External-CEO vs. Founder-CEO: Who should lead the company?

Millions of founders start their firms with the picture-perfect dream: launch the startup, control the business, hire a team of capable employees, enjoy the benefits, and retire as a billionaire. Here’s the shocker- not everyone can be an Anita Roddick, a Mark Zuckerberg, or a Bill Gates! Founders-cum-CEO is a unique breed. It’s fair to say that most founders are passionate about their idea. Therefore, they plan on steering such ideas to execution. But the day-to-day control of a firm’s operations is a CEO’s job, not a Founder’s, right? The whole debate brings us to the question- Can a founder make a good CEO? Is there a need for the recruitment of an external CEO as the business scales up? Below, we dive into the scenarios that will help you make an informed decision when it comes to running a successful startup.

Rear view of company CEO looking at big city from the rooftop

External-CEO vs. Founder-CEo trade-off

No one epitomizes a company quite like its founder. They have a deep, emotional connection to their business startups and with the position of CEO. Being a founder, you’re focused on achieving the company’s vision while maintaining total control. Nevertheless, this unique connection can hinder you from making the right decisions concerning the dynamic senior leadership needs of your startup. Once your business idea takes shape, and the company starts thriving, the focus isn’t being an entrepreneur anymore but instead, becoming CEO. It’s looking after the fundamental mundanities of operating a business: hiring, managing personnel, quality control, customer support, and so on. Essential activities for sure, but not those you could excel in singularly.

Yet, some of the greatest B2B success stories involve strong founder/external CEO partnerships. For instance, look at how Meg Whitman aided Pierre Omidyar’s eBay to become the second-largest eCommerce firm in the globe, trailing only Amazon. Conversely, Noam Wasserman of Harvard Business School disagrees with the ideology about Founder-CEOs running a business for the long term. In a recent study of 212 startups, Wasserman established that less than half of B2B founders were still CEO after three years, and no more than a quarter of the companies that attained IPO status were Founder-CEOs. Given the two unique scenarios, it is only fair that you will face a real-life dilemma on the kind of direction you want your business to take.

Should you become a founder-CEO

In 2019, Ben Horowitz of Andreessen Horowitz crafted a well-thought-out piece on why he prefers Founder-CEOs amid startup scaling. „Why We Prefer Founding CEOs“ looks into the three key ingredients that founding CEOs tend to own, but which experienced CEOs often lack:

  • Comprehensive knowledge
  • Moral authority
  • Unwavering commitment on the long term

In a nutshell, Horowitz asserts that it is close to impossible for a CEO to sustain the rapid product innovation that has become a prerequisite of modern-day startups without these three key ingredients. And you can understand why.

The key reasons

So, why do founder-led B2B companies like Fusion-io (David Flynn) or Workday (Dave Duffield &AneelBhusri) so often succeed? The reasons are endless.

The Business-to-Business world is fundamentally innovative. Today, it’s not enough to follow the crowd and wait for the best. These innovations are mainly product cycles. External CEOs are efficient at maximizing, but not inventing, product cycles. The reason is that innovation is a complicated subject for most people. Many view any truly unique idea as stupid because if it were a brilliant idea, somebody else would have already adopted it. As the founder, you are likely to have more natural initial detractors than external parties. Do you remember Steve Job’s return to Apple in 1996? One thing he did have is the founder’s boldness to innovate despite the doubters.

Here’s how Horowitz’s ingredients of a successful Founder-CEO play out:

  • Comprehensive Knowledge:

To come up with the original innovation to start a firm, founders must comprehensively understand the technology needed, the probable competitors, and the market in all its diversity and segmentation. These form the fabric of unique, innovative ideas. This knowledge is quite impossible to replicate, even with the hiring of a professional CEO.

  •  Moral Authority

More often than not, real innovation requires doing away with the foundational assumptions of your company. If the company is performing well, doing so will be difficult for the external CEO. The company’s primary belief system gets wrapped in such assumptions. Since you made the assumptions in the first place, it is much more comfortable.  

