Executive Brief Successful Founder CEOs evolve capabilities and opportunities

Professional CEOs can take a great idea that is established by the entrepreneur to

scale by building process, bringing in their experience of running large organizations,

their influencing capabilities, their network, industry knowledge and financial

sophistication. But can they keep the vision of the founder, their comprehensive

knowledge, moral authority and total commitment to the long term? This is essentially

the decision that both entrepreneurs and investors must consider before looking at

leadership through the life cycle of a start up

Reid Hoffman of LinkedIn, a successful founder CEO, offers that professional CEOs

should be brought in early enough so they share the commitment to the startup, which

provides them with the edge that entrepreneurs have along with their own strengths.

However, the ‘choice of early enough’ timing and fit requires a Capability-Opportunity

framework. A clear and detailed diagnosis of current state of capabilities and

opportunities related to startup, a guiding view of opportunities and a clear plan of

coherent action for building capabilities needed to achieve the optimal mix of

opportunities – These are the guiding principles required to support a decision on

continuing with a founder-CEO or bringing in a successor-CEO

Founder /Experienced

CEO Founder CEOs

Experienced CEO

Founder /Experienced

CEO

Opportunity

Cap

abili

ty

FOUNDER CEO VERSUS SUCCESSOR CEO

CHOICES AND TRANSITION

GSBA 543 Managerial Perspectives and

Leadership Prof. Carl W. Voigt

Team 9

Team Leader : Alse, Deepak Pannu, Jasdeep

Shiota, Saburo Su, Sam

Yildirok, Ece Yu, Edison

Startups have a lifecycle

Start-up businesses go through a life-cycle of launch, growth, innovation, and maturity

for the first time as organizations. They are at the phase of business where

entrepreneurs first have the genesis of a business idea and then set about to execute it.

Entrepreneurs must do this by leading the idea through the processes of discovery,

validation, efficiency and scale. Initially the entrepreneur must function as the CEO of the

start-up (and very often perform many other functions before a team is put together), but

through these stages there is a choice to transition leadership.

And leaderships transitions happen within the lifecycle.

Our approach to understanding factors behind the leadership transition choices at a

startup took the following factors into consideration

•  Establish the role of the Founder and CEO through the lifecycle of a start up

•  Discuss why there is a difference between typical CEO transitions and the case of

Founder/Startup CEO

•  Consider the events leading to a Founder-CEO versus successor CEO choice and

transition during key points in the lifecycle

•  Analyse the data that exists on success and failure factors of such choice.

•  Look at analytical frameworks for the choice.

•  Propose the ‘Capability-Opportunity’ map and look at the leaps needed from the

CEO we choose.

From a garden to the farm

Success in the creative startup phase depends on two factors •  Product & Market emphasis •  Clan type Control As we move to beyond the startup into the phase of building an organisation, the leader has to transition from operating through control to operating through involvement and empowerment. Greiner et all, recommend that we should’ locate and install a strong business manager who is acceptable to the founders and who can pull the organization together ‘. However, in a rapidly changing environment, where strategic choices, people leadership and execution of goals are tightly integrated, it is tough to separate the goals are tightly integrated, it is tough to separate the entrepreneurial founders from management of the business.

(L. Greiner, Cummings, & Bhambri, 2003)

A founder, especially in the early days, is the soul of the company. The initial spirit and visionary who sees an opportunity in the market that few people around them can see, until you turn it into a cash generating machine. And even though your card says CEO, the organization really needs your founder magic to get off the ground.

Marc Barros, Entrepreneur

How’s the Founder CEO succession different ?

The decision regarding transitioning leadership, sometimes

is made by the entrepreneur themselves, but is usually

called for by other stakeholders such as the venture

capitalists who hold stock in the company and invest in it.

There are considerations regarding relevant capabilities,

experience and strengths through the stages of the lifecycle

all the way through (often) an IPO. At different stages,

different capabilities are called upon. Initially, the discovery

and validation of the idea is very often made by the

entrepreneur and these may require vision, product

knowledge and great communication abilities, but efficiency

and scale may require a different set of capabilities

altogether.

