Editor’s note: Investor and entrepreneur David Gardner is founder of Cofounders Capital in Cary and is a regular contributor to WRAL TechWire.
CARY – It is an unfortunate fact that many startup founders cannot make the transition from a small team to a fast-scaling enterprise. They were indispensable in those early days as they worked closely with a small team to prove out their company thesis but with significant funding and scale, the very attributes that served them so well in the beginning seem to conspire against them as they try to transition to the next level.
Early-stage ventures are a very different game at scale. Success is no longer determined by what a single entrepreneur can do. Next-level leaders must know how to recruit, define processes, delegate, hold people accountable and manage through metric. These are very different skills then the ones that got the company going initially and many founding CEOs find themselves unable to make the transition or even to grasp the new skills they need before running out of cash.
One of the most important fiduciary duties (if not the most important duty) Board members are entrusted with is to ensure that the CEO has the required skills and is leading the company towards success. Unfortunately, by the time most board members realize that they have the wrong person at the helm, it is too late. The company is out of money and unable to raise more because of its poor performance.
Signs that a Founding CEO Needs to be Replaced
There are many warning signs that professional board members learn to spot as they try to guide companies through a scaling transition. If they can identify these signs soon enough, there may be sufficient runway to coach a first-time CEO to success or with less time, scramble to recruit a new CEO for the founding entrepreneur to learn from while salvaging the venture. Far too often, board members fail to spot these warning signs in time and the company runs out of capital. This is a tragic loss for all company stakeholders including the founders, investors, customers, and employees. Here are a few of those early warning signs board members should heed when evaluating a CEO.
People do not like to be micromanaged. It is extremely frustrating to work for a boss who assigns authority over an area only to take it back as big decisions arise or who dictates what tactics must be used yet holds the subordinate accountable for outcomes. No matter how articulate or talented a founding CEO may be, if he or she is unable to delegate and establish trust based on mutual respect, employees will start to churn. Conducting exit interviews with key employees is a good way for board members to get early insights into whether a founder CEO is up to the task.
The Blame Game
Effective CEOs at the top of any company take full responsibility for anything that happens within their organization. If subordinates screw up, good leaders know that they hired those individuals and chose to entrust them with whatever authority, budget and safe guards were deemed appropriate. CEOs who blame others generally do not have the maturity or strong enough self-esteem to stand up to the pressures and scrutiny of leadership. This is an early warning sign that the board may have the wrong person at the helm.
Resistance to Feedback
We require our portfolio companies to utilize regular 360 evaluations so that everyone, especially the CEO, is getting constructive feedback for personal improvement. We even developed our own assessment specifically designed for a first-time CEO to gather helpful feedback from subordinates. Great leaders know that they are not perfect and that they need continuous feedback for improvement. Even poor leaders can rise to the occasion if they gather and take to heart good feedback but a CEO who does not feel the need for or want such feedback, in our experience, is one who will have a very slow learning process.
A founder CEO who is unable or unwilling to delegate is trying to control everything just like he or she could in the early days of the venture. In trying to personally control everything in a scaling enterprise, they are in fact controlling less and less. They become the bottleneck in their organization as subordinates feel powerless to take any initiative or carry any of that burden. These CEOs often look exhausted and complain that they cannot work any harder. They often say that they do not have time to complete some very important tasks. Savvy board members will recognize these signs of frustration and exhaustion as an early warning sign of a founder CEO who does not know how to hire, delegate, nor manage and is most likely not going to be the one to scale the venture.
Many founder CEOs are unable to make the next level transition from startup to scale. There are early warning signs that a professional board members can spot. Some founder CEOs can be coached up while others will need to be replaced. Early detection of this by a board can literally mean the difference between a venture failing or thriving.