There’s Often Drama in Changing CEOs in a Young Company

July 23, 2010 at 1:06 pm Leave a comment

As I look back on issues involving changing a CEO, I always pause and sometimes even get a chuckle.

How many times does an entrepreneur with a great idea believe they are the only one suited to run their new venture? Usually, they believe they need to be the CEO. However, even if they are the well suited to lead a venture in the beginning, they are not the one to drive to higher levels beyond development. When this expansion phase occurs, the board usually has the difficult task of letting the entrepreneur/CEO know that it is time for him to take a new role in the company.

Often this communication does not go well, and the end result is that the entrepreneur cannot understand the message and leaves the company.

Here are two case studies I’ve personally witnessed:

1. Typical CEO transition scenario

A three year old company is doing very well. Making lots of profits and growing. The CEO and the board hire a seasoned executive with more big company experience than the entrepreneur/CEO has to help the CEO. The CEO and the new executive bond well, and it looks as if this transition will go well. In fact, the entrepreneur/CEO tells the new executive that he is glad the new executive has come on board, and that he will know when it is time to turn the reins over and step aside. About a year later, the board wants this transition to take place, but instead of knowing that it is time for prudent change, the entrepreneur/CEO starts fighting his board and terminates those executives on staff who agree that it is time for the change. This plays out over several months and by the time the board realizes what has really occurred, the company has lost market share, revenue, profits and cash. The change finally occurs, but it is too late, and the company ends up going out of business, when this did not have to happen if the transition had occurred smoothly.

2. Ultimate irony scenario

Another example is even more interesting. It would be funny if it was not so sad. An experienced venture capitalist decides to change “sides of the table”. An entrepreneur comes to him with a great idea but understands that he does not have the skills or inclination to run a business, only be a developer. The VC decides to run the company for a while until it gets going, at which time he will hire a new CEO, and go back to being a VC. As the company progresses, the business is able to raise in excess of $100 million towards building the company. It becomes clear after the major institutional round, at least to some of the employees and board members, that it is time for an experienced CEO. The VC acting as CEO however now decides that he is the only one that should lead the company and refuses to listen to his fellow VC’s and board members. He fights the board for quite a while, and in the meantime, the company’s spending runs out of control. By the time the board finally removes him from his position, the company is nearly out of cash, and has not completed its milestones. The irony of this is that the VC/CEO had experience on the other side of the table many times and witnessed other entrepreneur/CEOs not wanting to be replaced and fighting with the board. But in this case, he got enamored with the idea of running the company, he took it personally and lost sight of his original mission.

So, we give advice to young entrepreneurs to remind them that having a successful business should be more important than stroking their egos by being the CEO. Most entrepreneurs are best at developing ideas not at managing businesses. We advise that they have to be ready and willing to step aside – many times early on or earlier than they might like – and appreciate that it is nothing personal. It’s just part of the process of building a successful company.

Rich Brenner is Founder and CEO of The Brenner Group, one of Silicon Valley’s premier professional services firms. Rich is a veteran executive, entrepreneur, investor, board member, and philanthropist.

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Entry filed under: Interim Management, Restructurings, Shareholder Services.

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