Signs It Might Be Time To Consider Hiring A CEO

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Editor’s note: This is Part II of a two-part guest column written by legendary Silicon Valley investor Vinod Khosla, the founder of Khosla Ventures. In Part I, he offered suggestions to help founders determine if, when, and how to avoid hiring a CEO. You can follow him on Twitter at @vkhosla.

As a founder, there sometimes comes a point in your company’s growth trajectory when you need to hire a CEO or president from the outside to get to the next level. This can be an incredibly difficult decision to make, but it’s better for you to make the decision yourself than to be told by your board that they’re hiring one whether you like it or not. That situation is avoidable both by minimizing the chance the hire needs to be made, and also making sure communication lines with your board are wide open so you’re part of the process in picking a CEO complementary to you.

Unfortunately, unreasonable founders sometimes get in the way of good execution, especially when a company gets large enough to need structured management. It’s not always possible to keep the founder as CEO, and the best indication of whether a company needs a new CEO usually comes from the management team. New team recruits may not want to join, old ones may indicate a desire to leave or get disengaged, and the whole team may approach a board requesting a change.

The first stage of a company’s growth is one in which leadership generally happens in a “hub and spoke” style, where the leader/CEO/founder(s) is (are) at the center of most decisions and integration among functions happens mostly by the CEO. A CEO and his or her co-founders operate like a “kitchen cabinet” to make most decisions relatively informally and outside any normal process. This is often what I like to call the “feel” stage, or “make it up as you go along.” There are usually fewer than 30-40 employees, and many things are in flux as the collision of the founders’ vision and the real world is still working itself out.

As a bit of a tangent – make note that the quality of the people you hired at this stage into nearly any role are critical to your future success. You want the gene pool to start A+; this will set up a positive cycle and draw more and more top people to your company. See our papers on Gene Pool Engineering and Recruitingwhich dig further into this topic. If you cannot hire the A+ people, get someone who will attract them, because a company becomes the people it hires early in its life! Hiring the hirers of the future is a critical factor to future success.

Stage two of a company’s growth requires more integration, coordination, and sharing of leadership with the team as they begin to work cross-functionally and define processes and shared metrics. This is generally the stage where you want to start surrounding yourself with more senior people – both those who know the space, as well as those who bring experience from analogous areas to help you disrupt it. Usually, it’s best to have a mix of these different backgrounds, working well in “managed conflict” or “organized chaos.” At this point, you have to ask yourself as a founder – can you do this CEO job? Do you need to do it? What really matters to you most? Do you really even want to do it or just think it’s “expected” by your colleagues, family, and friends? Would you rather focus on vision and let someone else handle the details? Soraa and Lanzatech are two examples of companies with founders that looked forward to bringing in CEOs at this stage.

  • Sean Simpson (founder of Lanzatech) is a brilliant scientist, full of ideas and vision, but he came to us with what could only be described as a bad pitch with some brilliant nuggets that we picked up on. We bet on his vision and he built an excellent research operation in New Zealand, but when it became time to scale, we mutually agreed to bring in a strong business-minded CEO who understands the space well.  We were fortunate enough to find Jennifer Holmgren from UOP, who has been an excellent partner for Sean and has helped the company get to the next level with several partnerships worldwide that would have been difficult for Sean to put together. In Sean’s view, “The ideal timing for recruiting a CEO is when the technology just begins to demonstrate commercial readiness, and thus the company is on the brink of securing commercial interest.”
  • Steve DenBaars and Shuji Nakamura (co-founders of Soraa) were luminaries in LEDs, and did a great job building the technical organization around their fundamentally differentiated GaN on GaN technology, but they lacked critical business and operations skills. Steve acknowledged that he wanted to do it all, but was involved in the CEO recruiting process from the beginning and came to understand the critical importance of having strong business and operations leaders on the team. Now the company is scaling production quickly, with a professional management team onboard. “One insight for founders to recognize is that hiring a CEO and seasoned management team greatly increases the odds of a successful transition from R&D to product and revenue generation,” Steve says.

It’s worth taking a look at Noah Kagan’s blog post “Why I got fired from Facebook” for context on how excellent individual contributors (founders, but others as well), can end up being bad managers or even bad for an organization at a particular phase. There are different types of people in organizations and they have value at different phases.

Stage three of growth occurs when your business requires more functional depth and more consistent, integrated execution. Business processes need to be more defined and predictable, and the CEO becomes more of an orchestrator to make sure that each leader is driving functional excellence and all the functions are integrated across the organization. This helps to meet overall goals in keeping with an agreed upon vision.

As the company grows, you should ask yourself, what are you, as the founder, doing well and what don’t you have time for? Can you bring in a “hired gun”/partner to cover some of the time-consuming but less critical/less top-of-mind/less well-executed aspects of what you do? Maybe the right person will even help you stretch your vision. A good leader should strive to have 50 percent of their time free at the beginning of each week. This way, you can be proactive about where you want to lead instead of being reactive and buried when urgent events, emails, calls, and requests pop up. At some point, you may realize that you do not have the skills or experience to lead the organization on to its next stage of development, and/or it may be moving so fast that you don’t have the time (or often the interest) to develop them. This isn’t failure – it’s success!

