Pascal Levensohn, an experienced venture investor in California, has published a new white paper on the delicate issue of CEO transition in venture-backed companies, and it is available on his web site. As his interviews and own experience shows, CEO succession is a natural part of a company's evolution; the CEO who goes all the way to a billion dollar company is the very very rare exception. He outlines the warning signs and best practices for managing the transition.
The job of the board is to watch for these signs and come to a consensus on how to proceed. What may surprise some is how often board members do not agree on whether a transition should take place. Some directors fear the devil you don't know more than the devil you do. And board members should carefully evaluate whether the challenges a company faces are ones the founder CEO can develop through with coaching or augmenting the management team.
Companies can and do die while the board argues about this issue. The issue of who is the right CEO and their appropriate compensation is one of the top two sources of disagreement -- the other being valuation. In my survey on boards of venture-backed companies, the most frequent reason a founder CEO is replaced is because of his or her inexperience with the size to which the company has grown. Amongst other things, how to recruit and manage others is usually not part of the skill set of start-up entrepreneurs; large company people have those skills and entrepreneurs are not large company people.
The problem is not only experience but often attitude as well. Defensive behaviors, as is often evidenced in the board meetings, are a clear red flag for me. Building in a CEO evaluation process into the board calendar provides a good mechanism to at least get the subject on the table. But even prior to an investment, one can pick up key signals. Entrepreneurs who crave a controlling shareholding often are the ones who don't see that they are missing key skills when the company grows beyond the $ 5 mln revenue mark. If they don't feel that having 20% of a growing is better than 55% of a stagnant one, then the investors are in for a rude awakening. Of course the entrepreneurs need to have a huge amount of faith in their company as well as themselves. But faith to the point of deafness is detrimental.
As Pascal states "the feeling of betrayal is rooted in the poor communications between the (investors) and the founders about the natural evolution of venture companies." Betrayal can be felt by both entrepreneurs and investors. In the positive aura of the closing "honeymoon" inexperienced investors often overlook having the discussion with the entrepreneur about "what if you're not the right person to lead this company to where it needs to go". It is a tough discussion and it is much harder to start after the investment is in. Key to it is an effective board in place that can manage these expectations, take on the needed dialogue and do it in a fair and clearly objective way.
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Posted by: verzekering bedrijven | March 10, 2009 at 11:03 PM