Monday, December 04, 2006

Replacing the Founder CEO

It's been a while since I've heard the talk, so I was taken aback when it happened during a recent term sheet negotiation. You know the one: "We won't make it a condition of the financing, but we'd like to hear your thoughts about bringing in a CEO to take the company to the next level. You've done a great job, as a founder, but we feel we need a CEO with a track record from here on in."

Much has been written about when and how to transition from a company run by founders to one headed by professional managers. The theory is that, as the company moves to profitability, it moves away from the typical founder culture of group consenus and multitasking. Tensions arise between marketing and engineering, among others. A new CEO, the thinking goes, is better suited to overseeing these functional power shifts.

That's the theory. In practice, actually finding the right CEO remains a huge challenge, at least here in Canada. First rate CEOs who are willing to engage at the Series A/B stage of a startup remain in critically short supply. There seem to be two main reasons for this: first, there is no obvious path to a liquidity event in the current market that would entice a potential CEO candidate to accept the risk of failure and the lower compensation a startup offers. Some even believe that the overhang of bad public company news will remain for several more quarters, leaving little room for new public issuers for the forseeable future.

Second, the recent wave of leveraged buyouts in North America has created far more opportunities for near term profit in later stage companies than in stratups. There is a noticeable "flight to quality" by eligible candidates to form part of the management team for newly-private tech companies.

Entrepreneurship is really just a socially acceptable form of gambling. So the question is, if there are few gamblers at the table, why try and ruin the game? Why bring up team transition during term sheet discussions? Unless there is a world class candidate waiting in the wings, raising the issue seems to be an exercise in "setting expectations." This seems to me to be a waste of perfectly good relationship capital that the investors and the founder team have managed to accumulate. Perhaps worse, it can have a viral effect on the founding team's passion for the business. And passion - not talent or experience - is often what determines success.

Speaking at my graduation from Williams College years ago, Neil Simon said "Passion is the Super Bowl of enthusiasm...You pay attention to the details. And it's the details that determine the quality of life. " Or, in this case, the quality of a business.

There are many other blogs who can advise on the right way to manage transition. But raising it as a discussion point isn't it.

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