Every day, some tech startups are surpassing their numbers while others are struggling to keep going. Washio, an on-demand laundry service that abruptly shut down yesterday, is just the latest startup to lose its momentum.
There’s no shortage of ways things go wrong. Markets change. Companies underestimate the cost of doing business. Sometimes, too, the CEO isn’t getting the job done. In fact, you might feel very certain that your CEO is one of these people, and you may be tempted to complain to your company’s board members about it.
You might be disappointed if you do. However well-intentioned they may be, most board members won’t push a CEO out the door unless they have no other choice. Though VCs in particular talk up the help they provide to startups, when it comes to trouble within a company’s executive ranks, it’s, well, complicated.
“I think broadly the default is to back the CEO,” admits one investor who asked not to be named. “The CEO has far more access to the board than anyone else, and like it or not, his or her point of view tends to influence how you as a board member perceive the company’s situation. It’s sort of like, ‘Do I want to take a one-off comment, even a thoughtful one, and [give it more credence than] the interactions I’ve had with this [executive] over their tenure as CEO?’”
“Startups are hard,” says SoftTech VC founder Jeff Clavier. “The thing that no one talks about are the personal aspects of running a startup and the relationships between investors and entrepreneurs. We’re coaches and mentors, but sometimes, we’re psychiatrists, too.”
Slow down
If it’s any consolation, frustration at startups – anecdotally, at least – is playing out across the landscape as a growing number of aging startups confront an uncertain future. According to the company Mattermark, which collects and analyzes data on private market funding, late-stage deal volume in the first quarter was down substantially, with 23 deals accounting for $4.2 billion in capital, compared with 32 deals totaling $6.1 billion in the first quarter of 2015.
Venky Ganesan, a managing director at the early-stage firm Menlo Ventures, says that over the last 18 months he has received “five or six calls” from high-level startup employees who’ve grown unhappy with their CEOs.
The precise issue typically dictates what happens next. Strange as it may seem, the easy things are financial fraud or gross mismanagement, says Ganesan. Harassment is a deal breaker, too. “If someone is calling me about personal harassment or integrity around accounting, it’s immediate. You ring the alarm and get out the fire trucks.”
Anything “untoward” is the “bright line,” agrees Phil Black, the cofounder of early-stage firm True Ventures.
Unfortunately for board members and management teams alike, the problem is seldom black and white. Maybe employees no longer believe in a company’s strategy, or direct reports have lost faith in the CEO, or morale has hit a new low, or the CEO has grown detached.
Often, by the time a board member is looped into the situation, it’s also fairly late in the game. In Black’s experience, for example, the “absolutely best people tend to leave at the very beginning. They don’t want to sit around for something they just don’t believe it.” It’s the executives who leave without telling anyone why who should “almost be listened to more closely,” he says.
Ganesan is even more definitive. “By the time you get the call, it’s almost always too late for that [employee]. He or she has already decided to leave the company and basically has nothing to lose.” More, says Ganesan, “At that point, things are so toxic at the company that it’s hard to do something truly impactful. When things are going well, a company can handle some instability” in the form of new leadership. “When a company is struggling, it’s very hard to make changes.”
That doesn’t mean board members won’t do anything, but it does mean that unless the situation is dire – i.e., criminal – it’s probably safe to assume a company’s board won’t take drastic action, and certainly not quickly. Though staffers may want their chief executive axed, swapping out a CEO is “a disruptive process,” says Black. “You don’t know for at least six to 12 months after a new person joins whether you made the right decision or not, so it’s a change that shouldn’t be taken lightly.”
Stay calm
Among the many questions board members first ask themselves is whether and when to tell the CEO, which isn’t always a no-brainer. “Sometimes people just complain, and sometimes, CEOs make decisions that might not make them popular,” says Ganesan. “If I raise [the particular complaint] with the [CEO], it will put them on the defensive, so I usually try to meet first with another VP at the company and try to probe further.”
Black similarly notes that there are “always two sides to every story,” adding that “people have different tolerance levels and motivations for why they do things” and it “isn’t our job as a board member or investor to second-guess leadership and tell people what to do.”
Either way, says Black, when those calls invariably come in, it’s “important not to overreact right away and to at least appreciate that there can be honest differences of opinion about the strategy and tactics.”
That kind of cool-headedness might drive glum employees to the brink of exasperation. But it doesn’t mean they aren’t being heard. Though there isn’t a whole lot that a board can do with a CEO simply because he or she isn’t popular, “if the company is underperforming and a group of executives is clamoring for some kind of change, that needs to be dealt with,” says Black.
One favored tactic is hiring an executive coach, and it even works on occasion.
“Sometimes the [CEO or founder] is a bad listener, or doesn’t value the team’s feedback, or their decision-making is capricious,” says the VC who asked not to be named. “If it’s a personality thing, highlighting these problems to the person can lead them to improve.”
Black suggests he has also seen a “huge differential in a positive way” when there’s a strong rapport between the CEO and a coach or advisor.
Encouraging startups to establish annual anonymous 360-degree reviews can also make a difference, says Ganesan, who says Menlo Ventures is increasingly sending that message to the founders it backs. “People don’t spend time on it except in a down cycle and they need to,” he says.
Of course, ideally, VCs would also find more and better ways to connect with management teams. But for better or worse, it’s the CEO who they’re betting on, and that relationship is the one on which they’re going to focus.
“We’re usually dealing with the first layer of management, and it’s mostly with the CEO and founders,” says Clavier. “That’s the prism through which you see things, and it’s a prism that assumes you’re being told the truth.”
Sometimes, they are. Other times, board members are instead told an alternative version of the truth, and they “usually have no way of knowing until it turns up in the numbers, or the engineering team quits en masse,” says Clavier.
In those cases, he adds, he does feel responsible to a degree for backing the wrong person. “If we have to get rid of one of the founders at the seed stage or first couple of years, that means we did something wrong in our diligence. If it’s the CEO, then we really f_cked up.”
For what it’s worth, investors who are board members pay for those mistakes, and the price occasionally transcends lost capital alone.
“I used to not have directors and officers [liability] insurance,” Clavier says. “Now, I pay $30,000 a year to cover my funds. You just never know what kind of crazy crap can happen.”