Innovation Strategist & 2x Entrepreneur

Founder/CEO – Your Investors Have Already Thought About Firing You

As companies grow, the CEO must evolve. At critical milestones investors will ask themselves if the Founder/CEO is the right person to guide the company to future success. For a Founder/CEO to keep their job all the way to IPO, they must Level Up. The framework of Predictable Success can be used to bring this idea into clarity, and empower the Founder/CEO with the perspective to adapt as the company evolves. For a Founder/CEO to keep their job all the way to IPO, they must Level Up. Otherwise their VC’s will fire them.

Yes, Your VC Has Already Thought About It

Your VC doesn’t want to fire you. But you can be sure they’ve thought about it.  In fact, each time you triumphantly declare you have achieved a new milestone, they’ll congratulate you for making it this far – and the very next thought that comes into their mind will be “is this the right guy to take us to the next stage?”

I heard Steve Blank, godfather of the Lean Startup movement share this idea at an entrepreneurship event at Colombia University a few months ago.  It struck me as a painful statement to make, but he then said “The needs of companies evolve. VC’s need to make sure the right CEO is leading the company. It’s usually the founder, until it’s not.”

Steve’s talk was about the evolution of management thinking.  Traditional MBA’s teach students how to be executives in enterprises. Business schools have built a management stack for companies with “knowns”: known markets, known customers, known channels, etc.  By contrast, the Lean Startup movement is about dealing with “unknowns”. Lean Startup teaches startup founders how to “search” for a sustainable business model.

World-class Founders are great at Search.
World-class CEO’s are great at Execution.

Right in the middle there is a transition point between Search and Execution, which is characterised by a set of organizational turmoil that has to happen on the route to achieving scale.

At that turning point, investors will want to bring in operational execs – and the interests of the investors and founders immediately diverge (e.g. making money vs achieving vision).  The second the founders can prove they have found a repeatable and scalable business model, often the same day they are elated by their sense of success, investors start to think “Is this the person that will take us to scale and a liquidity event?”  They will think very very hard about firing the Founder/CEO and replacing them with a professional CEO.  VC’s won’t tell you they’re thinking about it, because to the founder it’s like being fired for succeeding.  The reality is, at this turning point the needs of the company have changed.

Steve Blank continued: “Some VC’s, for example Andreesson Horowitz, will bet on founders that can take the company successfully through Search and into Execution – but what percentage of founders are still the CEO at the liquidity event? It’s not 100%.”

The Predictable Success Framework Puts This Idea Into Perspective

That critical point of organizational turmoil Steve Blank mentioned can also be thought of as a growth stage called “Whitewater”.

The concept of Whitewater comes from a framework published by Lew McKeown in his book, “Predictable Success”.  In it, he describes a 7-part framework that describes the growth stages of companies.  This framework perfectly puts Steve Blank’s comments into context and paves a way for Founder/CEO’s to lead their companies all the way to liquidity.

 

Predictable Success

Here’s a summary of each stage:

EARLY STRUGGLE – This is the classic startup phase, where the founders search for a scalable, profitable and repeatable business model.  The founders are experimenting, improvising, bluffing, learning – searching, searching, searching. They are scrappy and imaginative, hustling and building their way to their first set of customers and a signal they have a business which can take off.  Experienced founders know exactly what kind of struggle Early Struggle this really is.

FUN – One day the phone rings, and rings again. The demand takes off. Customers have heard about the startup and their offering. Traffic starts to spike on the website and orders start coming in. This is the beginning of a cycle of rapid sales growth Les McKeown calls “Fun”. In this phase, nothing matters except sales, but they are coming easily and frequently. The company scales up with top-line revenue growth as the major driving force. Nothing else really matters, but no-one on the team cares, because it feels magnificent to get out of Early Struggle and see money coming in.

FIRE CEO DECISION #1? – It’s here that VC’s will first think about firing the founder.  “Will the CEO manage this growth properly? They’re onto something, but will they wreck it? Do we need to replace them?”  Let’s assume the answer is no, and the founders are trusted to keep the growth going.  This is when the next turning point occurs.  With the same surprising burst of sales that kicked off Fun, the company enters the 3rd stage of growth called Whitewater.  Except this time it’s not customers calling to buy, they’re calling to complain.

WHITEWATER – By this stage, the company has grown in complexity to the point where  founders’ shoot-from-the-hip style no longer works.  Instead, every new sale causes more problems. Customer orders are being mishandled: wrong product, wrong address, 2 weeks late, arrives broken. The systems are not in place to manage the complexity, so everyone in the company starts to trouble shoot.  Soon enough, this gets out of hand too, leading to ever-strained or completely broken communication systems and internal conflict.  Work days are now as infuriating as they once were fun.

