Fire the Founder?

Posted on March 30, 2012

Founders have different aspirations. Some founder CEOs are eager and able to develop their CEO skills enough to run a mid-market company, while others are not. Those who want to keep the job must build those skills rapidly, ahead of the needs of the business, if they hope to keep the backing of their investors.

Other founder CEOs don’t love the CEO’s job in a growing, midmarket company, yet care deeply about their firm and want it to achieve its goals.  They would love to have someone else as CEO, yet still remain in place to oversee that CEO and safeguard their investment.

Most VC firms prefer to bring in a “professional” as the business appears to be scaling, believing that founders don’t have what it takes to build value rapidly, and that a fresh leader with experience as CEO will do a better job.  But do they?  Not always.  Founders have deep domain knowledge and some “magic” that made the firm successful in the first place.  Many companies with big success stories kept their founder as CEO for a long time.  Many professional CEOs have failed.

Most VCs or investors discuss strategies for dealing with the founder they consider a problem in these terms:

Replacement.  Most outside money sources (VC’s primarily) solve their problem by firing the founder and hiring a replacement.  Sometimes this means the founder stays on as a technical leader, but most of the time, such a situation is uncomfortable and frequently falls apart.  The founder’s “magic” is lost.

VC Coaching.  Short of replacement, some VC’s believe that they can coach their own founder into improving sufficiently, but many of them aren’t truly investing enough in the process, or don’t have business coaching skills necessary to do the job.  Secondarily, because the VC’s have their own vested interest in the situation, most founders are hesitant to be fully candid with their investors, especially in their areas of weakness.

“Adult” supervision.  Sometimes the problem can be addressed by adding executives who mitigate the founder’s weaknesses, like a strong CFO.  This strategy can help, but a founder/CEO not acting like a CEO is still a big problem for a mid-market firm.

A better solution is to assess all the variability normally encountered in the world of an externally-funded mid-market firm.

Assessment. We must determine:
1.   What are the needs of the business as it grows to mid-market size?
2.   What are the current skills of the founder?
3.   What is the founder’s desire and ability to grow as CEO?

Gaining clarity on all these moving parts marks a critical first step. This process is best accomplished by an outsider who can, with fresh and impartial eyes, compare the business and the CEO to benchmarks they’ve developed given their experience. Moreover, outsiders can get people to open up in a way no insider ever can.  In some cases the outcome is crystal clear:  either to retain or to replace the founder. Yet in other cases the assessment indicates areas of strength and weakness, aiding in the creation of a professional development plan.

Growth & Support Plan. If the decision is made to retain the founder, and have him successfully act as CEO during the mid-market phase, then identify overtly the professional development and support plan for that CEO, and fund it amply. Everyone, VCs included, agrees that the team is extraordinarily critical to success.