Startup Board Success: ‘Founder to Future CEO’ Transition – 7 Key Focal Points with Koen Mulders

‘Lots of founders aren’t the CEO. And lots of CEOs aren’t the founder’. Marc Randolph, Netflix Co-Founder

 

The vast majority of scale-ups have a transition moment where the founder hands over the lead to a new CEO. According to a survey of the Harvard Business School, only 40% of the founders are still CEO after year 4, and only 25% lead their companies to an IPO. Combined with the knowledge that a change of leadership often has a significant impact on a company’s future, these numbers emphasize the importance of managing towards a smooth ‘founder to new CEO’ transition. However, on many occasions, such a transition has proven to be difficult.

The need to transition to a new CEO generally arises as a company evolves from being a ‘large small’ to ‘a small big’ company. During this development, the responsibilities, skills, and competencies that are required in a leader shift significantly since a founder creates something from nothing, and a CEO manages something that already exists to greatness. A CEO needs to manage, next to the vision, strategy, and innovation, also challenges such as streamlining operations, lowering costs, and managing an increasing number of employees, products, services, functions, geographies, and customers. This has little in common with the leadership requirements of a startup. In which founders typically bring vision, entrepreneurial spirit, and innovative ideas to a small-sized organization. In many cases, the founder is not having the skills required for managing a scale-up, and (s)he is not always interested in or capable of developing them. When this is the case, the board needs to trigger and manage a full transition toward a new CEO at the right time and with great care. This will be a key factor determining the future success or failure of the venture.

A key challenge of such a transition is that the founder is the heart and soul of the company. As such, the founder may not see the need for a change of leadership. Or, even when (s)he does recognize this need, (s)he may still stay in the lead (informally) and hold back a new CEO from being successful. Another risk is that the newly appointed CEO turns out to be not the right fit. This may for example happen when (s)he is not operating in line with the spirit and purpose of the company.

To prepare and execute a smooth transition, I recommend considering 7 Focal Points (derived from various case studies and expert articles, see references):

1. Find the right moment and sufficient time

• As a board, you need to have clear metrics in place to monitor the company and CEO’s performance, with regard to both financial and team management aspects (e.g. engagement, attracting and retaining talent). This will enable an open and factual dialogue, and trigger eventually the start of planning the transition.
• Potential warning signals for a board that a change in leadership is required can be:
  • Stakeholder misalignments (frequent and big gaps)
  • Challenges in attracting, and retaining talent
  • Financial problems, spending to high/ cash flow shortage
  • Difficulties to raise additional investments for the next growth leap
• It is of essential importance to plan for sufficient time to prepare, define, communicate, and execute the transition with care and quality.
• Keep the formal handover period of the leadership transition short, to have only one captain in the lead at the same time.

2. Founder buy-in

• It is crucial to take the founder fully on board in this process. Founder acknowledgment and support are an essential base, in case a transition is required, for acquiring the support of other stakeholders and employees.
• Some founders recognize that they are not the right leader to bring their company to the next growth leap. They truly act in the best interest of the company to be open for a transfer of leadership. ‘The only way to move forward is to step down’.  Others need more encouragement and tougher dialogue to get to this insight. I would recommend such a dialogue to focus on questions such as: what is needed for the next phase? is this what energizes you (founder)? Do you believe you are the best-equipped person for this job to make the company the most successful?
• Involve the founder in the succession planning and search: (s)he will be able to support and let go if they believe the company will be in good hands with the new CEO candidate.

3. Future role of the founder(s)

• After building from nothing the venture to a running company, it can be very difficult for founders to let go, as this is such a big part of one’s identity. Hence, it is important to agree on their future role.
• The founder can transition into the CEO long-term role, this is rarer yet it happens. This needs full board assessment and alignment if this is the right choice. To make this transition successful, support and leadership coaching will be needed.
• The founder can also move to other roles within the company (a requisite; the founder needs to fully accept the changed responsibilities and let go of former responsibilities):
  • Staying in a company focused on a certain field of interest and expertise, for example when passionate about innovation to become CTO, or in marketing/sales, to become business development lead.
  • To become a board member, enabling the firm to benefit from the new leadership, whilst keeping access to the founder’s deep knowledge.
• A transition outside of the company, aligned with their personal passion, can also be an option.

4. Fit of new CEO, to the company’s needs, personality, and leadership capabilities.

• The board needs to take time to determine and align a CEO profile that matches the required criteria and leadership mix to lead the company through the next leap of growth.
• Critical leadership capabilities normally are; strategic thinking, driving results, leading change, leading people, collaborating and influencing, and building people capability. The most successful founder-to-CEO successors also have a strong personal drive and are highly credible with customers, investors, employees, and management.

5. Foundation through communication

• Stay in control of the communication with all stakeholders. Communicate on time, and create clarity and trust for the transition. Plan for sufficient time, and give people the opportunity to reflect and react.
• Include in the communication the future role of the founder and the value the new CEO will bring to the company.
• Ensure that the founder, board, and new CEO all adhere to the same narrative.

6. Full handover, not only the CEO’s responsibilities also the informal ‘source’

• Ensure that the board supports the transition and that stakeholders are fully aligned on the direction and vision of the company.
• Be aware that the founder has a unique relationship with the company. Employees, investors, and business partners generally identify- and are emotionally connected- with the scale-up via the founder’s values. The `role of source´ (i.e. the creativity and energy driving the initiative) also needs to be passed through. There is a lot of power and influence associated with this role, and this needs to move over to someone new. This role operates at a deeper level and requires special attention in the handover. If this does not happen, the new CEO will most likely not be able to lead the company as information flow is still elsewhere.
• Act as a board if you signal red flags that the handover of ‘the source’ has not been successful: power struggles, authoritarianism, death-by-consensus, a focus on money, a lost CEO, a founder who just can’t let go.

7. Faithful to the purpose and creative vision of the company

• The new CEO should stay connected to the long-term values of the venture and through this secure support from the founder, employees, and other stakeholders. When an initiative becomes disconnected from the original vision (when, for example, the primary driver becomes money), the company risks becoming less creative and inspiring and losing its attractiveness to employees, partners, and investors.
• Focus on shifting the company culture from founder-led to founder-inspired in order to preserve what is best about the company and prepare for new growth and scale. A new CEO should show respect for the founders’ legacy, and at the same time needs to have an understanding of their envisioned future legacy and act accordingly.

The Founder to CEO transition is one of the key pivotal points in the development of a scale-up into a mature company. It is a very important and delicate process to be aware of and to manage well. The 7 Focal Points can be a good starting point for planning and designing this transition.