These decision points, along with the addition of

stakeholders along the way, make it critical for a leadership

transition to be considered. Should the entrepreneur

continue to lead the idea and the company into growth, scale

and past Greiner’s concept of five phases of growth for a

business? Or is there a need to bring in a CEO at a certain

stage to provide the right impetus to carry the organization

along the path of growth, competitive advantage and

success? The challenge is the hostile environment for

startups and the fractional chance of success overall - which

means every bit of advantage needs to be optimised to

increase the chances of success.

T h e   c r i ( c a l  differences   between  l a t e r -­‐ s t a g e  s u c c e s s i o n   a n d  F o u n d e r -­‐ C E O  succession   include  the   higher   level   of  a<achment  between  Founder-­‐CEOs   and  t h e   fi r m s   t h e y  create,   the   much  l a r g e r   e q u i t y  holdings  of  Founder-­‐CEOs   (which   give  them   much   more  control   of   the   firm),  the   fact   that   many  F o u n d e r -­‐ C E O s  remain   in   the   firm  (even   though   it   is  being   run   by   their  successors),   and   the  fact   that   nearly   all  e a r l y -­‐ s t a g e  succession   events  i n v o l v e   o u t s i d e  successors     ( in  contrast   to   later-­‐stage   success ion  research,   which   has  f o c u s ed   on   t h e  insider-­‐outsider)  (Wasserman,  2003)  

The Founder’s Dilemma

Noam Wasserman notes that successful Founder-CEOs are a rare breed and “…fewer

than 25% led their companies’ initial public offerings.” (In an analysis of 212 American

start-ups in the late 1990s and early 2000s). He also notes that Founders don’t transition

easily. “Four out of five entrepreneurs, my research shows, are forced to step down from

the CEO’s post. Most are shocked when investors insist that they relinquish control, and

they’re pushed out of office in ways they don’t like and well before they want to

abdicate.”

The reason investors bring in professional CEOs is to lead the company through the

project to the process stage, argues Derek Lidow in his article on entrepreneurship

(Surviving a Start-Up’s Transition from Projects to Processes), which entrepreneurs can

find difficult to do. The entrepreneurs themselves have a choice to make an efficient

transition of leadership depending on their choice of control against cash .

Show me the money or show me the product! Noam Wasserman found two events central to the Founder-CEO succession

•  Completion of Product Development

•  Raising of each round of financing from outside investors.

Product development and roadmap aspects are primarily a product strategy concern that

combines creative skills in understanding customers, buyers and markets in conjunction

with technological evolution. Financing aspects show how the business model of the

enterprise is evolving to generate value for its various stakeholders. Only founder CEOs

cross the “Valley of Death” but the capabilities required after funding are different.

In essence, the Founder-CEO succession question is largely about who is to be trusted

with the severe accountabilities of an evolving enterprise.

…and then you can go !

40% of startups continue with Founder-CEOs

Founder CEOs have the advantage of founding vision, the influence they have built in

their organization and ownership stakes. However, 30% to 50% of firms go into an IPO

with a non-founder CEOs at the helm(Jain & Tabak, 2008). This can be attributed to

factors such as the influence of venture capitalists, founder personality and traits, size of

founding team, governance structure, ownership structure, independence of the top

management team and the size of equity financing within the firm. The challenge

however is only about a tenth of 1 percent (0.10%) of U.S. firms ever achieve revenues

of more than $250 million in sales. A tiny 0.036 percent will grow to reach $1 billion in

sales.

Founder-CEO firms tend to outperform outsider-CEO firms Eleven percent of the largest public U.S. firms are headed by the CEO who

founded the firm. Founder-CEO firms differ systematically from successor-

CEO firms with respect to firm valuation, investment behavior, and stock

market performance. Founder-CEO firms invest more in research and

development, have higher capital expenditures, and make more focused

mergers and acquisitions. An equal-weighted investment strategy that had

invested in founder-CEO firms from 1993 to 2002 would have earned a

benchmark-adjusted return of 8.3% annually. The excess return is robust;

after controlling for a wide variety of firm characteristics, CEO

characteristics, and industry affiliation, the abnormal return is still 4.4%

annually

Companies where Founders continued as CEOs beyond startup phase •  Scott Cook- Intuit •  Mark Zuckerberg -Facebook •  James Goodnight – SAS •  Stephen Wolfram – Wolfram.

