A word of warning: VC’s and CEO’s may hate this post, though more the former than the latter unless you’re the New CEO replacing the Old CEO. I must also say that the Valley has gotten better in recent years as it has realized that replacing a CEO is no small thing. Many now conceed that may be easier to train a good Founder to be a CEO than to get a CEO to understand what the Founder has hardwired into their DNA. Nevertheless, replacing CEO’s is a very common thing in the Valley. Young entrepreneurs have no idea how prepared their Board is to do so if they hit a rough spot. I had a VC tell me one time, “Replacing people is what we do, that’s really how we add value.” What the Young Entrepreneur may not know is that perhaps their Board made the decision to replace the Entrepreneur as long ago as the very first time they gave them money. I guarantee any smart investor will have thought about it and decided how far they think the Founding CEO can take the company. A clock may be ticking that the Founder doesn’t even know exists.
I will leave aside the discussion of what the replaced CEO/Founder ought to do. They’re going to have to figure out how to make peace with the new arrangement and whether to stick with their company. Ideally, everybody knew it was coming and the Founder didn’t even want to be the CEO. Equally as ideally perhaps the New CEO and the Board will continue to see some value in keeping the Founder around and that value will be something the Founder is prepared to deliver. In that case, maybe there is hope and you should disregard this post. These are matters for the Founder to consider with regards to their career, but if you’re not a Founder, read on because your situation is different. This is not about whether it’s possible to hire a better CEO or whether there aren’t companies that have done very well hiring new CEO’s. It’s not about the fate of companies at all, it is about the fate of your personal career. This is about some math and some personal experience that both speak loudly to my own calculations about career.
First thing is, I have a fair bit of experience with this process. Out of 7 gigs so far, 3 have involved a CEO replacement and at the most recent one, I was the CEO that replaced the incumbent. Based on the experiences of the first two I had decided that if the CEO was replaced in future gigs, I was moving on. This is what I told the Board the first time they came to me and wanted to replace the CEO at the third gig. What I hadn’t counted on was that they would ask me to step up to the position at a later date. Somehow, when that happened, I forgot my old plan and launched into the CEO job with gusto. We showed immediate strong growth and got the customer to where it should’ve been in terms of financial metrics for a SaaS company of our size. It didn’t matter in the end and the company failed because it couldn’t raise a round (which is the cause of death for most startups). I should have stuck with my original plan and moved on when the CEO was replaced.
I can walk you through the whole story and point to ample extenuating circumstances for why the company couldn’t raise a round–we needed to raise that round shortly after the 2008 Dinosaur-killing Sequoia memo went out, one of our two VC’s wouldn’t participate because they had investments in competing companies, yada, yada. It’s all bullshit because these were symptoms and not the disease. When Boards replace CEO’s they are fixing a Big Problem. Typically it is a very big problem, although it may not be the problem you think it is. You’re there, in the trenches, focused on winning at your startup. Your Board is jaded, they have a lot of other investments, and they’re focused on minimizing their pain while they let their winners run with as much rope as possible. They are far more subject to Deal Fatigue than you are, and they’ve heard so many presentations filled with facts and figures that they’re much more willing to go with their Gut. They have the luxury of going from your Board Meeting, which is depressing as heck, to one at another portfolio company that is leaping over tall buildings in a single bound. Only the very best Board Members can be objective and keep all these experiences separate. Put your hand in cold water and then into lukewarm water and the lukewarm feels scalding hot.
That Big Problem will be described in rational terms like, “This company has never hit a target yet on Sales.” But, the reality may simply be that not only are they tired of dealing with missed targets (which may have been overly optimistic, missed by just a little bit, or impacted by Outside Events out of the Company’s control), but they’ve also lost their optimism, and they don’t trust the Old CEO. That’s a very dangerous Big Problem to try to solve because Deal Fatigue magnifies the scale of every problem. You see, the VC’s never had the degree of Hope and Fanaticism that I hope you came into the deal with. They can’t, they’ve seen too many fail and they’re totally bought into the Portfolio Effect. They don’t have to fight every battle tooth and nail, they just have to know where to double down and where to cut their losses. You can’t take it personally, it’s their job and their business and they are good at it.
So if the CEO is being replaced, your business is probably facing the very biggest problem the Board can imagine plus a lot of subjective negative momentum that only the Board feels. It’s both a numbers problem and a relationship problem. Naturally there must be a relationship problem, because events are leading to a divorce. Sure, maybe it’s all proactive and there’s no problem beyond a little growing pain. Right. And maybe that horse over there is really a unicorn that temporarily misplaced his horn. There are two cases to replace the CEO:
1. The incumbent was never going to take the whole trip and knows it and everyone has found a happy upgrade. This is a Good CEO Transition.
– or –
2. That Big Problem is staring the Board in the face (numbers) and they don’t believe the incumbent can get through it (relationship). This is a Bad CEO Transition.
