If, When, And How To Avoid Hiring A CEO

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Where I Went Wrong, Second Annual Edition

Editor’s note: This is Part I of a two-part guest column written by legendary Silicon Valley investor Vinod Khosla, the founder of Khosla Ventures. In Part II, he will examine the signs that it might be time to hire a CEO. You can follow him on Twitter at @vkhosla.

Though debated among some venture investors, in my view, it is always better for a founder to grow into being a CEO. When there’s a choice, the founder’s vision, culture, and approach are usually more important than “good management” alone. While I’ll offer some insights for investors, this piece is primarily addressed to the founders themselves. I’ll start with some suggestions for buying time to learn and grow into the CEO role.

Build A Complementary Team

Being supported by a strong, operating-type team will allow you to focus on leading your company’s vision, culture, and performance standards while your team executes. You don’t have to be good at everything if you build the right team and have the self confidence to learn from it. Be willing to hire people who are better than you and who have skills or experience in areas that you don’t. Of course, this advice doesn’t work in every situation, as it depends on your own strengths and weaknesses. From my experience, here are a few team-builder examples:

John Hering (CEO/Co-founder of Lookout). When we invested in a Series A round for the smartphone security company, John was an unlikely candidate to grow fast enough to continue successfully as CEO. But he was able to because he built an exceptionally strong and complementary team and was very open-minded about learning from them. Of course, the company’s needs will change, and his hires over the next few years will determine the future of Lookout and his own career path.

Jack Dorsey (CEO/Founder of Square): Jack learned a lot from founding and running Twitter, and he started Square with those lessons in mind. He built it differently from the ground up in late 2009 (KV led the Series A). Keith Rabois joined as COO less than a year later in August 2010 and has proven to be an excellent complement while Square has grown explosively. Jack pushes the vision, culture, and design, while Keith ensures executional excellence.

Danielle Fong/Steve Crane (LightSail Energy): Steve and Danielle are another complementary pair. Danielle is a brilliant scientist who drives the vision and more, while Steve manages the team in the CEO role. Their initial market is electric grid energy storage, and they have many technical and market risks to sort out. According to Steve, Danielle’s most important role is to make sure that everyone’s working on the right things. “Her role is far from being only technical, as managing priorities is a big part of driving the vision,” he says. “She’s the best pure entrepreneur in the company.” To ensure continued success, the company will likely benefit from expanding the leadership team to include deeper market knowledge and product commercialization expertise.

Assess Yourself

Honest and informed self-assessment is critical. An experienced inner-circle/kitchen cabinet may be the most helpful tool for assessing your skills and what the company needs. Foster an open culture that challenges your own view and destroys any tendency toward group-think. If you have read Daniel Kahneman’s Thinking Fast and Slow, you realize how easy it is for any of us to fool ourselves. Our minds are not as rational as we believe while being quite good at rationalizing what we believe.

You should also get advice from the outside: disinterested, objective help that is tough and critical but doesn’t include any governance (think “CEO coach” or “trusted critic” — anyone who’s experienced and will be honest with you). It could be an entrepreneur who has seen CEO transitions from the perspective of a board member, with both positive and negative outcomes. Khosla Ventures does its part by favoring brutal honesty over hypocritical politeness in our feedback, while supporting entrepreneurs in their growth objectives. This isn’t always the most comfortable, but it is very valuable if you as founder want your company pushed to greater heights and bigger things or to avoid risks that could be anticipated.

David Friedberg, CEO of The Climate Corp., views assessment as a mindset issue that is symptomatic of failure and success:

The skill of being self-assessing/self-critical goes hand-in-hand with getting your company to a point of success – ask yourself: Are you the entrepreneur that always responds to the question ‘How are things going with your company?’ with ‘It’s great! We’re the best.’ or ‘We are facing some meaningful challenges, but I think we have a plan that gets us over them.’ So many entrepreneurs answer in the former tone, and they are typically the least self-aware and self-critical. I think being self-critical is a great skill that goes along with being objective about your business’s shortcomings and working constantly to improve.

