13 Comments

Summary:

It matters because if you want to be The King of your startup, some new research out of Harvard Business School suggests your days are likely numbered. HBS’s web magazine Working Knowledge has another useful piece today that addresses the reasons why founding CEO’s are so […]

It matters because if you want to be The King of your startup, some new research out of Harvard Business School suggests your days are likely numbered.

HBS’s web magazine Working Knowledge has another useful piece today that addresses the reasons why founding CEO’s are so often replaced by their boards of directors. It also reveals a frustrating paradox: “when founder-CEOs do really well, that also increases the chances that they’re going to be replaced.”

The Founding CEO’s Dilemma: Stay or Go? is based on a new work co-authored by Noam Wasserman, a professor of entrepreneurial management at Harvard, and Henry McCance, Chairman of VC firm Greylock Partners. We’ve highlighted a few important points, including the authors’ Rich or King Test, which they borrowed from Onset Ventures. Take it to see if you’re replaceable or irreplaceable founder.

Says Wasserman to Working Knowledge:

Typically, early in the life of a company—when it is developing its first product or service—the founder who conceived of the idea and began developing it is the perfect person to lead the company … However, when that milestone is reached … The challenges within the company change so dramatically…

Now, the product has to be sold: You have to create a sales organization, manage multiple functions, deal with customers, handle more complex financial issues, and deal with a very different set of challenges for which many founder-CEOs are not equipped. … it is precisely their success that has increased the need to replace them at this point.

Of course this pattern is exacerbated when a founder-CEO brings in outside investors. VC’s, says Wasserman,often make the assumption that the person who started the company is going to have to be replaced along the way, and may therefore have a quicker ‘trigger finger.'”

Then Wasserman shares one way to tell if you are more, or less, likely to be replaced:

The Rich vs. King Test

We teach a case in our first-year entrepreneurship course on a Silicon Valley VC firm called Onset Ventures … called the “Rich versus King” test. It gets to this essential trade-off around what drives an entrepreneur: Is it the need to control the company (that is, to be King), or is it the drive for success, particularly financial success (Rich), which may require that the entrepreneur step aside once certain business milestones have been reached? Onset does not like to invest in founders who “want to be King” out of concern that they will not want to be replaced if such a step is required in order for the company to be successful.

The only founders who can assure their ability to continue as CEOs are those who don’t raise outside money from Onset and its peers.

Of course, that outside money is often necessary to build a valuable company, so King-motivated founders usually have to give up a lot of potential growth to remain King. In the entrepreneurship class, I push students to think hard about why they are choosing to be founders to begin with, and then to make conscious choices that are consistent with those motivations. The founders who get into trouble are often the ones who make decisions without regard for “Rich versus King,” and who therefore decrease the chances that they will achieve their goals because they haven’t made choices consistent with their motivations.

  1. In the case where the founder is successful and they he or she gets fired, I don’t think success is causal to termination. What’s more likely is that other board members perceive the founder is unable to best manage some aspect of the new, larger business. For example, if a company successfully develops a product and brings it to market and is then focused on sales and marketing, then the founder who had a background in new product development and engineering might not be well equipped to deal with the sales and marketing challenges the company now faces. So in this example, yes, the founder was successful (at getting product to market) but that success didn’t cause termination (instead it was lack of experience/skills in sales and marketing). That’s my $0.02 anyway.

    Share
  2. I agree with Furqan. The ‘Rich versus King’ test contains some faulty assumptions, or at least it over-simplifies what is invariably a much more complex scenario. He rightly points out that there are more than two roles required of a typical CEO, and sometimes one of those roles is one they are simply not suited to play. At that point, the role may have to be re-cast.

    In the Industrial Age, when organizations were structured like the machines with interchangeable parts running down on the factory floor, so were the jobs performed by their employees. William Whyte’s ‘Organization Man’ was a square peg who fit in a square hole. Today, successful, entrepreneurial organizations are structured not as machines but as networks. They are fluid, flexible, responsive and responsible to their environment and to the customer communities they serve. So are their employees, CEOs included.

    The rigid organization cannot survive the tremendous market currents at work in the global business environment and the rigid individual cannot prosper. ‘Rich versus King’ is a rigid, Industrial Age test being put to a Networked World.

    King, Rich, Servant, Knight in Shining Armor, Supplicant, Wizard, Sheriff, Jester (or in Furqan’s more concrete terms, Financier, Salesperson, Marketer, Engineer, Product Developer) — a great CEO might play any or all of these roles, depending on the situation they find themselves in. Herb Kelleher, the founder of Southwest Airlines, used to show up in the maintenance hangar at 3 in the morning with coffee and donuts for the night crew and sit and listen to what was on their minds. Where does it say in the VC playbook for CEOs to do THAT?

    Share
  3. Those who can, build large companies, get rich, and run them (for example, Bill Gates). Those who cant, write articles like these….

    Share
  4. I believe that the VCs want founders to “think” that they will have to be replaced, so the founders get diluted out of a position of power in the company. It depends on the experience of the CEO and if they have the ability to transform from a startup CEO to an operating CEO.

    Lets not forget that VCs often try to take control, put their monkeys into a company and then drive it into the ground because they don’t know the business. I can name five companies in the NW that have had this experience.. TR>

    Share
  5. As Anatoly alluded to many of the big financial success stories like HP, Microsoft, Apple had their founders as CEO or other top positions for quite some time. Yes, the odds are that one person can’t (or shall I say doesn’t want to) handle the CEO role throughout the course of a business but if you go into a deal thinking that then could you be setting up a self-fulfilling prophecy?

    Share
  6. [...] Do you want to be Rich, or be the King? [...]

    Share
  7. [...] successful, even iconic, entrepreneurs have difficulty “letting go.” In a way, we all want to be the King, not just Rich, of our startup domains. The reporter, Max Chafkin asks some other silly, but fun questions of [...]

    Share
  8. [...] technology founders would love to see their companies go public, especially those of the Rich, rather than King school. The IPO market hasn’t recaptured the heat of the dotcom boom (not a bad thing!), and one [...]

    Share
  9. [...] your aim is to build a sustainable company (recall our ‘Rich or King?’ question), you really must have a succession plan in mind, if not in place. At the least, you need [...]

    Share
  10. [...] I am apparently less motivated by the Fame Factor than some. Guess I’d rather be rich than famous. (See: Do you want to be Rich, or be the King?) [...]

    Share
  11. [...] Ownership and change of control: Rich or Royal: What Do Founders Want? See also F|R’s: Do you Want to be Rich or Be the King? My Case Against Venture [...]

    Share
  12. [...] Ownership and change of control: Rich or Royal: What Do Founders Want? See also F|R’s: Do you Want to be Rich or Be the King? My Case Against Venture [...]

    Share
  13. [...] something like “Do You Want To Be Rich, Or Do You Want To Be The King?” (mentioned here) was interesting, but the majority of the magazine seemed useless. I was particularly turned off by [...]

    Share

Comments have been disabled for this post