This is the time to take a good hard look at the Old CEO and ask yourself whether they were the sort that never planned to finish the job and they welcome an incumbent. You can tell if you’re any kind of judge of character at all. The signs will have been there all along. The Old CEO will be too young and inexperienced. They will lack ultimate leadership potential and CEO gravitas. The new guy, meanwhile, will be much more experienced and will carry much more gravitas. They’ll be exceedingly smooth and confident. There will be at least an initial sense that the old and new CEO’s like each other. Those are some of the signs of a good CEO transition.
In a bad transition, the new guy may be a little more experienced at being a CEO or they may be the same or less CEO experience. They often have a totally different background, “Hey, all we need to do is replace this Engineer with a Sales Guy and we are Golden.” They often have a track record that has little to do with Startups and everything to do with having been a lesser executive at a much bigger company. It’s the first CEO gig for an SVP of Sales, for example. When they’re together, which will be rare, the Old and New CEOs don’t talk to each other much and don’t make much eye contact. The Old CEO is either completely absent or remarkably quiet compared to his old self. He’ll have nothing to say about his plans going forward. “I just want to take some time off to relax with my family and decide what I’ll do next.” Lastly, if the New CEO has some kind of amazing comp package, that’s a sign that an otherwise talented exec is being asked to step in and do what the Board views as Mucking out the Stalls. Those are some of the signs of a bad CEO transition.
If your company has had a tough time making its numbers, if it has been pivoting, if there is unusual pressure for progress, if you’ve either just raised or are about to raise a round, and you see the Bad CEO Transition Signs, get your resume in order.
Why move on if you’re dealing with a Bad CEO Transition?
First, let me direct you to Jason Lemkin’s missive about what the dilutive effects of a new CEO will be. What he has to say is absolutely true and I’ve seen it from both sides of the table (as the New CEO and as an exec greeting the New CEO). Virtually everyone except the New CEO and VC’s will be taking a significant equity haircut. It’s got to come from somewhere and the New CEO is the savior while the Board doesn’t consider itself part of the problem.
Second, consider what happens after the New CEO is hired. For starters, you know something ugly is out there in the Board’s purview, whether or not you’ve been told what’s going on. If you don’t already know, nobody is going to let you in on the secret just because there is a new CEO–quite the contrary. Publicly, there are no Bad CEO Transitions, there are only Good CEO’s brought in amicably for the continued maturation of the company. Besides realizing there is a Big Problem, you also have to come to terms with the challenges New CEO faces in overcoming that problem. No matter what anyone may think, CEO’s are punished way too much for failure and rewarded way too much for success. In other words, New CEO is going to have to make a lot more changes because just changing the CEO doesn’t go very far to solving the Real Problem. New CEO can’t do it alone. They are going to need a lot more capital (hence the dilution Jason writes about) and talent. Unless your problem is one of simple execution, New CEO also faces the problem of educating themselves enough on your company and space so they can begin to formulate a solution. Once they arrive at a solution, it will nearly always require still more time to hire the right people to help facilitate that solution.
Translation: There will be no progress on your Company’s Big Problem during the CEO’s first six months and still no progress for probably much longer.
In fact, there may be no measurable progress for more than a year, although a smart New CEO will find something to declare victory on within 6 months. Meg Whitman wants five years to show much progress at behemoth HP. The reason it’ll take much longer is that even after the CEO formulates a new plan (what they’re doing the first six months), they must then get all the rowers in the boat moving in that direction and doing so with enough force that it has some measurable impact. During that time, at least another six months, all sorts of unpleasantness will surface. Anyone in the organization with a political bone in their body will be trying to romance the New CEO either to advance their own personal position, get New CEO to embrace their agenda for how to make it all better, or often both. All those battles Old CEO fought to get the troops aligned and moving in one direction are suddenly undone, and the Old Combatants will be back to thinking they were right in the first place and the fact that Old CEO lost his job just proves it.
There is a tiny bit of good news in that if New CEO has been around the block and is smart, he knows darned right well the politicians are out in force and he is taking notes. When he has a good idea who the worst offenders are, he will replace them with his own Trusted Lieutenants. That’s good news assuming the Trusted Lieutenants are less political and are genuinely stand-up people who will help the Company succeed. New CEO will probably also replace whoever runs the part of the company perceived as being the biggest part of the Big Problem. Of course determining the truth of that is also ripe for political discord. Sales will argue the Product sucked or that Marketing never got them enough leads. Marketing will argue Product didn’t listen to their Product Managers, didn’t build enough product, or that Sales didn’t follow up the leads they were given. Product will argue there’s been Sales Execution problems or that Marketing never really understood their product and wasn’t able to present their beautiful baby in a good enough light. Finance will skewer anyone that was off budget by even a little bit. This will all slow down the ability of New CEO to figure out what is happening considerably. The smart ones may just choose to ignore all the history, focus on the Big Problem, and just start implementing their idea of Best Practices in whatever parts of the organization are most likely to improve on the Big Problem. This is scary to all concerned because the changes are not motivated by anything in the Company’s history–they’re motivated by New CEO’s history and experience, which is not yet well known or understood withing the Company. That’s why it will seem like there is no rhyme or reason to the decisions being made–you won’t have the right background to understand them.