John Hering adds that he has found it very constructive to do regular 360 self-reviews, where he will personally review his performance and collect feedback on strengths and weaknesses from the team. Reward constructive criticism by your team; this is tangible evidence of an open and intelligent culture. Constantly ask them “What can I do better?” and assess whether you’re getting honest and constructively critical feedback. It’s very hard for a CEO to get good feedback, since for employees who depend on you, it’s so easy to say “the right thing” vs. the brutally honest truth – it’s often necessary to dig it out by asking the right questions and building relationships.

It’s important to think about not only your skills and abilities, but also your interests. As a founder, how do you want to spend your time? As the company grows, the tasks of the CEO include not only setting the vision, but also guiding the execution, ensuring necessary funding is in place, building the team, and managing resources. Day-to-day administration, such as conducting personnel reviews, can take an inordinate amount of time, so augmenting your team with a CEO, president or COO is something you may consider in order to maximize your contribution to your enterprise.

Engage With Your Board

Open discussion with your board is necessary. If you can’t discuss the company’s needs and risks with them, try to get a new board (or at least try to replace some of them). If you can’t get a new board, you can often change its bias by adding an influential person with the right perspective. When facing challenges with board members, sometimes spending time one-on-one to openly discuss their concerns and reservations is your best route to building a stronger personal relationship and reaching mutual understanding free from the political dynamics of a formal board setting.

Lookout’s John Hering says:

I strongly believe that choosing your investors/board members is a function of recruiting, especially for a first-time CEO. Bringing on board investors that have operating experience can be invaluable to helping a founder/CEO scale – from direct CEO coaching to recruiting key executives.

In my view, other than hiring or firing a CEO, a board should not make any decisions. In private entrepreneurial companies, the board’s role is only to assist the founders by giving tough and honest advice (this is why we call our business “venture assistance” and never refer to Khosla Ventures as investors). Our ideal is often to get a sitting or recently retired CEO on the board who relates well with you, so you have an operator who gets it. Too many boards think they are in the governance business or the decision-making/voting business, which causes management to set up an information wall that blocks honest discourse.

I feel a board shouldn’t have to vote on anything except their confidence (or not) in management. In 25-plus years of being on boards, I have never once voted against a management team except on the question of whether the CEO should be changed. I feel free to argue informally, to have real, sometimes uncomfortable discussions, and to leave the final decision to the team that will execute it. It is hard for a team to execute well when it does not agree with what a board voted to do, or conversely to be fully honest, open and objective about all its alternatives if they believe the board is going to make the final decision on an issue.

The founder of Excite, Joe Kraus, felt I was pretty tough on him at times, but he once told me he gauged how important I thought it was to make the right decision (some decisions are more critical than others) by observing how hard I pushed a point of view. That is exactly my modus operandi, but I always leave the final decisions to the team. My role is to make teams think about things they are ignoring and to push them to greatness without ever making a decision for them. I often take positions I don’t believe in just because I think the team is not considering a certain perspective enough. I have now mostly stopped sitting on boards so I can focus more on exercising influence without authority. In companies where we have majority ownership, we will often avoid having any KV partner/employee board members if the company has a good board so we can give the team truly independent input.

Monitor Your Company’s Culture

Trust and openness are key to good dynamics within a company, while negative energies start a vicious cycle (like passive aggressive behavior vs. open discussion, excessive politics vs. meritocracy, undermining co-workers/leaders vs. constructive criticism and support, assigning blame vs. taking ownership). Address these dynamics early and avoid the downward spiral caused by increasing bad blood and lack of mutual understanding. This is relatively easy when things are going well, but founders and board members alike must be vigilant as the organization goes through challenging times.

Being constructive but honest about concerns early may avoid cycles of distrust and a degradation of working relationships. A focus on brutal but constructive honesty is critical to avoid these sorts of challenges. Remember, you don’t know what you don’t know, so you want to be very critical about your own perspective as well, instead of reacting defensively to critiques. Sometimes, but only after all else fails, it is necessary to cut out the source of the sore, which is often a specific individual that is causing too much of this negative cycle.

