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BW Businessworld

Are You A Founder-CEO?

If you are one, then you cannot restrict yourself only to the ‘cool’ stuff

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The role of founders evolves as a start-up grows. It can take various shapes and forms in different start-ups. ...At an early stage, founders need to do a lot of the heavy lifting—hiring the start-up team, getting the right stock-option plan in place, evangelizing with stakeholders, renting office space, getting the MVP right, meeting partners, budgeting and managing costs, process definition and documentation, review mechanisms, meeting investors and pretty much anything you can think of. They are designing, creating, solving problems, dealing with continuously shifting priorities and goalposts an above all cleaning the shit every day. This comes naturally to most founders—hustling every day to help the business get off the ground...

What Is the Right Number of Founders?
The general wisdom is that one is too few and four are too many. We tend to agree. Therefore, the sweet spot seems to be two or three. This is based on several studies that looked at hundreds of start-ups and correlated the extent of success of the start-up to the number of founders. Obviously, this does not mean that if you are a sole founder, you should blindly launch into a search for a co-founder or that you could multiply the probability of success by getting one. All it means is that successful start-ups with sole founders are rarer than those with multiple founders, and to an investor the probability of success is higher if the number of founders is two or three, everything else being the same.

Obviously, the phrase ‘everything else being the same’ dilutes the validity of this conclusion. The challenges for a sole founder are many and need to be compensated by other factors. Similarly, having more than three founders usually means slowing down decision-making, chaos and some politics. Successful start-ups with four or more founders seem to address this unconsciously by behaving as a start-up with two or three founders by relegating the remaining founders to a slightly outer circle—these founders can then choose to happily operate in that orbit or may choose to opt out at an appropriate point in time.

Therefore, funding tends to be easier when the number of founders is between two and three, and the skills of the founders are complementary. Sole founders are viewed a bit suspiciously, but the suspicion can be overcome if after closer scrutiny the other data points are positive. Similarly, start-ups with four or more founders are generally evaluated to see if there is a clear leader or a core leadership that is not in excess of two or at best three (if it is three, then the synergy in the skills should be so strong as to overcome dilution in speed and direction).

Founder-CEO or Professional CEO?
This has been an age-old debate and one on which the opinions have seen wild swings. It appears that the majority of the VCs today seem to have a clear preference for founder-CEOs, though some decades ago the same VCs may have argued for the induction of a professional CEO as soon as the product-market fit was reasonably well established. The underlying belief was obviously that the young founder(s) had the ability to innovate and hustle to get the start-up off the ground to this stage, after which, in all likelihood, they would fall short on the skills needed to run a larger set-up.

On paper, it sounded perfectly logical, though there have been an increasing number of young founders who have demonstrated the ability to run larger setups—Amazon, Oracle, Adobe, Dell, Salesforce, Siebel, Apple, etc. The list of founders who have been able to successfully adapt is a long one. There have been a few notable exceptions where professional CEOs were brought in—Eric Schmidt at Google, Jeff Weiner at LinkedIn and Kalyan Krishnamurthy at Flipkart are some examples). In each of these cases, the founder(s) and the professional CEO have complemented one another extremely well. Some founder-CEOs have successfully brought in a COO who could manage the day-to-day affairs—the nuts and bolts of the business. Sheryl Sandberg at Facebook is a great example where the decision to hire a COO has been validated...

The bottom line is that each case is different and unique. Therefore, be aware of what has worked at other start-ups, but remember that you need to figure out what works best for yours.

This is what Ben Horowitz had to say on the subject of founder-CEO versus professional CEO: The technology business is fundamentally the innovation business.... Technology companies are born because they create a better way of doing things. Eventually, someone else will come up with a better way. Therefore, if a technology company ceases to innovate, it will die.

These innovations are product cycles. Professional CEOs are effective at maximizing, but not finding, product cycles. Conversely, founding CEOs are excellent at finding, but not maximizing, product cycles. Our experience shows—and the data supports—that teaching a founding CEO how to maximize the product cycle is easier than teaching the professional CEO how to find the new product cycle.

The reason is that innovation is the most difficult core competency to build in any business. Innovation is almost insane by definition: most people view any truly innovative idea as stupid because if it was a good idea, somebody would have already done it. So, the innovator is guaranteed to have more natural initial detractors than followers.

Steve Jobs’ return to Apple provides an excellent example. At the time Jobs regained control of Apple, the conventional wisdom said that Apple was getting killed by ‘PC Economics’ and had to separate the operating system from the hardware. Specifically, Apple couldn’t compete with Microsoft unless it became more horizontal and let commodity hardware manufacturers compete while Apple focused exclusively on the OS. The professional CEO who preceded Jobs (Gil Amelio) took the conventional wisdom to heart. He set out to create an ecosystem of Mac cloners
who would provide the commodity hardware complement to Apple’s famous OS.

When Jobs came in and reversed those decisions, most industry analysts thought Jobs was insane. Jobs not only killed all the commodity hardware and the horizontal strategy, he went radically vertical. In addition to the basic hardware and operating system, he added applications (iLife, iWork) and peripherals (like the iPod). He even added retail stores.

What you need to remember, though, as a founder-CEO is that if you decide to continue to run the show, you need to be very comfortable doing everything it takes to build an organization—town halls, communication, governance, compliance, long meetings and reviews, firing, coaching, business plans, etc. You can’t just restrict yourself to the cool stuff. 

With permission from Penguin Random House India

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