Companies where outsiders became CEOs •  Dick Costolo – Twitter •  Michael Scott - Apple

Some industries even have higher ratio of founder CEOs

The results indicate that founder characteristics, governance structure, ownership

structure, and extent of VC influence are all influential in determining the likelihood of

founder CEO at IPO. There seems to be a negative relationship between founder age

and probability of founder CEO at IPO. For founder CEO firms, 62% of founders have

career experiences in marketing/sales and product R&D functions compared to 45% of

founders for non-founder CEO IPO firms.The mean size of the founding team for founder

CEO firms is 1.61 compared to 1.08 for non-founder CEO firms – Founder CEOs who

remain CEOs at IPO tend to have larger founding teams.Greater the number of board

seats occupied by VCs, the lower the probability of founder CEO at IPO.

(Jain & Tabak, 2008)

Can we understand the transition and its challenge ?

Though Greiner, Bhambri et all, built the 4-D transformation model from a large

corporation CEO perspective, it has substantial applicability in context of the Founder

CEO versus Outsider-CEO. The environmental slack and organizational receptivity

tradeoff will often decide if attempts to replace a founder-CEO with successor CEO will

be successful. Of special interest from a CEO choice perspective, is the ‘CEO Action

Orientation’ aspect of the 4-D model. Throughout the phases of growth, CEOs need to

demonstrate different behaviours and capabilities to keep growing the organisation.

Professional CEOs with experience have often dealt with these cycles either in partly

mature organizations or with other startups. Founder CEOs find that they need to

learn, be flexible and evolve through the various stages from product to process.

Do we know if the founder CEO suffers from the effects of five frictions ? W h e n e n t r e p r e n e u r i a l leaders fail to keep p a c e w i t h t h e i r companies, i t i s often not due to their weaknesses, but rather an overuse of their strengths. Their intense drive and ability to juggle a lot of balls at once and q u i c k l y c h a n g e d i r e c t i o n s , s o important in the early s t a g e s o f development, can, if n o t r e c o g n i z e d , undermine them in later stages.

Mcfarland, Keith R. (2008-01-15). The

Breakthrough Company: How

Everyday Companies Become

Extraordinary Performers (Kindle

Locations 865-867). The Doubleday

Religious Publishing Group. Kindle

Edition.

Founder-CEOs can retain advantage only provided they

upgrade capabilities and if the imperative is driven by

innovation and product superiority

. When the firm enters the stages where the core focus in

management and financial science as well as investor

confidence, professional CEOs retain an edge. Founders

flourish in an environment of long term vision and constant

product innovation (such as Facebook’s Mark Zuckerberg’s

refusal to carry banner ads for short term financial gain,

leading to less intrusive and more contextual advertising,

with far greater payoffs and consumer acceptance -

therefore continued growth. Facebook also kept reinventing

its critical Newsfeed algorithms to stay relevant. A Founder

CEOs ability to identify five frictions and stay ahead of those

while retaining a core product and market focus, will place

him/her in a position of advantage.

Get Out and come back Strategic imperatives of the transition from entrepreneur to Founder CEO

•  Capture and grow market

•  Adapt with the constantly evolving early-stage

market

•  Scale the organization and its operations

•  Shift from low cost focus to optimum costs

focus.

•  Creating structural speed advantage

•  Build the organization and orchestrate its

culture

The CEO who takes up this challenge will

•  Need to have the courage to make choice

between the strategic imperatives

•  Set the agenda on how progress will be

achieved and others

•  Enable his team to evolve from entrepreneurial

instincts to structural agility.

•  Network and influence to generate ideas as

well as energy within the organisation while

bringing people and ideas from outside into a

growing enterprise.

……Or Stay on and learn

Insider or outsider – It is capabilities and opportunities that matter The choice of a founder-CEO versus successor CEO is guided by two questions

•  Where do we want to be?

•  What do we have and what do we need to build?

