March 25, 2022 | 4-minute read (672 words)
When it comes to starting a business from the ground up, founders are without a doubt the most important players. Their blood, sweat, tears and sleepless nights keep the team motivated and persuade others to believe in their idea.
However, bringing on a CEO with expertise in operating high-growth companies may be necessitated as the business grows. According to a considerable body of research, including a study from Harvard Business Review, the value of founder-CEOs declines as companies develop beyond the IPO stage.
Often, founder-CEOs begin to struggle to adjust as their firms get larger and more complicated, as Andreessen Horowitz co-founder Ben Horowitz argues in "The Hard Thing About Hard Things." A startup's leadership needs are distinct from those of a rapidly expanding company, and the CEO's function is further complicated by the company's enhanced prominence and dispersed ownership after the IPO.
In other words, a founder produces something from nothing, whereas a CEO oversees an existing business. Both of these roles require need discrete skill sets. Supporting the founder's transition from the CEO job when the time comes can benefit the organization.
We've put together three recommendations for investors, boards of directors, and executive teams to help founders depart smoothly before the advent of a new CEO.
Every founder is attracted to business for their own reasons. Understanding what motivates a particular founder can help inspire their future moves.
For some founders, the early stages of a business are highly appealing. For example, Rick Alden, the CEO of Skullcandy, stepped aside to pursue other early-stage ventures more aligned with his passions. He said that while he was interested in the entrepreneurial process, he did not want to run a publicly traded big firm.
Other prominent founder-CEOs have stepped down to devote their time to philanthropy or humanitarian causes. Bill Gates, for example, switched his focus from Microsoft to the Bill & Melinda Gates Foundation, while Jon Huntsman Sr. departed Huntsman Chemical to launch the Huntsman Cancer Institute.
On the other hand, some founders like to pause before jumping into something new. Sasha Orloff, the co-founder of fintech business LendUp, took a 100-day vacation after resigning as CEO to refocus and consider his next move.
Lead founders in the direction of their passions.
While HBR's study shows that the value of founder-CEOs diminishes after an IPO, it finds the opposite is true for non-CEO roles. When a founder-CEO moves on to another position within the company, the new leader often benefits from the founder's extensive experience in an advisory role. This strategy works best for founders who recognize that they are no longer the best fit for the CEO position but are still dedicated to the firm and eager to help.
When Google reached $100 million in sales, Sequoia Capital, one of its major investors, was concerned that founders Sergey Brin and Larry Page were too young to lead the company. Sequoia persuaded Page and Brin to select a CEO.
They chose Eric Schmidt, who guided the quickly expanding firm through a successful IPO and phenomenal growth. Schmidt encouraged the young founders through the managerial ladder while also relying on their creativity and know-how to build products and improve key business activities.
Urge founders to take on non-CEO responsibilities in the firm.
If the founder-CEO is involved from the start, the executive succession planning process is more likely to run smoothly.
Ideally, the founder will lead the transition. Steve Jobs, Apple's co-founder, personally hired and nurtured his successor, Tim Cook, to manage the business. When Kendra Scott stepped down as CEO of her namesake jewelry line, she named long-time executive Tom Nolan as her replacement.
If the founder is unwilling to lead the charge, the board should take over and engage the founder as much as possible. Even after 25 years as CEO, Bill Milliken, the founder of the popular charity Communities in Schools, was hesitant to let go. Instead of dismissing Miller, the board recruited an outside counselor to urge him to join the board.
Include founders in succession planning.