Why Do Founding CEOs Pass the Baton?

Most founders embark on a start-up journey with aspirations to see the company through to greatness while maintaining the role of the CEO. Most founding CEOs aspire to be the Bill Gates, the Steve Jobs, and the Mark Zuckerbergs of the world.

The reality is quite different. The majority of start-up CEOs recruit their replacements as the company grows beyond $15-20M in revenue.

Driving Forces Behind Founding CEOs Who Leave

The role of the growth stage CEO is completely different. Once the start-up figures out the right formula (who is the customer, what is his pain, how the solution addresses the pain, how the solution should be marketed, priced and sold), it is ready to scale. Scaling a company requires a completely different set of CEO skills. It requires the operational expertise to recruit highly experienced senior managers who have specific functional expertise. It requires the skills to establish an operating rhythm that gets the growing number of employees and managers all focused on the right set of priorities. And it requires managing through others and getting out of people’s ways.

The possibility of the founding CEO having both start-up and growth stage skills is extremely rare. And founding CEOs should not feel ashamed in any way if they are not able to carry a company through the two stages. In fact, it is a brave and shrewd founder who recognizes the issue, and raises his/her hand first to point out the need for a transition. I have seen that happen in a few of our portfolio companies.

The second driver (or in this case impediment to the transition) is the founding CEO’s ego. Transitioning a founding CEO can become a major issue for the company, its board and its investors when the founding CEO resists facing the reality of the need. Denial is the first reaction: things are going fine, things are not as bad as the board/investor thinks it is, etc. Blame is the second: it’s not my fault, I don’t have the right team, I don’t have enough support, I don’t have enough funding, etc. Anger is third: everyone is against me, the investors are trying to take over my company, the board is trying to screw me, etc. Shame is the fourth: I have failed myself and others.

These emotions are natural, but very unfortunate and unnecessary. They are also driven by ego. The problem is that founding CEOs tend to put their own personal aspirations above those of the company. If a founding CEO starts by dispassionately assessing his/her skills against what the company really needs, he/she will likely come to the same conclusion as the board.

I wrote about this before in the post, Mr. CEO: Would You Hire Yourself?

Lastly, I have seen entrepreneurs blame their investors when the founding CEO is replaced. Now that I have lived on both sides of the fence, I can tell you without hesitation or bias that investors should not be blamed for forcing a transition. VCs are not stupid (at least most of them are not). A VC is not going to force an unnecessary change in leadership unless it is necessary. VCs realize that CEO transitions are super difficult and do not guarantee success (what if the new CEO doesn’t work out?). When a VC (and invariably the board of directors) decides that change is needed, it is usually very necessary and typically should have happened earlier.

If you’re going to blame your VC for anything, perhaps blame him for not surrounding the founding CEO with the senior managers and the expertise that could help the founder succeed. Eventually, the buck stops with the CEO. Ultimately, no one should be blamed. Founding CEO transitions are natural and should be expected.