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How to know when the founder should give way to a professional CEO

This originally appeared on LinkedIn. You can follow Reid Hoffman here 

Twenty years ago, the classic startup model was to have young founders start a breakthrough company, then bring in “grey hair” in the form of experienced executives once it was time to scale the business. Key examples included Cisco, Yahoo, eBay, Google, and many smaller companies. In the last decade, however, that common wisdom has shifted, at least for consumer internet companies. The new received wisdom is that the best entrepreneurs can stay CEO through the entire growth cycle of the company. Think of Jeff Bezos, Larry Ellison, or the late Steve Jobs. My partners at Greylock and I have invested in a number of young founding CEOs who match this pattern and are doing a fantastic job leading their companies through hypergrowth, such as Brian Chesky of AirBnB and Drew Houston of Dropbox. The question is, why has this shift occurred?

Last year, Ben Horowitz of Andreessen Horowitz articulated a well-thought-out philosophy on why he prefers to back Founder-CEOs and keep them in charge as the company grows. His essay, “Why We Prefer Founding CEOs” lays out three key ingredients that great founding CEOs tend to have, and that professional CEOs often lack:

  • Comprehensive knowledge
  • Moral Authority
  • Total commitment to the long term

Ben’s point is that without these three key ingredients, a CEO won’t be able to maintain the rapid product innovation that is a prerequisite for success in today’s startup world. Ben cites Google and Cisco as rare exceptions where a professional CEO helped steer a company to market leadership and that the evidence is “one-sided and overwhelming” that you shouldn’t bring in a professional CEO. In other words, Ben asserts that bringing in a professional CEO should be a last resort for a founder.

And yet, many of the greatest success stories of the internet era involve founder/professional CEO partnerships. During the dot com era, Yahoo!’s Tim Koogle helped build Jerry Yang and Dave Filo’s startup into the world’s most valuable internet company. Meanwhile, Meg Whitman helped Pierre Omidyar’s eBay become the second most powerful ecommerce company in the world (trailing only Amazon). The Web 2.0 era provides successful examples like Joe Kennedy and Tim Westergren at Pandora, and the current social era provides even more, including Dick Costolo at Twitter and Tony Zingale and Dave Hersh at Jive.

Sure, there are plenty of cautionary tales about how VCs have ousted founders in favor of “professional CEOs” who run companies into the ground. But it’s hard to call the evidence “one-sided and overwhelming” when there are so many strong counterexamples.

Noam Wasserman of Harvard Business School has been studying what he calls “the founder’s dilemma” for nearly a decade. In his academic paper, “Rich versus King”, he looked at 460 American startups from the 2000s. His statistical analysis showed that, paradoxically, founders maximized the value of their equity stakes by giving up the CEO position and board control: “The results show that, controlling for company size, age, and other factors, the more decision-making control kept (at both the CEO and board levels), the lower the value of the entrepreneur’s equity stake.”

In another study of 212 startups, Wasserman found that it was rare for Founder-CEOs to run their companies in the long term; less than half were still CEO after 3 years, and less than a quarter of the CEOs of the companies that reached an IPO were Founder-CEOs.

Given the evidence that bringing in an outside CEO can often pay off financially and, more importantly, in terms of overall scale and impact of the company, it’s important to explore the possibility—even if it isn’t your first choice. I speak from personal experience, since I hired and partnered with a CEO, Jeff Weiner, very successfully at LinkedIn five years after co-founding the company.

Once you decide to evaluate the option of bringing in a professional CEO for your start-up, the real questions are, “Should I replace myself?” If the answer is “yes,” then “How do we make the transition?” And once you make the transition successfully, “How can I play a constructive long term co-founder role at the company?”

How do I know when to replace myself?

I love the early stages of building a company. The small team, building a brand-new product, out-innovating complacent incumbents…not only is the experience fresh and exciting, it also focuses on the things most founders love—especially technical ones: Solving interesting problems, developing new technologies, devising a unique strategy. But if you’re successful, the job of being CEO shifts dramatically over time. All of a sudden, you need to focus on a different set of challenges and concerns like establishing standard procedures and managing a large number of employees.

To remain successful, you have to be passionate about that kind of work as well. Ask yourself, “What am I focused on? What am I world-class at? What am I really committed to?” The answers will help you determine if you should bring in a CEO.

In my experience, CEOs need to derive satisfaction from the nuts and bolts of building a company, not just building product and articulating the vision. They need to be passionate about leadership, management, and organizational processes as the company scales.

To be a successful growth-stage CEO, you need to be ready to manage a 1,000 person organization and devote substantial time to time consuming things like running meetings and other business process. You can’t just do the exciting stuff like making the final call on product and speaking at conferences, while shuffling off everything else to the mythical COO who loves doing all the dirty work and doesn’t want any of the credit.

