Editor’s note: This post was republished with permission from the Ewing Marion Kauffman Foundation’s Growthology blog.
This post is the first in a series on CEOs. The first is on CEO-Founders, the second will be on CEOs as the new private equity, and the third will be on CEO pay.
Season 3 of Silicon Valley comes out next month. This season the Pied Piper team is being replaced by a formalized CEO. So, what’s the deal with professional CEOs coming in to manage founders’ firms?
Founders are the most important person in an organization, because without a founder, an organization would not exist. However, after a business is fully actualized, the CEO becomes the most important person in an organization. The CEO is paid the most, is the top of the bureaucratic food chain, and has full authority on the decisions made in a company. It is the hope of most founders that they will also get to be the CEO, but that is not always the case.
We’ve seen it many times. Steve Jobs started Apple, was fired from Apple, then later re-hired. The same thing happened with Jack Dorsey and Twitter. Jerry Yang was fired from Yahoo in 2009, only to have five CEOs succeed him in four years. Martin Eberhard co-founded Tesla and acted as the CEO for one year until Elon Musk took over. An outlier in technology, Mark Zuckerberg, has continued to act as the CEO of Facebook, with the help of a very active COO—Lean In queen, Sheryl Sandberg.
Founders and CEOs provide vital human capital to an organization. However, as organizations build wealth, as they expand they’re multi-functionality, and as needs from boards, investors, and consumers change, so do the needs from an organization’s CEO.
The struggle is real for founder-CEOs. Why?
Financing (More money, more problems)
Small Giants by Bo Burlingham explains that some companies choose to stay small in order for the founder-CEO to continue to have the freedom to run a company he or she is passionate about. But for many companies, growth is the goal for success to be realized. In his book, Burlingham details the story of founder Martin Babinec of the now public corporation, TriNet. The transition to high equity is in most cases at the cost of freedom. More money, more problems, as the story goes. As Babinec’s company grew in size, Burlingham explains:
“Yes, he was the CEO, with all the perks of the office, but he was by no means a free agent. The responsibilities he’d taken on governed how he spent his time, whom he spent his time with, where he went, what he did, and when he did it.” Above all, they determined the kind of business he would have.”
An organization’s growth is limited by capital, and thus, the decision to go big, is the decision of a founder to lose some of his or her independence. In the case of Babinec, he ultimately allowed his company to grow, which dictated where he raised his kids, how he spent his time, and decided what type of organization TriNet ultimately became. He continued to act as CEO for 20 years until he stepped down.
Founder-CEO Capacity for Organizational Management (You have distracted from my creative process)
Once organizations become very valuable, the skills and abilities of the creative innovators who started the company, are often misaligned with that of a successful organizational manager (i.e., the professional CEO).
With companies that are bringing in large amounts of investment, a professional CEO transition from founder-CEO is almost expected. In the Founders Dilemma by Noam Wasserman, Wasserman notes that from finance investment Round-A to Round-D, founder-CEO drops from 75 percent to 39 percent. In fact, by Round-D, 23 percent of firms are on their third CEO.
Wasserman describes two scenarios for why founders are moved out of their role as CEO—voluntary succession, and fired for failure. In any case, these decisions are triggered by the board of a company 62 percent of the time.
Wasserman explains, voluntary succession on the part of the Founder-CEO is the least stressful of the CEO successions, as these founder-CEOs often have more say in who replaces them. “Founders who willingly volunteer to be replaced may be those who are most self-aware and have become convinced that the demands of the CEO job are beyond their ability.” He also notes that they may simply be burned out or wish to move on to a new venture.
Sometimes founder-CEOs are fired for failure. We have seen this in cases such as Steve Jobs and Jack Dorsey. Boards and investors look at the founder-CEO’s ability to finish development, hire an executive team, meet goals set by and with the board, and impress investors. When a creative idea developer must shift to this new identity, there is sometimes a misalignment of skills and abilities.
Professional CEOs should have the managerial know-how to keep an organization moving forward. Founder-CEOs are blessed with the creativity to innovate great new products and start influential organizations. While not all Founder-CEOs have what it takes to be long-term business managers, they provide a crucial resource for any new company—the idea that starts it all.
Alex Krause is a research assistant in Research and Policy for the Ewing Marion Kauffman Foundation, working on the Kauffman Emerging Scholars program and assisting in the development of the entrepreneurship and education dashboards. She also assists in writing literature reviews, blogs, articles, and information briefs on economy, policy, entrepreneurship, and education.
She previously worked as the project director of Building a Community of Readers for the Kansas City Public Library. Earlier, she was an AmeriCorps VISTA for the Office of Mayor Sly James and his Turn the Page KC reading initiative and an economics analysis intern for the U.S. State Department in the U.S. Embassy in Berlin.
Krause is a contributor of Kauffman’s entrepreneurship research blog, Growthology.org, which is syndicated by Missouri Business Alert.
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