Damned if You Do, Damned if You Don’t- Why Successful Entrepreneurs Get Replaced

Management, News February 2, 2012

Creating your own business, building it from the ground up, and having it succeed are likely some of the most exhilarating things you will ever do in your life. But once your business starts to transform from a gutsy start-up to an honest-to-gosh corporation, you might find that you need to reassess your priorities.

It’s Different at the Top

The skills you need as an entrepreneur don’t necessarily match the ones you need as a CEO of a medium or large-sized company. Founders are removed from their executive positions all the time. Steve Jobs is perhaps the most famous example of this phenomenon, but he is far from the exception. Founders are removed or step down from their executive posts in a majority of cases where start-ups achieve significant success.

Charismatic leaders who found their own companies and run them for significant periods of time after they have established themselves and have achieved solid successes like Bill Gates or Michael Dell are actually quite rare, which is why they get a lot of attention. Founder-succession is a fact of life for most successful start-ups, and all companies I’ve worked for have experienced the same.

The Science Behind Founder-Succession

Noam Wasserman, assistant professor at Harvard, conducted a study on why founder succession is so commonplace. Simply put, a hired or promoted CEO of an already successful company can expect to stay when they lead their company to success, and expect to be forced to leave if they mess up. A Founder-CEO on the other hand, can expect to be forced out especially if they succeed.

Donkey

Founder-CEOs often neglect to change existing systems to better handle the spoils of their own success

In the majority of cases, Founder-CEOs develop emotional attachments to their work that allow them to bring the company to the fore. However, this same passion can make them blind to realities (or even imagined situations) that investors and other (now more numerous) stakeholders of their now-established company might see. This is bound to happen if the Founder-CEO is unable to scale the business’s systems to handle growth.

Couple that with a prevailing attitude that companies should do everything to ensure better returns for their investors. Unfortunately for themselves, most Founder-CEOs think of maximizing value for customers.

So even when a Founder-CEO is successful, investors (especially in high-potential start-ups) tend to think “This guy isn’t making us rich as fast as he possibly could!” – and they would probably be right. Whether or not this attitude is conducive to sustainable growth is another issue.

How You Can Stay On

For an entrepreneur who wants to keep a controlling stake in their business it’s very important to take care where your investments come from. Have lawyers handy and draw up a company “pre-nup” if you will, when wooing risky venture capital. Venture capitalists will often make the assumption that founders will have to be replaced with executives experienced in dispassionately maximizing returns on investment- and VCs are more likely to have founders replaced whenever a new round of investments come in.

Dilbert Successor Grooming

By Scott Adams

 

Many founders also acknowledge they might not be the best to handle the company when it starts to be really successful. In this case, Founder-CEOs may consider grooming or hand-picking a successor themselves, especially one that would be acceptable to other investors. While an imperfect solution for entrepreneurs who want to retain direct control, this can help them retain some form of influence over the company.

I’m Getting Fired From My Own Company!

What can the average beleaguered successful entrepreneur do? Wasserman explains “The ideal situation is where the board and the founder can craft an appropriate non-CEO role, one that the founder willingly takes on. However, given how hard it is to convince many founders that they should step down, there is also a big cost to keeping a disgruntled founder active in the company.”

So the next time you take on venture capital with the expectation of runaway success, always ask yourself “what is my company’s success worth- to me?”

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