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Plan to Transition

Yesterday, Fred Wilson wrote about Transitions in start-ups.  In general, I agree with Fred that transitions in companies (start-ups or otherwise) are better if they come from within rather than being forced from the outside.  However, in my experience, many times transitions have to be forced.

One question that VCs often ask entrepreneurs, particularly technically-oriented and/or first-time entrepreneurs, is how they would react if a professional CEO is needed at some point when the company grows.  The best entrepreneurs define themselves by the company's success and will want to bring in whatever new management becomes necessary as a company develops.  Companies go through stages where the needs are different.  The professional CEO could rarely start a company from scratch and the technical founder usually can't run a $50M company.  The companies change, and therefore management probably has to change to deliver the optimal outcome.

Some entrepreneurs get this.  I've worked with quite a few who knew what their own strengths and weaknesses were.  They realized that, if they were successful, the company would need more experienced management.  That didn't indicate weakness on their part, but rather success in that they had moved the company from a standing start to some level of success.  Overcoming those odds is the first victory a company must achieve.

However, it's often difficult for an entrepreneur to see this from the inside.  Even if they indicate that they are open to this type of change at the onset of the company, once they are in the heat of the battle their objectivity is compromised.  Many times founders will point to the fact that they haven't made a significant mistake as a reason why they should continue to run the company.  I remember telling one entrepreneur that if I waited for him to make a mistake before we made a change, then I would have made one, too!  The Board's job is to be proactive in assembling the right team around the company, rather than reactive.

These can be some of the most difficult decisions that a Board can make.  Usually, the Board prefers to have the founding CEO continue in some other role at the company.  Sometimes, the founding CEO poisons the ground with their actions, forcing them to have to depart.  This is always bad for the company as the founding CEO is often greatly responsible for the success that gets a company to this transition point.

This is why having an active, engaged, and objective Board is critical to a company.  Generally, VC's bring this to a company.  Non-VC backed companies often make a mistake by not bringing on outside directors who are truly objective.  Also, these types of directors rarely will take action against the founder who brought them in.  And, many public company boards are populated with people who either don't want to rock the boat or are beholden to the CEO.  This creates opportunities that many activist investors try to take advantage of.  For the company's sake, they are much better off with a constructive or operational activist than the alternative.

Companies and Boards should take a hard look at themselves to make sure that there is a truly objective view on the company and the management team at the table.  And, they have to plan on transitions.  Companies should be frequently changing, and that may mean occasional changes in management, too.

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