FIRE CEO DECISION #2? – In Whitewater, the role of the professional CEO becomes relevant again.  Investors will ask “They’re getting bigger but haven’t grown up yet; is now the time to bring in someone who can handle things properly?” Most investors are savvy business people themselves and will see the patterns: they know when proper systems and management must be put in place.  If they think the CEO doesn’t have the flexibility, maturity or capacity to lead the company in a more structured way, the CEO will be replaced by another who excels at execution.

PREDICTABLE SUCCESS – The fourth stage in the framework is the goal of all companies: to achieve a point where the company is a well-oil success machine. There is a perfect balance of systems and innovation. Work is delivered consistently. Communication flows evenly and effectively across the company. Decisions are made quickly and efficiently, using a variety of perspectives and the data that’s available. Goals are readily set, and the gap between results and execution is small.

FIRE CEO DECISION #3? – Seeing Predictable Success happen in real time, investors will once again ask if the founder is the right person at the helm.  “They’ve come a long way and they company is performing, but can the CEO keep it there? Or do we need to have a hard conversation and bring in a professional who can keep this going?”

TREADMILL, BIG RUT, DEATH RATTLE – I won’t go into detail on these stages because companies only reach them if they are managed poorly. The bottom line is you ‘fall’ out of Predictable Success by over systemizing the company and stifling innovation and creativity.  Staying in Predictable Success is tough: leadership must walk a razor think line between efficiency and innovation.  If the company is over systematized, it’s ability to innovate and stay ahead of the market slowly declines.

3 Critical Turning Points

The Predictable Success framework therefore brings into context 3 crucial points where a Founder/CEO may be replaced by a professional CEO:

1) Turning Point #1 – Mid-Fun – Can the Founder/CEO guide the company towards ongoing sales growth?

2) Turning Point #2 – Early-Whitewater – Can the Founder/CEO help the company grow up and become more efficient and consistent?

3) Turning Point #3 – Mid-Predictable Success – Can the Founder/CEO keep the company in that fine zone between systems and innovation; or will they drop into Whitewater or Treadmill?

What Can Founder/CEO’s Do To Level Up?

The good news is that founders can Level Up at each of these turning points to evolve their style and adjust to the new needs of the company.

Imagine the Founder/CEO making these statements to their investors at each turning point:

1) Turning Point #1: “We know we’re in Fun. The focus at the moment is sales at all costs. We want to move fast and break things and get market share as rapidly as possible. I know the Fun will come crashing down at some point, but we are monitoring a few key metrics that will tell us when it’s happening.  We are carefully tracking customer feedback and have a robust communication platform in place so we can see when the tension and frustrations start to climb. When that happens, we’ll know it’s time to slow down a bit and focus on the systems so our internal structure can catch up with the growth”.

2) Turning Point #2: “Fun is over. We’re starting to drop the ball all over the place. We could let it go for a while to get more market share, but that’s only going to make the problem worse. We need to shuffle the team to encourage cross-function interaction and more accountability for particular functions. We’ve highlighted the internal systems that need to be top priority if the team is going to work efficiently. In fact, our staff have told us what they need to take their frustrations away and improve efficiency. We’re working through a program now.”

3) Turning Point #3: “The balance of efficiency and innovation is our primary focus at the moment.  The company knows how to succeed, it’s in everyone’s DNA. We have to keep the machine humming and make sure our people are empowered with the tools they have and all the supporting systems, without getting bureaucratic or squashing innovation. As soon as we feel like we’re going to tip over the either side, we’ll address it. We have just hired an excellent new COO and their mission is to keep us on that fine line for optimal performance.”

Further Reading

I highly recommend reading Les McKeown’s book to get a full understanding of each stage. He has found a fantastic following in the Inc5000 community and his framework is relevant to companies of all sizes.  In the context of venture-backed high-growth companies, his simple framework provides guidance on how the Founder/CEO needs to evolve as the company does.  Thinking about company growth in these 7 stages demystifies the leadership challenges fast growing companies experience.  

Awareness of the pattern is half the problem.  The rest relies on adapting to the needs of the company as they change.  If the Founder/CEO does this well, they get to keep their seat at the front of the bus.

 

Share your thoughts in the comments below, or connect with me on Twitter.

 

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Kosta Stavreas

Innovation Strategist & 2x Entrepreneur