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Entrepreneurship: Staffing a CEO

I tend to view things fairly simply. From coding to business I’ve found that this works exceedingly well. There are always special cases, but I tend to handle those on a case-by-case basis. I try to keep the general workings of my code, my life, and my business fairly straightforward. It’s saved me from a lot of agonizing over finding the perfect way to do a given thing. I also tend to hold specific truths to be self-evident. One of these truths is that if a CEO is required he or she should be brought in early, rather than later. Either a new CEO was required from day one or a new one wasn’t. If they always were, bringing one in early is best for the company, for morale, for logistics, and just generally. Of course finding the right CEO is no easier and may in fact be harder earlier than later, but I stand by my assertion. I didn’t always think this way.

 

CEO: Now or Never

Jim Collins’ new book Good to Great is a prequel to his eye-opening Built to Last that discusses what it takes to get a company from good to great. From a company no one knows about to one that is a household name. Collins explains that the companies that did well — exceedingly well — all had CEOs that either started the companies or came from the inside and those that did poorly — and I mean poorly — had CEOs brought in from the outside. This goes against everything you’d come to expect but, in fact, it makes perfect sense.

Being in IT means I use IT companies as a benchmark and the companies that have been founded and then led to greatness invariably were led by the techies that founded them. In this list I include Microsoft, Apple, RIM, and Newbridge among others. But you can also include Linux and other Open Source initiatives that require strong management and vision; a drive to take the organization forward to a desired destination. The effort is the same whether it’s for financial gain or personal glory. You have to lead a team of disparate individuals forward towards a common vision. That vision is defined by a particular individual (or individuals) and must be dragged, kicking and screaming at times, forward. It requires a huge amount of faith in the direction and the vision as well as the people hired to take the organization forward towards the dream.

If you look at the various individuals who lead or have lead successful IT companies you see a common thread: they all have successfully recruited talented individuals who believe in the vision and are willing to help bring it to fruition. And the passion the leaders instill in the vision spills over into the individuals who adopt it as their own, and become just as passionate. In fact, in a well-run organization it becomes difficult to separate out who joined when; everyone is equally passionate.

Dispassion

And here’s the rub, if anyone isn’t passionate they end up infecting the entire organization with their doubt until it becomes a cancer that must either be excised or kills the host. Unfortunately, not everyone’s doubt has the same effect. Some are slow simmers of doubt that can quickly be quelled; others festering sores. The worst doubts are the ones that are associated with senior managers. If the senior managers don’t believe — or lose their faith — it’s over. If senior managers join without believing it’s immediately evident. The vibes flow through the company. It derails the entire organization’s direction.  It breeds distrust between divisions. It kills.

Disinterest

Equally evil and dangerous is a CEO’s disinterest in the company. Perhaps the fit wasn’t perfect, perhaps the company isn’t going in the direction the CEO thought it would, or perhaps the company isn’t what the CEO thought it was. Whatever the case may be, if the CEO becomes disinterested in the workings of the company, of selling the company daily, of being part of the company then it’s time for the company and CEO to part ways.

At times this is the most difficult thing to do, especially if the CEO is generally well liked. It may also be a financial burden due to contractual obligations. The best possible outcome would be for the CEO to leave on his own, thus ensuring the company doesn’t have to endure a financial hit. Usually, and unfortunately, the financial hit occurs regardless. The CEO hangs out in the company collecting a paycheque until he or she finds a new job elsewhere. If that takes weeks it’s not a big deal; if it takes months — well, you get my drift.

The disinterest is also picked up by staff. They see that the CEO is isn’t pushing and selling as hard as he or she can. The staff then wonder why they should be killing themselves getting the product out the door. And then, the vicious death spiral starts. And without an effective CEO it’s very hard to get out of it. Hence the need to ensure you hire the right CEO, or none at all.

Salesmanship

Every CEO is a salesman, even if he or she started as a techie! The daily ritual of a good CEO is to sell the vision to the employees, to potential customers, to the media, to whoever will listen. And it’s got to be a believable sales pitch. The listeners have to believe that the CEO has bought into the dream. VCs will often say that the CEO has to have drunk his own Kool-Aid. The CEO will be going into environments where FUD is prevalent and broadcast by larger organizations that are protecting potential revenue. The CEO has to be convincing and be able to get customers, especially customers, to the point where theyíre willing to bet money on the product the CEO is selling.

Furthermore, as the company grows and requires more senior staff it is the job of the CEO to sell the company and its vision to potential hires. They have to be convinced that this is an opportunity that can’t be passed up. During the dot com days there were lots of interesting opportunities and a large number of senior executives looking for work. Today there are still a lot of executives looking and not that many companies. It’s crucial to take your time, evaluate each and every candidate, and not hire someone unless they are perfect. If they can’t sell you on themselves, this would be a good indication they won’t be able to sell the company and its product to anyone, either.