I went through this self-examination while I was still CEO of LinkedIn. I have always been passionate and committed, both to the company, and to its mission. I want to enable individual professionals to have more successful careers and to increase the productivity of mankind across entire industries and countries. I want a company that lives up to the original standard that Hewlett-Packard set for Silicon Valley—a great place for high-quality people to work that provides an experience that would continue to benefit them even after they move on to other things.

But as we scaled from a handful of people in my living room to dozens of people at an office, I saw the job of the CEO shifting. At 50 people and beyond, a CEO increasingly has to focus on process and organization, and that wasn’t what I was passionate about. For example, I didn’t like running a weekly staff meeting. I could do it, but I did so reluctantly, not enthusiastically. I’d rather be solving intellectual challenges and figuring out key strategies, not debating which employees should get a promotion, or configuring project timelines.

I co-founded LinkedIn in 2003, and by 2005, after asking myself the key questions about my passion, focus, and commitment, I knew I wanted to bring in a CEO. When I brought this up with my main VC, David Sze at Greylock, he had the same reaction I suspect I would have had: “Are you sure? Couldn’t we just hire a COO and have you stay as CEO?”

I had thought about the COO option, but I knew that the company needed someone who felt like they “owned the ball.” And I was confident I could partner well with a CEO, given my experience partnering with the various CEOs of companies being on the board. What’s more, the kind of person who has the capacity to be a great leader usually wants to be CEO, not COO. Sheryl Sandberg is one of the few great leaders who has been willing to be COO, and even then, she’s a unique COO.

At the time we began the search, I wouldn’t have believed how long the process would take.

After more than a year of searching, we brought Dan Nye in as LinkedIn’s new CEO at the beginning of 2007. Dan Nye came to us as CEO with a strong organizational background, having been a general manager at both Intuit and Advent, where he had responsibility for organizations many times the size of the early LinkedIn. In addition to strong capabilities, Dan is also perfect on integrity and culture. My idea when hiring Dan was that I could handle the product, and he could handle everything else. Dan helped us evolve LinkedIn from a product-focused startup into a complete company. During his time as CEO, he built a real sales department, rebuilt the executive team, and doubled the size of the company. But after a couple of years, I realized that as we continued to make major changes to the product, we needed a CEO who would “own” product as well.

My mistake was thinking you could divorce product strategy from the CEO role. It was a mistake related to the broken “grey-haired supervision” approach to professional CEOs. 20 years ago, you could count on product cycles lasting years, which meant that constantly developing new products and refining the vision was relatively less important than aggressive execution. The “professional” CEO back then just had to be a superb executor for the founder’s vision. The rise of internet time has reduced product cycles to months and weeks. As such, a CEO can’t focus solely on scaling concerns—today, the CEO has to be involved in the product.

So I decided to step back in temporarily as CEO and tried to find a new CEO with consumer internet product experience and organizational experience at scale. (Dan went on to continue being a very successful company builder, becoming the CEO of Rocket Lawyer and, among other successes, quadrupling its revenues.)

James Slavet, a partner at Greylock, introduced me to Jeff Weiner. James and Jeff had worked together at Yahoo!, and Jeff at the time was also an executive-in-residence at Greylock. As I got to know Jeff, I became convinced that he was the right choice to LinkedIn. I believed that Jeff’s experience at Yahoo! could help us by spreading a deep focus on consumer product insight and strategy throughout the entire company.

How do we make the transition?

If it’s ideal for a CEO to have the knowledge, moral authority, and commitment of a founder, the answer is simple: Your transition process should bring the new CEO in as a co-founder of the company, not as an “adult supervisor.” Jack Dorsey has said as much: “Companies have multiple founding moments. I consider Dick Costolo to be a founding member of Twitter.” Dick wasn’t named CEO until 2010, four years after the company’s official start.

Think back to the list of all the successful Founder/CEO pairings. With almost no exceptions, four things were true:

1. The decision to step back from being CEO is a function of self-realization. It doesn’t work if the plan is being externally imposed by investors, for all the reasons Ben H. outlined. If you’re passionate about the nuts and bolts of building your company, and your VC simply thinks they know better, it’s probably a mistake to acquiesce.

2. The outside CEO was brought in early, so that he or she could play a real role in shaping the product, business, organization, and culture of the company. There is one exception to this pattern, which is when a company has lost its way, and the new CEO is essentially re-launching the company. The classic example here is Lou Gerstner, who transformed IBM from a failing hardware company to a services powerhouse.

3. The original team of founders was a small group of two to three people, making it easier to form strong co-founder bonds. Being able to build a trusting relationship is critical. In the cases of both Yahoo! and Google, Jerry/Dave/Tim and Larry/Sergey/Eric built warm and trusting relationships that lasted for years.

