As you start your business and it begins to gain early traction, you are probably not thinking about your successor. But research shows that most founders, especially of fast-growing companies, won’t last as CEO past the third round of funding.
Whether or not you are the one who will beat the odds and lead your company past its IPO like Mark Zuckerberg, Nick Woodman, or James Park, the changing role of the CEO and the differing skills required of a CEO of a company at scale are worth considering early.
CEOs who make it all the way in the companies they found may be the names you recognize, but they are the clear exception. Despite the overwhelming statistics indicating otherwise, most founders believe they will buck the odds. Like Lake Woebegone, where all children are above average, the math doesn’t work out that way.
Whether your longevity is determined by investors, who after several rounds of funding may assume control and unceremoniously toss you to the curb, or you decide on your own that the new demands of the role are not for you, the chances are you will end up handing your company off to someone else. So, why not take control of this dialogue as early as you can?
The value ladder
During the early days of your venture, no matter whether you are the queen of sales or the chief software developer, you likely started out as an individual contributor.
You were probably really good at what you did and your expertise was a beacon lighting the early path that you traveled. But your organization can grow just so much while the CEO is tethered to operating as the chief doer. In order to expand, you’ve got to find ways to leverage your talents, to find others who can follow your lead and extend your impact.
You need to start working on your business rather than in your business. There are scant few CEOs of multi-million dollar companies whose chief role is still defined by the individual client-facing work that they do.
To spur the growth of your company, you’ve got to climb the “founder value ladder.” To ascend the ladder, you must be willing to reinvent yourself on almost every rung. Rather than being the one doing the work, you’ve got to transition to higher value tasks of managing others doing the work, plotting strategy, planning the architecture of your business, and ultimately accumulating and investing the resources to enable others to play their appointed roles.
Not every founder is comfortable at the uppermost rungs. In order to climb to higher value roles, you must shed some of the lower value tasks on which you have been spending your time. The ladder analogy describes this challenge well since it is hard to straddle many different rungs of the ladder at the same time. You’ve got to relinquish your hold on the lower rungs to reach for the higher ones.
Most founders are reluctant to give up the individual contributor roles that reflect their deep expertise. When you are good at something, you like to keep doing it gaining the positive reinforcement you no doubt crave. You appreciate how difficult it is to find others as good as you to fill the void your shedding of tasks creates. But finding someone who is only 80 percent as good as you at a particular task will have to be sufficient. While the last 20 percent you may miss out on is important, it is far outweighed by the leveraged value you can produce by giving up the task and reaching the next rung.
An early dismount
Realize, however, there are many very successful founders who actually never made it above one of the lower rungs. Most of those are not household names.
Many made plenty of money and created important enterprises, but only after giving way to other capable leaders. People like Leonard Bosack and his wife, Sandy Lerner, who founded Cisco but were ultimately succeeded by John Chambers, or Martin Eberhard, who co-founded Tesla Motors, not with Elon Musk but with another unknown, Marc Tarpenning. And, in a company where I worked, Bob Thomson, founder of Hyperion Solutions (then known as IMRS, Inc.), who gave way to Jim Perakis.
As a founder, you should realize that there is no sin in sticking to the first rung or getting off the ladder early. It can often be the most direct path to maximizing your wealth. But, it’s a choice that every founder has to make.
Noam Wasserman, formerly of the Harvard Business School, calls this choice “rich or king.” His research shows that optimizing results for founders requires that they make the binary choice between maximizing their wealth or maximizing their stature. For those not willing or perhaps not skilled in climbing the ladder, the choice of rich may mean voluntarily dismounting the founder value ladder before you fall.
Rich or king
For every founder, the question about motivation—to be in charge (king) or to make money (rich)—is critical.
Almost every founder—certainly when confronted by a potential investor—answers this question with “rich,” but would really prefer not to have to make the choice. As the intoxication of being in charge of a growing company sets in, it can be very difficult to give that up. According to Wasserman, founders who refuse to choose between the two usually end up with neither.
A long runway
Those founders who decide “rich” as their primary motivation should plan early to begin the process of identifying their own successor.
That doesn’t mean they need to identify and hire the next CEO tomorrow. What it means is that during every executive recruit, they should consider whether this person might end up being capable of becoming the future CEO. We all know that hiring is a challenge. Resumes lie, interviews are more about performances than about capabilities, and references are rigged. The stakes are high, especially when hiring senior executives.
The best way to know if you hired the right person is to witness them in action. Whether you already knew that person in a prior encounter or your careful vetting makes you willing to give them a try, their performance on the field is the only true indicator of their potential. Someone who could end up being your replacement should have as long a runway as practical to ensure they will have sufficient speed and lift to soar into the CEO role when its that time.
Assuming you select the right person, more power to you. If you make your early executive hires with the idea that one may turn out to be your successor, you have sufficient time to take a mulligan if it doesn’t work out. Too many companies get caught having to make an emergency hire (like Uber recently did) because the founder flames out, gets caught in some untoward behavior or unfortunately expires prematurely and no one was in place ready to take on the role. Venture capitalists who have participated in one of these drills often joke that they should hire two successors for the founder at the same time, the first one and the one that will replace the first after he or she fails. Following a founder is hard to do.
Founders of growing companies should consider these factors early in their development. It turns out quite counter-intuitively, that founders of fast growth companies get replaced earlier than their slower growth counterparts.
The faster the organization grows, the faster the skills required of the CEO change. When you clearly recognize the difference in the role of a CEO versus that of a founder, you may find that you prefer your current role more. The hiring of an executive that might be capable to someday take over the reins can provide an audition with that flexibility.
Having an executive in the wings who understands the business, whose mettle has been tested, and who is ready to go when needed is perhaps the most important insurance a company can buy.
Les Trachtman is the chairman of The Trachtman Group and CEO of Purview. He is the author of the book “Don’t F**K It Up: How Founders and Their Successors Can Avoid the Clichés That Inhibit Growth.” Trachtman is an expert on the fragile transition between organization founders and their successors. You can find more information at www.foundertransitions.com