Ego

In Good to Great one of the overarching theses of the book is that CEOs with improper egos are detrimental to the health of the company. He utilizes a simple image to gauge whether a CEOs ego is beneficial or detrimental to the well being of the company. What Collins uses is a mirror and a window, and the CEO’s reaction to good news or bad news. The good CEO looks through the window whenever something good has happened and heaps praise upon his or her workers. When something goes wrong, he or she looks into the mirror to allocate blame. The bad CEO does the opposite. Quite simply, the bad CEO is the one that takes credit for all that goes right and lays blame on those around him or her for everything that goes wrong.

The question is: What kind of CEO do you have? You need to ask prospective CEOs about what they perceive as their greatest achievement and how much a role they had to play in it. If they put themselves front and center, it’s highly likely that you’ve got a wrong CEO. Even if all the answers are right, ask employees that used to work for him what type of CEO he or she was. You need to be brutal in your assessment because the nature of CEO you hire will either make or break your company. And, if you’re a start-up, you may not have enough runway to correct the effects of hiring the wrong CEO.

Never

My take on CEOs is either bring him or her on early (very early) or not at all. Investors may insist that a founder run the company for a given period of time and then hand over the reins to someone else. This is easy to agree to initially, but very hard to follow through on. My personal experience indicates that if you allow logic to prevail — namely the logic that someone with business experience and connections will help grow the company — then the transition can be fairly smooth. Unfortunately, if the person who comes in doesn’t quickly assert a sales presence and brings in revenue then friction will occur between the original employees and the new CEO and anyone he or she may have brought in. Also, if the company is still in a highly technical state bringing in a non-technical CEO can cause some serious problems. A high tech company is its employees. Without them it’s nothing. That’s why great CEOs like Steve Jobs ensure he connects with the people in the company that make the company move forward, namely the techies. Without them Apple would be dead. Jobs gets this. And in return for this understanding — and his actions — he gets an insane amount of loyalty. And people who are that loyal will do amazing things.

Furthermore, if the sales and marketing staff are working hard bringing forward potential customers while the CEO and his “vast” connections bring no one, then friction will exist between sales and marketing and the CEO or between the original employees and the CEO wondering why the white knight hasn’t produced.

And there’s the general problem with bringing in a CEO well into a start-up’s life. Once the start-up is established, work expectations are set by the original team. If productivity is measured in one part of the company it will be measured throughout a company. If the engineering staff must produce a product by a fixed date the engineering staff, rightly, will expect sales to be delivered by a given date. Similar expectations will exist for Marketing, Professional Services, etc. If sales are hyped up and then nothing comes of it the disappointment will be disastrous. Employees will begin to question the company’s direction, perhaps even the company’s viability. If that begins to happen the whole enterprise may derail. In the end, promises broken — even ones that may not be realistic — will result in employees leaving. And if senior and well-respected employees begin to leave the company is in dire straits. God forbid if the main founder decides to leave at this time. His or her exit may result in a mad rush for the exits dooming the firm.

Abdicating the Throne

Now, investors are professionals. They have dealt with successes and failures time and time again. They know, instinctively, what it takes for someone to be a successful CEO. Unfortunately a lot of it is gut instinct. But if their gut tells them you can run the company initially you have to ask them why they feel you can’t learn to run it for an indefinite period.

In actuality you won’t run any company you’re involved in it indefinitely. Sooner or later you’ll want to either change your focus or leave. Perhaps enjoy the cash you’ve made if the company is a huge success. Whatever the reason, leaving requires you to have an exit strategy and that exit strategy requires that you know how to hire the right CEO.

To me there are only a few points at which someone should abdicate leadership of the company they’ve founded.

No Management Ability

Not everyone is cut out for managing a start-up, or any company for that matter. Hell, some people aren’t cut out to manage themselves and require constant attention from mentors, etc. If you’re one of these people that just have no management ability or no interest, then it’s best to start looking and bring in a CEO immediately. I would recommend that you don’t even run the company initially but have one of the investors run it, preferably the chairman. This way it is obvious from the get-go that you’re looking for a CEO. There’s no reason to “step aside” as you’ll already be in your appropriate position. For example, if you’re an amazing computer scientist but not the best at managing staff, perhaps Chief Scientist would be a good position. You’d be free to think and move the product forward, concentrate on what you enjoy to the benefit of the whole company and all those around you.

And, you won’t have the stigma of having run the company ahead of time. The loyalty of initial staff will be to the company and the founders, but the founder-CEO link won’t exist, allowing the new CEO to easily integrate with the rest of the company. And since everyone realizes that a CEO is on his or her way, then no one can be disappointed that there was a management change as there was none.

Also, don’t be surprised if investors demand that you find a CEO before you get any funding. Many times they really don’t want to fund a company that will appear rudderless. It’s why knowing people who’ve run other companies and nurturing those connections is an excellent way of finding a CEO if you’re not really up to the task or not interested. And any potential CEO at this stage will show interest in a variety of ways, including doing a lot of the necessary work for free. If they demand payment up front, run. A proper high tech CEO knows that “no risk no reward” and thus is willing to put sweat equity into the business. Someone without a stomach for risk is someone who is not suited to being in let alone running a high tech startup.

