NEW YORK, New York — The fourth NetForum meeting took place on March 14th, 2013. The discussion centered around a hot issue in the world of fast growing Web companies: the respective roles of the Founder CEO and the Professional CEO. This issue touches one of the foundational elements of any business, the management, but is of particular relevance to fast growing companies because they can run through growth stages very quickly — very often there is no time to allow a founder to retire, or mature, and a transition to a professional CEO if not done perfectly can cause the business to miss a beat and just collapse. Investors will not fund a business without a strong management, or the ability to install one quickly, and strategic buyers always look to secure the continued participation of key employees in a M&A transaction to ensure they are not buying a company devoid of its creative motor. Jamie McGurk, the in-house Corp Dev/M&A partner at Andreessen Horowitz in Menlo Park, joined the group to share his insights on the topic. His role is in line with Andreessen’s public stand that they prefer to deal with founder CEOs (http://bhorowitz.com/2010/04/28/why-we-prefer-founding-ceos/) and that THEY, as a firm, need to mold themselves to work with founder CEOs.
Andreessen Horowitz (“AH”) was founded to be the model VC firm that Marc Andreessen and Ben Horowitz wished they had had as an investor when they were founders at Netscape and Netops. This is in contrast to the traditional VC firm with a small number of General Partners, each sitting on multiple portfolio company boards and each an island of knowledge and contacts, without the institutionalization of information sharing across the firm and without a way to systematically add value to portfolio companies in all the areas where they need help. AH has 70 professionals in HR, Sales Operations, PR, Corporate Development, Research, and of course Investment, that are geared to generate deal flow, analyze it, deploy capital, help companies recruit human capital, generate sales, do deals, raise money and exit. In the Private Equity sector there is a trend now towards “operationalizing” – meaning adding to the PE firms people with operating experience who can add value to businesses to complement and potentially supplant the much maligned number crunchers. These are similar ideas in parallel fields challenging the status quo, until they create a new paradigm…
Studies showed that within 3 years of an investment, VCs had replaced somewhere between 50-70% of CEOs. Some CEOs have the self-awareness that they are not the right person for the job, either because that’s just not who they are, or because the job outgrew them, so they have asked to be replaced. Many around the table supported this idea, having experienced it first hand or having seen it in their companies or in companies in which they had invested.
An issue that was brought up is that sometimes the rank-and-file knows that the CEO is not the right person for the job but no one on the Board is doing anything about it. A comment that was made by a serial CEO is that his experience was that VCs were leaning over backwards not to replace the CEO and that sometimes the Board acted too late. So instead of there being an evil plan to go in and replace the CEO, there could be an opposite predisposition, a reluctance to take action when needed. Investing in good people and helping them become good CEOs could work but failing to either a) truly help a CEO that is doing poorly or b) replacing him or her fast is a breach of a Board’s fiduciary duty. But one can understand why group dynamics can prevent 5-7 people working as a group to eject one of their own from his or her seat…
Another question that came up was whether the founder-led companies actually produce better results for investors. There is data that indicated that founder-led CEOs generated better IRRs than those led by professional CEOs. The data was challenged by some of our members on the basis that it was inherently biased. Basically, if you have a great company led by a great CEO, why bring in a professional CEO? Hence, the professional CEO hiring may be an indicator of sub-optimal performance compared to the ideal case of the founder who gets it all right and rides into the sunset. This makes sense as any CEO change causes a disruption and a loss of institutional knowledge, so the mere fact of replacing the CEO, especially a founder CEO, is a high-risk endeavor and it can take a while for everything to settle down. If it works out, the professional CEO brings a productivity boost that should make up for the disruption caused by the CEO change. But sometimes it does not.
Participants discussed the fact that the founder is often the embodiment of the company and it is hard for someone new to come in and become all of that. Yet, it was pointed out that it is an absolute requirement, that the CEO of a startup, founder or not, must convince the team that he or she is now the soul of the business. Professional CEOs who come in to replace a founder may never have that credibility, or may need to work extra hard to acquire it.
The discussion shifted from a focus on Founder CEOs to “founding teams.” Several people work together to start a company and over time, someone emerges, a natural born leader and becomes the unmistakable CEO. Sometimes, the founding CEO develops the awareness he is not the right person to do the job as it has evolved and gets a new CEO to replace him. Reid Hoffman wrote a nice blog on his experience bringing Jeff Weiner to run LinkedIn, describing it as bringing a new founder, even if he was not the founder.
Members discussed the importance of securing the participation of founders when they are still CEOs in the context of corporate M&A. Members who have responsibility for M&A for their companies discussed the importance of making a proper transition that captures that knowledge base during M&A transactions.
There was also a discussion of Richard Branson, an illustrious founder CEO, who is the embodiment of his company to the outside world. Many wouldn’t have hired Sir Branson when he got started but that he has done a great job understanding the need to surround himself with great talent, allowing him to remain and succeed as CEO for so long.