4. The new CEO had prior experience running a large organization. The whole point of hiring someone from the outside is to bring in skills and experience you don’t have, which will help scale the company. Here, Sheryl Sandberg represents the classic example—her management and people skills were brought in to complement Mark Zuckerberg’s great product vision and strategy. Notice how even as COO rather than CEO, Sheryl is accorded co-founder status, and is the lynchpin of the company’s management team and strategic decision-making.

Yahoo! presents a particularly fascinating example of these principles at work. When Tim Koogle came in as CEO in 1995, all four principles applied: The founders knew they wanted a CEO, Tim came in early, he formed a tight management triumvirate with the founders, and he had experience running large organizations from his time at Motorola. Later Yahoo CEOs failed to follow these principles, largely sidelining the founders until Jerry Yang’s return.

More recently, Marissa Mayer joined Yahoo at the Lou Gerstner phase—everyone acknowledges that Yahoo! needs to be remade. While her success is far from certain, if she does succeed, she will be viewed as a re-founder, not just a management caretaker.

My own experience bringing Jeff Weiner into LinkedIn stuck pretty close to these four principles.

1. As I’ve already detailed, the decision to bring in a professional CEO was one I initiated back in 2007, after a lot of self-examination.

2. While LinkedIn was already six years old when we brought Jeff in, it was still a relatively small company. Jeff was our 338th employee, and helped us launch our Talent Solutions business, which is now a key revenue driver for us.

3. Thanks to our strong mutual connections via Greylock, Jeff and I were able to bond and build a relationship both before and during the process of bringing him on to the team.

4. When Jeff was an EVP at Yahoo! he ran a 3,000-employee division. Not only was that far larger than LinkedIn at the time, it’s about as many employees as we have today!

What long term role can I play in our company?

I wanted to make sure that people made the shift from looking to me for answers to taking their cues from Jeff. Bringing in a CEO is like performing a brain transplant—you need to wire in a whole new set of connections. If the founder is still in the building, it’s all too easy for people to keeping checking with him on every decision, rather than with the CEO.

When Jeff came in as CEO, I booked a hefty amount of travel for his first 6 months. When employees tried calling me to double-check a decision, I replied, “Sorry, I’m in Rome, talk to Jeff.” Jeff needed build up his own connectivity within the organization. By the time I returned from Europe, those connections were hard-wired.

For Jeff’s part, he went above and beyond to immerse himself in the company. For example, just a few months after Jeff joined LinkedIn, several engineers were sitting around at midnight in between bug fixes for what ultimately turned into a very late night product launch that extended into the wee early morning. One of the engineers decided to pull a graph of their new CEO’s login activity on LinkedIn.com. People were shocked: the only time period during the launch when Jeff was not consistently logged into the site was between 3:30 – 4:00 AM. It turned out he was obsessed with the product quality — just like a true founder. To this day, Jeff is renowned for being one of LinkedIn’s most active users and is known for his ability to catch bugs before our developers.

Today, as Executive Chairman, my office at LinkedIn is next to Jeff’s, and when I’m not on the road or at Greylock, I’m on the LinkedIn campus most of the week. I enjoy helping the team on strategy, corporate and business development, and product vision. The most important thing I do, though, is sync up with Jeff every week about what’s on his mind. In our catch-up meetings, I’m able and willing to challenge his ideas. It’s hard for a CEO to get honest feedback and candid advice; so, provided you do not undercut him or her in the organization, as a founder you can play a uniquely helpful role in this respect. (And any CEO you hire should be eager to accept your honest counsel.) When it works, it makes the loneliest place in an organization—the CEO’s corner office—somewhat less lonely and potentially a lot more effective.

Of course, it might be that you’d rather transition out of a regular role after hiring a CEO. This can work, too. After bringing in Meg Whitman to run eBay, Pierre founded the Omidyar Network to make philanthropic investments, and returned to his native Hawaii where he’s done wonderful work for the community where he grew up. He’s still actively involved in eBay as chairman of the board, but he’s not at the office every week.

Conclusion

Twenty years ago, venture capitalists were in a hurry to bring in professional CEOs. Today, many of the same VC firms are busy touting their support for long-term Founder-CEOs. Both approaches can work, which means that as an entrepreneur, you should focus less on what’s fashionable, and more on what’s right for you. This is a highly personal decision, and the right answer depends on you and your team—including your co-founders and your VCs. You might be a Steve Jobs, or you might be a Pierre Omidyar. As an investor, I’m willing to back you, even if you’re not sure which one you are yet. In every investment we make, we hope that the Founder-CEO will be able to lead the company to success, but if not, and if you realize as I did that you want to bring in a professional CEO, we’ll work with you to find someone who is a true partner.

So as it turns out, Ben was right. You always do want a Founder-CEO. But that person doesn’t always have to be the Founding CEO. Being there at the start isn’t the only path to being a founder. “Founder” is a state of mind, not a job description, and if done right, even CEOs who join after day 1 can become Founders.

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