Disruptive Individual

Sometimes the existing CEO is simply too disruptive to run the company. Even though they may be the founder their mind wanders and they’re not solely interested in what the company is doing and the vision. They’ve come up with the cool idea and perhaps can get the thing kick-started, but long-term they’re not interested in seeing this to closure. The fact they got it funded and may even have closed a few sales, if they’re not closers in the long term it’s best if they’re removed from the company.

Ironically this is usually not noticed by investors since what they initially see is a very successful business person capable of formulating a corporation, a vision, enticing investment, and hiring qualified staff. However, as time progresses he or she may suddenly find what they’re doing is not that interesting anymore. It was a rush early on, but now is a chore.

Honesty would be the best policy, approaching the investors and saying that it’s time for a new CEO to come in. But usually what happens is the investors watch as the CEO slowly becomes more and more disinterested, focusing on side projects, allowing the main business of the company to either continue on by itself or under the management of someone else. Regardless, by this time investors become worried and physically remove the CEO. Usually this is announced as being a decision of mutual consent (i.e., “We think it’s time for you to go.” “I think you’re right.”). Unfortunately, by this time there may be other consequences of the CEO overstaying his welcome. Hopefully any damage is minor and can be quickly fixed. But, unfortunately again, the position of CEO isn’t something you fill in a week and the company may be run by the board for weeks or months before a viable CEO can be found. This may be disastrous for the company.

IPO

Running a public company versus a private company is very different. A private company is shielded from view. Documents pertaining to the business are private and don’t need to be provided to anyone. A public company is just what the name implies, public. Its internal functioning, books, etc. are all public. Anyone who is a shareholder can ask to see various aspects of the corporation. Accounting and accountability are much higher. Furthermore, shareholders have a much larger say in the way the company operates.

Usually the person who is perfectly able to deal with a private company is incapable of dealing with a public one. The quarterly chores  alone scare most off from wanting to be on the front lines.

As an IPO comes into view it may be necessary to start looking for a CEO that is capable of taking the company public. Although the CEO may be capable the CEO must honestly determine whether or not he or she is ready to take the company public. If the limelight, dog and pony shows, etc. aren’t something the present CEO wants to go through it is perfectly acceptable to have the current CEO step aside either just prior or just post IPO. In fact the current and next CEO could do the tour with the investment bankers together providing comfort to the public investors.

Midlife Crisis

This is something that affects everyone. Even Bill Gates has had his, leaving the running of Microsoft to Steve Ballmer as he focused on being Chief Software Architect and ultimately leaving to tend to his charities. It allows someone to begin doing the dreaming of “what’s next”, either from a technological point of view or a personal one.

Wanting to get back to your roots or back to something other than financials, HR issues, board meetings, etc. Wanting to get back to where you started is a normal thing. We all long for the simpler days when our worries were trivial and life uncomplicated. The running of a company is one of the most arduous things you can ever do. The livelihood of dozens, perhaps hundreds, of people depend on your decisions. A misstep and all those people can be without a job. Even if you do everything right you can still all end up jobless. The market is a very unforgiving thing. I’m just surprised more senior executives don’t just leave and go off and do something else, like Bob Metcalfe did.

If you feel that a midlife crisis might be in your future, planning for succession isn’t a bad idea. In fact, not doing so is inconsiderate considering the possible consequences. And although the midlife crisis may well sneak up on you, you can at least begin the succession process when it does strike — delaying your departure until the company is properly set up with a successor.

 

Conclusion

But that’s just one person’s opinion — backed by some interesting research by Collins and other scholars of business. Perhaps your company will be different. Perhaps. But the purpose of this blog entry is to determine whether a CEO should be brought in now or never? To me, if you must bring in a CEO bring him or her in now. Don’t wait; start looking now. Let the entire company know you’re looking and make sure that the persons you bring in are interviewed, interviewed again, and interviewed some more. Make them talk to others in the company, not just the founders and the investors. Test them by throwing problems that currently exist or recently existed within the company at them and see how they’d resolve the problems. Find out how passionate they truly are about the area of IT you’re in. Find out if they truly understand the technology. Find out if they’re passionate about technology. If they’re not technical, and you’re heavily IT oriented, you may not want them around. Do you really want to be constantly explaining everything twice: once to the IT portion of the house, the second time to the CEO? And what are they bringing to the table? What’s their track record? You will need to assess their track record with start-ups to judge whether or not they’re going to bring what you want to the company. If they’ve only been with large corporations they’ve become accustomed to infrastructure you simply can’t offer. They need to be, in the words of one of my investors, hungry enough to eat rocks.??They should be focused on the well being of the company and be its lead cheerleader. He or she has to believe, perhaps fanatically, on the vision and be willing to move it forward. The CEO should not allow anything to stand in the way of success all the while understanding who it is that will deliver that success — the employees that make up the company. If the CEO ever feels that he or she is the reason for the company’s success you should start worrying.

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March 2011
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