If you are unfortunate enough to be in one of the organizations affected by these changes, life will be tough. Progress in your area will be delayed while this cycle of learning, renewal, and execution winds it way down through various org charts until it has gotten sufficiently far from the source of the pain (the Board is the source) and sufficient time has passed that we can’t afford to keep rearranging the Deck Chairs on every deck. A lot of the changes will make no sense to you at all, and you may wake up one day to find yourself in a company that bears little resemblance to the one you were so committed to not very long ago. Whatever your motivations–money, a chance to work on something really cool, belief in the dream, etc.–it may no longer be possible to pursue them. At best, a lot of time will pass and you’ll look ahead and still wonder when things will get back to “normal”.
Does all of this really have to happen?
If you have a Bad CEO Transition, in other words, one to fix a Big Problem, then I’m afraid the answer is, “Yes, that’s pretty much how things play out.” Whatever happens, it will take a lot longer than anyone hopes to fix things. Often, things will not play out and the company will be in permanent decline. None of the three CEO replacements I’ve participated in resulted in a company that was ultimately better off. Two of the companies are dead (Borland was a $500M a year high flyer and it is still dead having fallen inexorably with Philippe Kahn’s departure), and one still has a chance to get there, but at least from a shareholder value perspective, their high point is a long time back.
What do you do in these cases?
If you are in the right position, likely an executive reporting to the CEO and someone who at least sits in the Board Meetings, you are in a position to see it coming. Watch for what I call the Three Deadly Sins of a CEO:
1. They’ve missed their numbers.
2. The Board is not confident in their plan to fix #1.
3. They are not taking coaching from the Board.
In every one of the Bad CEO Transitions I have witnessed, these three sins have been allowed to go on for too long. That is a surefire way for a CEO to get themselves fired. Make no mistake, every CEO will break all 3 deadly sins at some point. Many will break 2 at a time. Some will break all 3. That latter group has a very limited time in which to show results before the Board will take action. I would say 6 to 12 months depending on the level of Deal Fatigue the Board is fighting to maintain perspective against. For startup CEO’s, Deal Fatigue is charged directly against Political Capital and when you run out of PC, you’re toast. Unfortunately, Deal Fatigue carries on like any other debt, and even the New CEO inherits the Deal Fatigue which is charged against their PC from the outset.
If you are not in a position to judge the subtle nuances of the Three Deadly Sins of a CEO, you may have to wait until the deed is done and the Old CEO is out before you know what’s happening. In either case, once you know what’s coming, it’s time to prepare your parachute because the plane is going to lose altitude quickly and may very well crash. If you’re lucky, the Outside World can’t tell there is a Big Problem. The Board and everyone else will try to put forward the face that it is all a logical progression. Find your next position on the strength of whatever positive sentiment remains around the deal. If you ultimately believe the deal will be a success, buy out your options as cheap insurance that you will still profit to a degree.
Perhaps the best way to look at it, if you can be so objective, is to consider whether you would take the job with the company as it stands with New CEO and knowing everything you know about it. Forget the old Dream that taints your soul and judgement. Do you want to work at a turnaround? One way to do that is to assume you have to start vesting your options all over again with a 1 year cliff. The dilution, confusion, delays, and added risk associated with New CEO are going to amount to the same result anyway. If you’re like me, and you’ve seen how the movie ends a couple of times, you’ll regretfully move on to find something new and less tarnished. Unless of course it’s you they’re asking to step up and be the CEO. My advice if that happens is to only consider that job if you’re a corporate ladder climber at heart anyway. If you’re an entrepreneur, you won’t be happy and there are easier ways to get to be a CEO with none of the downsides.
What happens if you stay?
There are two winning strategies in turnarounds–you either want to be the first to leave or the last. The last to leave gets to reap any benefits of the turnaround and having been part of it, may be rewarded more. But there is the certainty that at best, the Company will wind up back on whatever Dream Success Track you had imagined, but it will happen much much later than you’d expected. Alternatively, you can go find a new opportunity that doesn’t have the Deal Fatigue and Political Shuffling needed before New CEO can be successful. BTW, make sure your new opportunity’s CEO has been there for at least a year and tangible results are surfacing in your new company’s press releases lest you be jumping from the frying pan into the fire.
PS Isn’t the Jobs-Sculley picture strangely prophetic? Sculley is leaning on the Lisa, which was the more buttoned-down-and-business-like computer and Jobs is leaning on the upstart Macintosh. That’s not unlike their styles, personalities, and even their track records. Today there is no sign of Sculley or Lisa anywhere and the Mac is stronger than ever. Also, the transition from Jobs to Sculley was a Good CEO Transition and the one back to Jobs was a Bad CEO Transition. One put the company into a funk for years–so much for ignoring this advice to move on when it’s a Good CEO Transition. Steve Ballmer represents another Good CEO Transition and an argument to have moved on from Microsoft when Gates left.
The Bad CEO Transition (back to Jobs) brought Apple back to life as one of the World’s Greatest Companies, but even that last miraculous transformation took quite a while–years. If we look at the Return of Jobs as the Best Possible Bad CEO Transition, that’s another way to get the measure of how such things may matter for your career.