With respect to team relationships, The Climate Corp.’s David Friedberg shared some of his experience:

I think part of avoiding negative cycles may be forming the ability to dialogue openly with your direct reports and broader team. For example, after something as simple as going out to dinner with members of my team several times, we could much more comfortably have heated disagreements without causing long-term harm to our relationships, and without losing respect for one another. Prior to those dinners, I was just the CEO and my word was final, so they weren’t sure if stepping on my toes would cause irreparable distrust/discontent/etc. Building personal bonds enables stronger professional critique and progress.

Personally, I most want to engage with teams when I know I can challenge them, have difficult debates and arguments, and push them to sometimes uncomfortable limits, yet have them remain totally comfortable that I am looking out for their best interests. This reminds me very much of my parenting duties: My children never doubt that my goals and motives are to help them, but they don’t always agree with what I am saying. In the end, my children also know they will get to make the final decision and I will support their decision. Boards should push and challenge management teams without ever making the team feel like they cannot make the final calls or that a board member’s interests diverge from that of the team.

Why Am I So Supportive Of Founders?

Simply put, the success of a company often hinges on its execution of the founder’s vision. I prefer great vision and bad execution to bad vision and great execution. Companies are not “fire and forget.” In most cases, founders need to be continually involved to ensure that the vision is pursued relentlessly and updated incrementally as the team gains more experience. Every tactical decision a company makes should be tested for its consistency with its vision or the ship will drift toward convenience and short-term actions instead of staying true.

I firmly believe that staying true to a vision is best achieved by having a founder as CEO. It is almost always preferable over “hired guns” that can help you execute on the vision but seldom understand it as well and are often too pragmatic. That said, a management hire can be very much a champion of the vision and a true partner with the founder. Good managers are seldom unreasonable, and it takes “unreasonable people” to do the sorts of great things that normal reasonable people wouldn’t consider until you showed them enough proof that it can be done. For that reason among others, boards should try as hard as possible to keep the founder in the No. 1 slot with a good president/COO or an otherwise strong execution team under him or her. This will preserve their instinctive feel for the new space and the new rules.

Keep in mind, however, that these are generalizations and can of course be wrong. The specifics of a circumstance matter, and can change the optimal course of action, so understanding this is one of the larger contributions a board can make as a company grows beyond about 30 to 50 people. There are many other considerations regarding which roles to fill with manager types. Finally, it is important to remember that the best talent may not join without a CEO title, so a founder sometimes must balance between the vanity/utility/clout of a title and getting the best talent on the team. In the end, industry dynamics and rate of change often influence the best course for a founder to follow.

There’s also an intangible aspect to it. Friedberg remarks:

I think I am always a lot more willing to push/instigate dramatic/radical change than anyone else around me. I just know very clearly why we did what we did before and why we need to change it now, as we learn more about the market, etc. I think people that are hired to a company tend to lean towards doing what we’re doing now and not mess things up, because that’s what they joined up to do. I guess you could say that because I had a strong hand in building the sandcastle in the first place, I’m perfectly happy to knock it down and rebuild a better one 10 feet away, if need be.

Regardless of your management team structure, founders should drive their strategy/vision as long as possible to preserve company values. This is important because intuition about the markets is essential in my view. Usually, good managers/leaders who make good hired CEOs are not great at this “feel it out” approach – founders often have a better sense of what a minimum viable product ought to be, how to iterate quickly, when to pivot, and when conventional wisdom needs to be thrown out the window and reinvented. That’s another reason that I prefer founders as CEOs with a hired manager/leader as president. But either mix can work (founder as president or CEO); it just depends on the founder’s personality. At the end of the day, it’s critical to hire a CEO/COO/president who has passion for the company’s vision and truly believes in and has respect for the founder.