Our scan of the situation as well as prior research has evolved into a ‘Capability-

Opportunity’ map that recommends factors and scenarios to consider when making a

choice between Founder CEO and Outsider-CEO

Founder /Experienced

CEO Founder CEOs

Experienced CEO

Founder /Experienced

CEO

Opportunity

Cap

abili

ty

Defined

Evolving

Evolving

Defined

Consider your organizational and current CEO capability The Opportunity scale focuses attention on what the firm needs to have/build to go from

being a startup firm to an enterprise.

•  Cultural Transitions

•  Power Structure and Distribution of Equity

•  Organization Design

•  CEO’s interpersonal skills and the ability to transition from Control to collaboration.

–  Ability to ask the questions that will transform his/her team

–  Ability to learn and adapt

•  Competencies

–  Market and channels

–  Process

–  Resource

–  Geographical

The Opportunity scale focuses attention on what the firm needs to achieve as it goes

from being a startup firm to an enterprise.

•  Market definition

•  Clarity of Business model

•  Competitive Landscape

•  Growth rates

………..then choose the CEO who captures opportunity

Twitter tells us a story about leaders in startups

Twitter was created in March 2006 by Jack Dorsey, Evan Williams, Biz Stone and Noah Glass. The service rapidly gained worldwide popularity, with more than 100 million users who in 2012 posted 340 million tweets per day. The service also handled 1.6 billion search queries per day. In 2013 Twitter was one of the ten most-visited websites, and has been described as "the SMS of the Internet”. As of February 2015, Twitter has more than 288 million monthly active users. Jack Dorsey, the Founder CEO, was named by MIT as one of the top 35 innovators in the world under the age of 35. He is talented at identifying and pursuing ideas and innovations. For example, when he first saw implementations of instant messaging, Dorsey wondered whether the software's user status output could be shared among friends easily. Dorsey and Biz Stone decided that SMS text suited the status message idea, and built a prototype of Twitter in about two weeks. Dorsey started as the CEO and oversaw the startup through two rounds of capital funding by the venture capitalists who backed the company. Dorsey played the part of a Founder CEO working towards a win with a creative idea that fits a new opportunity and can be pursued relentlessly with the agility of a small size company. The company’s strategy and execution plans relied on his idea of the "the SMS of the Internet” during this early stage.

Jack Dorsey

•  Founder CEO •  2006-2008 •  Great Idea – Inconsistent

Product

Evan Williams

•  Product CEO •  2008-2010 •  Better Product – No

Business Model

Dick Costolo

•  Business CEO •  2010-Current •  Evolving business

model with a defined market

A look at Twitter Evan Williams: Williams is co-founder of Twitter. In 2008, William took over the role of CEO from Jack who wanted to focus attention on this other early stage ideas like Square Inc etc. Williams is an experienced serial entrepreneur who has founded several companies and worked in Google. Evan Williams and Meg Hourihan co-founded Pyra Labs to make project management software, a note-taking feature spun off as Blogger, one of the first web applications for creating and managing weblogs. Williams invented the term "blogger" and was instrumental in the popularization of the term "blog". Pyra survived the departure of Hourihan and other employees, and was eventually acquired by Google on February 13, 2003. In 2003, Williams was named to the MIT Technology Review as one of the top 100 innovators in the world under the age of 35. Williams left Google in October 2004 to co-found Odeo, a podcasting company. In April 2007, Odeo was acquired by Sonic Mountain. While, Williams is creative in ways similar to Jack, he has more entrepreneurial experience that makes him a suitable person who can take over Jack Dorsey’s role and grow beyond the startup stage. Dick Costolo is the current CEO of Twitter and was the COO of Twitter. On 4 October 2010, Williams stepped down from the CEO position to completely focus on product strategy. Dick Costolo took over the role of CEO at Twitter. He had started his career as a consultant at Andersen Consulting for seven years. He had also previously been on the founding team of the web feed management provider FeedBurner. After Google bought FeedBurner in 2007, Dick Costolo became an employee of the search giant. After the acquisition, Costolo began working in other areas of Google. Dick is an example of someone who has gone through various stages of the entrepreneurial cycle in varied roles. Moreover, Costolo also worked as a COO of Twitter. At this stage, Twitter needed someone who can focus resources on big bets, build structure and systems essential to a pre-IPO and post-IPO enterprise and collaborate with the product strategist, Evan Williams, in growing a sustainable business model around Twitter as a product and platform. In 2013, Business Insider referred to him as "one of Silicon Valley's most impressive CEOs”, and TIME Magazine named him one of the 10 Most Influential U.S. Tech CEOs. (1)

