Founder to CEO: The critical transition

Why is it that only 10—20 per cent of North American solution providers have a “”real CEO”” at the helm doing the job and fulfilling the role of CEO? Is because the “”real CEO”” job is a very difficult one? (although not as tough a task as growing a company without a “”real CEO””). Perhaps there are so few

“”real CEOs”” because the attributes of “”real

CEOs” are so unique and the attributes of those CEOs who do not succeed are so common (see WANTED: CEOs who can do the job). Much of the explanation for so few “real CEOs” lies with the fact the job is not one you can go to school to learn.

Most of the best CEOs have had the opportunity to watch successful CEOs or be coached by successful CEOs. There are few natural CEO. Those who claim to be “naturals” have often had lots of assistance along the way.

So where do “real CEOs” come from? For a founder of a solution provider who wishes to emerge as a “real CEO”, what are the patterns of CEO development? What is the reality of the critical transition from founder to CEO? Four patterns of CEO development are reviewed:

• Founder to Founder
• Founder to Problem
• Founder to CEO
• The Outside Hire

Founder to Founder

Many founders or owners of solution providers are perfectly happy running a business without the services of a “real CEO”. They run their own show. They have no Board of Directors other than that which may be required by company law. They have never thought of themselves as shareholders of their own company. If they have, they have never fully connected with the opportunity to increase the value of their shareholdings.

The business is always hungry, but never starving. Eighty percent of their expenses must be paid within thirty days. Accounts receivable take 55—75 days to turn into cash.

The business has no one responsible for Marketing, although they have told themselves many times that they should hire a marketing person.

The Founder/Owner who always stays a Founder/Owner spends most of their time simply surviving in business rather than building a company. Their businesses do not generally exhibit the quantitative attributes of highly successful businesses. There is little or no permanent capital in the business. As individuals, they may not have ever developed the attributes of a top quality CEO. As a result, their businesses are in terminal development phase typified by constant cash flow problems, periodic profit problems, and constant distractions arising from a lack of focused business planning.

In times like this, these businesses are at risk.

The businesses described above represent 50—75 per cent of solution providers in North America. These businesses are difficult to finance. The Founder/Owner typically loathes banks, does not wish to provide security, and has too high a valuation in mind for potential equity investors. The businesses built by these Founders/Owners are difficult to sell. Much of the value of the business lies in the unique, unsystematic way in which the Founder/Owner makes the business work. The businesses built by these types of individuals are also difficult to buy. The individuals who own and run them are unique, and not always the easiest to work with if they stay on to help the new owner.

But these Founders/Owners are happy. They provide employment for thousands of people. They deliver top quality customer service, and sell or influence the sale of billions of dollars worth of vendor revenue every year. So what is the problem?

Founder to Problem

In some cases a Founder or Owner who is pretending to be a “real CEO” can be more of a problem for a company than one who isn’t even interested in doing the complete job. The Founder to Problem situation often arises when a solution provider takes on an equity partner. Often, a venture capital provider after investing in the solution provider, drives for the creation of a formal Board of Directors and insists on one or more Board seats. Clearly interested in increasing the value of their investment, and often preparing the solution provider for resale or the public markets, the venture capital provider drives the Founder to become a “real CEO”.

The results for the Founder can be, and are regularly, disastrous. The Founder thinks he/she is being a “real CEO”. Unfortunately, they are systematically missing key aspects of the CEO job. Functional underpinnings of the solution provider such as alliances, partnerships, finance, marketing, organizational structure or technology strategy are not being addressed. The Founder, very often a highly control-oriented manager, is not able to change their management and leadership style and is replaced

by someone internally or by an Outside Hire. The Founder, by now very fond of being

a CEO, attempts to step out of the title, but can not step out of the role. After all, the

company is his/her baby.

The inevitable result is the Founder becomes a Problem to the capital providers. The

capital providers move to protect their investment and ousts the Founder. The

Founder, with no acceptable role in the organization and no financial or career exit

strategy, is often badly beaten up by the turn of events. Those who get another chance

often make very good “real CEOs” the second time around.

Founder to CEO

The best option for the increase in value of a solution provider is for the Founder or

Owner to transform into a “real CEO”. Owners and Founders should aspire to be their own CEOs long before they consider bringing in an Outside Hire for the CEO job. The evidence in the high technology industry is very clear: those organizations that have founders and/or large shareholding owners as CEOs have a history of delivering positive long term returns to shareholders. Sun Microsystems, Computer Associates, Oracle, BEA Systems Inc. and Microsoft are good examples.

How does the Founder or Owner who wants to become a “real CEO” proceed? They should start by reviewing their business to see if the business they own possesses the basic raw materials to be a quality business. There is no point in pouring top quality management into a low quality business with no prospects for profitable development.

The aspiring CEO should review the attributes of high quality CEOs to convince themselves they have what it takes, and that they can break any of their clearly dysfunctional management habits. The development of an Advisory Board for the business, populated by talented local CEOs, should be considered. Peer-based organizations such as TEC (The Executive Committee), organizations for high tech CEOs (AceTech), and CEO-focused programs being offered by many vendors should be investigated. In the final analysis, the aspiring “real CEO” must make a decision as to whether they want the job or not. If the job is not wanted by the Founder or Owner, and the requirement for a “real CEO” is sound, then the Outside Hire may be the solution.

The Outside Hire

The decision to bring in an Outside Hire as a “real CEO” is fraught with danger. The reason is simple: not all Outside Hires are “real CEOs”. Some Outside Hires are not talented enough for the job, while others are too specialized in one functional area.

Some Outside Hires are unable to dedicate themselves to the task of building someone else’s business, while others do not have the capability to elicit the trust of those whom they must work with. Still more Outside Hires, maybe brought in by capital providers, focus too much on appearances over substance and are unable to get at the “real CEO” job.

The success or failure of the Outside Hire is driven by the Founder’s preparation and the selection of the appropriate person for the job. In order for an Outside Hire to be able to do the “real CEO” job, the Founder or Owner must be willing to “give up the baby” and delivery the authority, responsibility and mandate to do the job to the Outside Hire. The Founder or Owner must do this privately and, more importantly, publicly (inside and outside the organization). The Founder or Owner must truly get out of the way, by executing both a management and possibly a financial exit strategy from their own company. The business press is full of stories of CEOs who leave high profile positions short periods after they have been brought in as Outside Hires because the Founder or Owner refuses to get out of the way.

Not all North American solution providers will create or hire “real CEOs”. Many Founders and Owners are happy the way things are. These Founders or Owners who become problems and are moved aside may get second and third chances to transform themselves into “real CEOs”. Some Founders and Owners will make the transition to becoming a “real CEO”. With hard work and focus it can be done. Still others may decide or be forced to decide that the CEO will be an Outside Hire.