Netflix provides a superb example. Faced with a transition from distribution of physical records to electronic delivery of bits, Netflix abandoned its old assumption that consumers wanted DVDs mailed to them. Instead, the company invested in signature innovations and produced a new round of exceptional offerings – streaming videos to Sony Play Station 3, connected DVD players, XBOX 360, and many more.

  • Unwavering commitment to the long term

As the founder, your startup is your life’s purpose. Your emotional investment may also exceed your equality stake. From the onset, the goal is to build something significant. You instinctively know that high product cycles come from finance and that even the most prominent product cycles will eventually die out. 

On the other hand, professional CEOs tend to be driven by short-term objectives. They get paid in terms of stock options that span four years and cash dividends for quarterly and yearly performances. Usually, investment in startups doesn’t pay immediately. If you care about your bonus in this quarter, you will have a direct incentive to avoid investments in brand innovations as you will not reap profits.

Any real innovation requires a series of substantial investments that go beyond up-front cash. Facebook’s founder Mark Zuckerberg incurred considerable debts to give his platform a facelift. He reinvented crucial features such as the news feed used by millions around the world. Most critics undermined his business acumen. However, it is by a total commitment to the long term that Zuckerberg has reaped significant benefits.

Bringing in an external CEO

In theory, any professional CEO can embrace the challenge of being a successful long-term CEO, but they have to commit to the three ingredients listed above. The recruitment of a CEO for your startup is one way to achieve prolonged success. But the real question is: „Should you replace yourself?“ If yes, then, „How do you make the transition?“

When to know if you need to replace yourself

During the early stages of building a firm, the experience is usually exciting – a small team, minimal venture capital, a new product, new technologies, and unique strategies. In due time, you may become entangled with the aspect of psychological ownership. Ultimately, this leads to a feeling of total possessiveness and the need to retain ownership; you become mentally attached to the business. When your startup reaches new heights, things will change all of a sudden. For instance, you’ll have to learn how to manage many employees. 

In the article titled „If, why, and how founders should hire a professional,“ LinkedIn’s Reid Hoffman affirms that for you to remain successful, you have to be passionate about the type of work as well. He says that CEOs need to gather satisfaction from the nitty-gritty of building a company, and not just developing a product. They need to be well-versed about leadership, control, and organizational processes when startup scaling occurs.

Are you the visionary or the integrator guy? I love Gino Wickman’s  Book “Traction” where he describes the nature of two kinds of personalities that every successful company needs. Gino mentions whereas founders are mostly visionary guys who had the initial idea, think of the product first and live in the future a top manager and CEO rather should be an integrator that thrives on creating order out of chaos and develops the company constantly and slowly with a focus on details.  

In short, ask yourself the critical questions about your passion, commitment, and focus, and you’ll know whether or not to hire an experienced CEO.

Why do most entrepreneurs fumble even when they have winning ideas? Let’s find out:

1. A bad attitude towards investors 

Most founders consider their companies as their ‚ride or die‘. For this reason, it is challenging to relinquish control. You may find it insane for an investor to ask you to give up management, at least to some extent. While it is only natural for you to feel emotionally attached to your startup, most investors aren’t willing to invest in a company that is overly dependent on one person. They want you first to hire an external CEO who can seamlessly handle daily operations. 

2. Managerial decisions are not easy to make 

The need for decisional freedom often triggers the idea of starting your firm from scratch. However, emotions may get the best of you, and you may end up making irrational decisions that may affect the startup negatively. Hiring a professional CEO will not only help keep your emotions in check but also sustain the morale of the rest of the team.

2. Lack of strategy

The initial strategy to start a business is very different from the one you need to scale it. For you to consider hiring an external CEO, the ability to explain and implement a strategy that scales up should be a key consideration. For instance, Facebook didn’t generate any revenue in its formative years. But 22-year-old Mark Zuckerberg had a strategy for the company in his mind, which ultimately proved right in the long run.

Wrapping up 

Two decades ago, entrepreneurs were in a hurry to recruit experienced CEOs. Today, many of the same B2B companies are firmly behind long term Founder-CEOs. Both approaches can work brilliantly, which means as a startup owner, you should focus more on what’s right for you and less on what’s trending.

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Von Lorenz Hartung | 07.04.2020 | Leadership

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