A traditional manager becomes important when the critical questions are things that have been seen before, like: “How sales people work” or “What constitutes a good VP of sales?” or “What sales cycle or sales economics really are in an existing area?” A board needs to differentiate between serving existing markets with better product vs. creating new markets or channels or “new wisdom” on how to do what well. Is it important to know customers or to “re-educate” them? All of these questions and the constituency of the current team determine how best a founder/CEO role should be configured if the interest of the company is what is being optimized.

For example, Scott Cook founded Intuit in 1983. Bill Campbell served as CEO from 1994-1998 and has since served as chair of the Intuit Board of Directors. Bill essentially executed on the company’s vision for which Scott was the “keeper” before, during, and after Bill’s CEO tenure. This partnership was based on trust and mutual respect. When Scott was looking for a CEO to help lead Intuit, finding someone with shared values was critical to him. He knew Bill had the operational skills to lead the organization forward, but his focus in the interview and reference process was “Do we share the same values about how to run the business and lead its people?” Coming into Intuit as the new CEO, Bill believed it was critical to keep Scott engaged and active in guiding the company’s evolution. He believed in honoring and respecting the past as you move toward the future. It was not always easy, but the two worked hard to craft roles that played to each other’s strengths and leveraged their partnership. They didn’t always agree but they always acted with respect and trust.

Though it rarely happens, the best situation may be similar to Google’s Larry Page and Eric Schmidt, where Eric helped as an interim CEO and close partner for a few years, and then handed the job back to Larry. Pulling this off really depends on having a board and lead investors who truly understand this process and do not feel that an experienced CEO is always better.

Friedberg said:

I think that I and a lot of founders try to become great managers as the business scales, but too often we revert to our standard state and just disappoint. While we can aim to become better managers, at the end of the day, we need a team of folks that are good managers of people and know how to coordinate them to help us achieve our goals/vision. I think that being a good manager is one skill that is almost universally learned. A (young) entrepreneur can be great at science, tech, negotiations, sales, etc. but generally doesn’t start early in their career as a great people manager – it is simply not an innate talent. As a result, this is the one key trait to look for in your direct hires, and I think it’s also the one thing I’ve seen folks fail at doing well – generally, they want to hire “young and smart” (mimicking themselves) and in so doing, hire first-time managers who may be great at particular functional skills (writing software, negotiating, design etc.), but lack the experience of managing/organizing/aligning people.

In general, founders do better when path-to-market is very exploratory and rules need to be broken and “new wisdom” needs to be created. Managers/leaders do well when the path is clear, the industry is entrenched, and the product is an “expected service.” In old markets, it’s critical to have a laser-focused VP of sales who knows how to incentivize and motivate the sales team to go further than they would on their own. The playbook differs depending on whether you need to simply know your customers well, as any good salesperson does, or if you have to re-educate them and evangelize a totally new solution to problems the customers may not know they have.

Of course, nothing prevents the founder from being or becoming a good manager (again, it is almost always ideal and it’s often important to employ tactics that buy the founder more time) with time to learn management and leadership skills. Taking the plunge and jumping without a parachute is especially valuable when there’s little to lose beyond investor money, but a lot to gain. However, as a company becomes more valuable, you need to worry as much about preserving the value that has been built as about building new value through new initiatives. This delicate balancing act moves a company from a “startup” to “traditional company building,” and should change the approach of the founders and the board. Suddenly there is more to lose and more to preserve! There is a time in a company’s history when there is value to preserve as well as to create.

Friedberg comments:

I agree with the wisdom that as the business scales, we need to be more cautious in business-building/changing. Sometimes I am too quick to react and push for change, and I need to be surrounded by folks who can help temper this with more thoughtfulness about the course of action.

LightSail’s Steve Crane cautions, however:

My sense is that failure to drive a successful product line to the next level due to concern about hurting its value happens far more often than the reverse. It’s a situation that’s more likely to occur when “professional” management is running the show in my experience. There’s a key balance to be struck between overly reckless founders and overly conservative managers.