Discussing “Failure, Success, And Founder-CEO Succession” by Noam Wasserman

Written by Lance Hillis

Glenn Solomon, a venture capitalist for Notable Capital, wrote an article for Fortune regarding the next challenges of going from a successful startup to a “growth stage company”. He muses that even after you’ve beat every initial challenge, created a fantastic team, and have found your spot in the market, you’re finally ready to get to work. Solomon remarks how scaling a business becomes harder and harder as the law of larger numbers take over.

You have to get better as you get bigger. One key way to do this is to find partner companies. Another method is to stay focused, and if you are to expand, making small bets in adjacent markets help expand the business while continuing to invest in what has made your core business successful, without stretching your resources too thin. Even as a founder who gears themselves up for their startup to transition into a growth stage company, it’s more often that you’ll see yourself replaced than not.

Founder Succession

Wasserman brings up the situation of Lew Cirne, who was the sole founder for his JavaScript troubleshooting startup, Wily Technology. Throughout this process of him building the product, hiring on professionals who were paid more than himself, and growing through multiple rounds of funding, he was a resounding success as a CEO. However, he was still eventually asked to step aside as CEO by his VC investors. Lew questioned what he had did wrong throughout the process, but the reality is that by the third round of fundraising for startups, more than half of the original CEOs had been replaced. This was not an uncommon occurrence, and is in fact, the norm, for a founder-CEO to be replaced with a “professional” CEO.

Succession or replacement of a founder-CEO can be initiated by his or herself, the board of directors, or through investors, with a majority of those succession plans initiated by the latter two parties. It is always a difficult process all the same. When a founder decides to step away, this is typically the most obviously easiest transition. CEOs who choose to voluntarily step down are typically more motivated by wealth rather than control and typically choose to step aside due to performance related issues, but usually achieve more control, such as Mike Brody, the founder-CEO of Transitive. He stepped aside as CEO after feeling it was time, following a slip in company performance. Therein, he was able to maintain his position as chairman of the board, enabling him to retain some control. Those CEO’s who are more motivated over control, and choose to fight without leverage, usually end up losing even more.

Why is it that founders are replaced though? The seeds are planted early, but two fields of focus being product development and fundraising are the two data points that Wasserman states are crucial in that decision. The role of a technical founder changes drastically when they go from product development to business management. On top of managing new modalities of business, hiring new employees, and attending sales calls, there’s a degree of financial criteria that most founder-CEOs aren’t privy to. This is a scaling issue. Those who got the company from a startup to a growth stage company, including their employees and founders, may not be viewed as capable for the next stage of growth, and may be pushed out. This, additionally, tests a founder-CEO’s loyalty to those who stuck by him or her in the startup days, as friends and family members are pushed out.

On the other hand, success at fundraising is another critical challenge. Throughout each round of funding, founders cede board seats to investors in exchange for capital used to aid company growth. As founders cede power, they soon expose themselves to losing a majority of voting power and the chance to be fired. In Lew Cirne’s case, during the third round of funding, they felt it necessary to find an individual who had a sales and marketing background. He was kept around following his replacement as the CTO, but they already relegated his technical responsibilities to others. He found himself being more of a figurehead, a mentor to his replacement, Richard Williams, than having an active role, but this was what was needed to ensure a smooth transition. On the other hand, a founder who stays and maintains too much control can drastically impact the performance of a company as well.

All-in-all, in a startup, a founder-CEO is more than likely to be replaced. It’s the nature of the beast. Initially the board of directors may coach a CEO through new obstacles, but in reality, they have been planning for a replacement before they’ve even met you. It’s a cruel reality to face, but one to keep in mind when weighing your options. This is why you must think deeply on your motivations in starting a company, what it will take, and what you will face.