, and promised to allow him to run the company long-term.

His top team, still in place from two years prior, quickly agreed to work with Partha to return the company to health.  Within a year, the firm was back on track, its stock price had recovered, its head count was at an all time high, and the future looked bright again.

But for Partha, the fun and enthusiasm he remembered from the early days didn’t return.  The old camaraderie and personal bonds didn’t snap back into place.  Too much heartache had occurred, the relationships with the employees and the investors were not the same as they once were; and the company now seemed and felt very different from the one he had started years ago.  He notified the board that it was time for him to move on.  With trepidation and regret, the board allowed him to again replace himself.  He successfully recruited and found a new CEO who bonded with the team and who desired to build but not transform the firm.  After 10 months, the new CEO’s leadership is working well.

Partha is enjoying some time off, savoring his children’s teen years, and building his golf game.  He knows the business bug will bite him again, and when it does, he’ll be all in, as always.

The Analysis

Most of us who own and run businesses are without doubt intelligent, disciplined, and competent.  If our careers were just a “job,” we would surely do that job well.  But what really drives us to go beyond doing a “good job” is a burning passion deep inside.  That passion makes our businesses feel like a part of ourselves, and wraps our emotions and our heart into our work.

Partha loved Aztec Software, and it was his passion.  His story illustrates one way in which an owner can lose his passion for a business – how a business can go from being a part of an owner’s soul, to being a separate “thing” (for better or for worse).

Thinking carefully about growth and ownership issues is critical, and Partha did it right.  He thought deeply about taking angel money, knowing that the angel’s strategy and expectations were for high growth.  Throughout all the ups and downs, this angel has been an excellent supporter, allowing Partha to maintain leadership, and assisting when possible. But this isn’t always the case.  Deciding to be a small owner of a big high growth business is not wrong – it is simply a different path than being a majority owner of a smaller firm.  But most of the time, founders who become small owners of high growth firms end up outside the firm.  They nearly always have personal pain related to the separation, but in exchange, become free to start a new firm.  Aztec was Partha’s third firm, and I am certain there will be a fourth and fifth.

Hiring leadership in any company, at any level, is tricky.  But the challenge of hiring a new CEO is immense.  In this case, no-one knew the industry was about to hit the wall the very next month.  The odds of success were low.  The personal anguish Partha felt as the new president took over and the company struggled is normal.  It is difficult to distinguish between separation/loss of control pain, and pain from seeing bad decisions harm your company.  What is critical in these transitions is the Board of Directors, who should be an experienced team of business leaders who can much more objectively see the situation.  It is their job to keep control of the CEO/President and the transition process.

Partha’s wife, Anu Partha says, “I’ve seen Partha through three startups.  His emotional side is learning that businesses change and are a process.  He was much better at letting go this time, but he worked at it.  He kept telling himself for nearly three years that change was on the horizon.  Letting go was still hard, but he was ready.”

The real question for every entrepreneur and business leader is how to manage their passion.  Are you a “one company” leader, loyal from the beginning to the end?  Is the seeing the longevity and evolution of the business over time what stirs your passion?  Or is it the newness of a business or market that really gets the juices flowing, so much so that you’re willing to endure the pain of exiting from your last business?  Think carefully about it, and spend the time it takes to figure it out.  After all, it’s not really about business, but about your life and how much you enjoy it.

I can picture Partha in about 2050, a wise old man telling his stories about the days when Silicon Valley was still wild, untamed.  What will your entrepreneurial stories sound like when you’re an old timer?

Takeaways:

• A founder/CEO’s passion cannot be turned off and on at will – not even by his own will.
• Look forward, and recognize situations that can damage that passion, and either avoid them or be sure they are worth the risk.
• Often times when the passion is gone it’s time for a change – usually a new business.  Leaving the old behind is painful, but necessary to rekindle the fire.