There comes a time in many startups’ lifecycles when bringing in an outside CEO or president is necessary and good.  They’ll bring vital management bandwidth, knowledge to respond to the unknown unknowns, and many other executionally important attributes to help make your vision a reality.  The hardest part is trying to hire before the need – don’t wait too long. This means understanding your challenges ahead and anticipating when they might be too much to handle alone.

You should try and hire someone that shares your fundamental values about people and leadership but brings complementary skills. Don’t rush into a decision and don’t settle, but realize that your tendency may be to block any hire. Be proud that you’ve built enough value to attract a great CEO and build something even more valuable! Or, if you haven’t built enough value for whatever reason, give your shareholders a chance to recoup some value from their investments. There won’t always be consensus, because there are many hard judgment calls to make in this process, and everyone has different biases, goals, and aspirations. But the earlier you shore up the needs of your company, the less likely it is that the situation will become unpleasant for you. More likely, acting early will provide leverage and bandwidth.

Steve Crane, CEO of LightSail Energy, offered a perspective that applies to an important subset of companies:

The key transition point is when a start-up is getting ready to go to market with its first product, especially if that product is a substantial one. The company goes from being inwardly focused to being externally focused. Of course, it’s critical from the beginning to understand the market need in detail and to establish close ties with early customers. But, in my experience, everything changes when you start to ship. Completely new challenges show up all at once – customer support, scaling, managing a sales force. Most founders fail to proactively prepare for those challenges because they’re so consumed with the task of getting that first product out the door.

Avoiding Common Pitfalls Of Management Transitions

It is a common misconception that CEOs need to know the business or technical area in detail in order to be effective – this is most often not a requirement! An excellent leader with the right mindset and experience in related areas can often be better than a person with deep area expertise who “knows too much” and is overly attached to conventional wisdom vs. how things could be different.

Some of these management hires don’t work out (I’d say roughly 30 percent) and some end up not working well with the founder while potentially doing well for the company. Save your “bullets” to admit a hiring mistake and effect a change if you or the board made a hiring mistake. As hard as they might be, the best decisions you can make are ones that benefit the company, and there may come a point when it’s time to leave your baby in others’ hands. To minimize the likelihood of this happening, it’s important for the board not to force a hire without the founder’s buy-in. They should at least be transparent and say they will do it despite a founder’s objections. Brutal honesty helps greatly in this situation, and the worst case happens when the board pushes a candidate and you hold back and don’t share your reservations.

Also, hiring outside management shouldn’t be viewed as the first step in the founder’s exit. The best hired CEOs will still let the founder’s role and vision flourish while they help successfully execute it. Usually, founders are better at setting, iterating and evolving a vision, while the CEO/managers are good at helping an organization achieve the vision. As I said in Part I, 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?”

Giving up the CEO role (or creating a president/COO role) is not easy, but it can be done gracefully so that you, as a founder, preserve your “silver bullets.” A productive transition can dramatically change the influence you have once you give up the job, and it will set the company and yourself up for long-term success.

David Friedberg, CEO of Climate Corp., has an interesting perspective (not one I completely agree with) on when a founder should stay or go:

A lot of companies have a limited opportunity in the end. Their technology or competency may have limited scope, as opposed to others that may be extensible to other markets, areas, regions, business models, etc. (i.e. Google vs Demand Media). I think when there’s a role for the founder to continue doing that first stage of innovation-driving in perpetuity, then you should stay, and will be happy doing what you do best. Otherwise, if a company scales into its ultimate opportunity and enters the optimization phase, then you should go, because your skill set does not have a great place in the now-scaled enterprise.

But make no mistake, sharing leadership can be a challenge. It’s important to have one CEO, especially as the company starts to grow. This is why keeping the founder as CEO and getting a president and/or COO for delegation makes things work better and keeps the vision intact. But (1) delegating away real authority voluntarily is key, as is being confident enough to trust your team and patient enough to not need to act as CEO on every decision. (2) You will generally not get as good a person as president or COO, as you would if you give them a CEO position. There are tradeoffs.

Entrepreneur/manager conflicts often result from entrepreneurs not completely understanding the real constraints, tasks, or roles of their core executive team, and sometimes it is the CEO who does not understand the reason they were hired. A good venture firm will have portfolio founders who have run into these situations and can advise you.

Building a startup from the ground up is a very challenging and rewarding task. I firmly believe that the key to successful companies rests most often on the founders driving the vision. However, it is almost as important that the founders have enough self-awareness to recognize when they need help. Sometimes a founder is able to steer the ship as CEO from the bare vision all the way to huge success, and we prefer this when possible, but they’re almost never able to do it alone. Working openly with your board and your team to determine what executive additions are needed at various stages is critical to your company’s success.