Twitter is a prime example of how changing opportunities and capabilities influence CEO choice. As it has evolved from an idea to a product and a business enterprise, it has needed a CEO change to adapt and succeed. Each of Twitter’s CEOs has an entrepreneurial background but their roles have primarily centered around the capabilities they were able to bring to the table and the opportunities they chose to pursue.

CEOs growing a startup need to bridge a transition

A clear and detailed diagnosis of current state of capabilities and opportunities related to startup, a guiding view of t opportunities and a clear plan of coherent action for building capabilities needed to achieve the optimal mix of opportunities – These are the guiding principles required to support a decision on continuing with a founder-CEO or bringing in a successor-CEO

Small/Mid-Size Entrepreneurial Enterprise

Leader is Sovereign Organization is Sovereign

Strategy as adaptation Focus resources on a few big bets

Character Reflects Tribal Clan Systematic Character Building

Win because we’re small Win through structural advantages

Rely on our own ideas Incorporate the best outside ideas

Build commitment for the vision Question fundamental assumptions

Mcfarland, Keith R. (2008-01-15). The Breakthrough Company: How Everyday Companies Become Extraordinary Performers (Kindle Location 420). The Doubleday Religious Publishing Group. Kindle

Edition.

For Further Reading

•  Fahlenbrach, R. (2009). Founder-CEOs, Investment Decisions, and Stock Market Performance. Journal of Financial and Quantitative Analysis, 44(02), 439. doi:10.1017/S0022109009090139

•  Greiner, L., Cummings, T., & Bhambri, A. (2003). When New CEOs Succeed and Fail: Organizational Dynamics, 32(1), 1–16. doi:10.1016/S0090-2616(02)00134-1

•  Greiner, L. E. (1998). Evolution and revolution as organizations grow. 1972. Harvard Business Review, 76. doi:10.1111/j.1741-6248.1997.00397.x

•  Jain, B. A., & Tabak, F. (2008). Factors influencing the choice between founder versus non-founder CEOs for IPO firms. Journal of Business Venturing, 23, 21–45. doi:10.1016/j.jbusvent.2005.11.001

•  Rumelt, R. P. (1995). Inertia and Transformation. In Resource-Based and Evolutionary Theories of the Enterprise: Towards a Synthesis (pp. 101–132). doi:10.1007/978-1-4615-2201-0

•  Wasserman, N. (2003). Founder-CEO Succession and the Paradox of Entrepreneurial Success. Organization Science. doi:10.1287/orsc.14.2.149.14995

•  Mcfarland, Keith R. (2008-01-15). The Breakthrough Company: How Everyday Companies Become Extraordinary Performers

•  (1) http://www.trustedreviews.com/news/instagram-now-has-more-users-than-twitter •  http://mashable.com/2010/10/04/twitter-down-again/ •  "Innovator of the Year Awards". WSJ. Magazine (Dow Jones). 2012. Retrieved March

18, 2013. •  http%3A//www.matthewmckinnon.ca/kingoftheblogs.html&r=http%3A//

en.wikipedia.org/wiki/Evan_Williams_%28Internet_entrepreneur%29 •  http://www.justintimemanagement.com/the-7-stages-of-business-life-cycle •  h<p://reidhoffman.org/if-­‐why-­‐and-­‐how-­‐founders-­‐should-­‐hire-­‐a-­‐professional-­‐ceo/  •  h<ps://hbr.org/2014/03/surviving-­‐a-­‐start-­‐ups-­‐transi(on-­‐from-­‐projects-­‐to-­‐processes/  •  Rumelt, Inertia and Transformation, 1995.