Finding a CEO
At least one of the founders of every new company takes on the role of CEO. If you’re personally involved in starting a venture, perhaps it’s even your idea, you’ve convinced a partner or two to join you on the journey, and/or secured some initial funding, and have a desire to lead the team going forward, then it’s likely to be you. As a company grows and requires more capital, venture investors (VCs) may become involved. With some significant frequency, sooner or later, VCs wind up replacing founding CEOs. It’s not a guaranteed outcome, but not a rare event either.
Finding the right CEO to lead an early stage company is one of the most important and difficult tasks facing a company’s Board of Directors. The fact that founding CEOs are often replaced is not particularly surprising for at least three reasons. First, nearly 3 in 4 VC-backed businesses fail to perform as planned. A common rule of thumb is that out of 10 venture financed start-ups, 3-4 are complete losses, another 3-4 return the original investment with no gain, and 1-2 provide substantial returns. Whether or not the CEO is responsible for the performance below plan, Boards often seek a change in direction at the top when businesses appear to be on a path to failure. This tendency was discussed in a 2012 article in the Harvard Business Review reflecting on “VCs’ Strange, Instinctual Need to Replace Founders” (https://hbr.org/2012/07/unpacking-vcs-strange-instinct).
Second, even in successful companies, different leadership skills are more important at different stages of their life cycle. It’s relatively unusual to find a single individual who excels across the spectrum of skill sets ultimately required, even though there are many high-profile examples of individuals who do. Just think of any of the founders who started and continue to lead multi-billion-dollar businesses, such as Gates, Brin, Zuckerberg, etc. Nonetheless, a visionary founder CEO with the passion and skill to promote their idea and raise seed funds may not be the best person to run a high growth operating entity, take a company public, or lead a publicly listed company. Should a founding CEO clearly lack the required skills to take the company forward, a search for a new CEO is likely to ensue.
Finally, it’s not uncommon for founding CEOs to decide to leave on their own. This may happen from frustration or burn out after years of grueling effort to get a business off the ground, or tiring from the almost non-stop need to be in fundraising mode. It’s not the life everyone envisions when they think about starting a company. This also may happen following a good outcome, such as an acquisition. Even when the acquiring company wants to keep the leadership team intact, the founding CEO may determine that they are less interested in the new corporate culture, or addressing the new objectives, and choose to leave on their own to pursue a new opportunity.
I’ve had a chance to be a founding CEO, a replacement CEO, and a Board member seeking a new CEO – several times each. Sitting on both sides of the table gives one an interesting sense of perspective. I suppose as a consequence of experience, over the past few years I’ve been asked more frequently than ever about whether I know of good CEO candidates for a given company, or what types of qualities one should be seeking in a new CEO.
My guidance depends in part on the stage of the company, but let’s keep the focus of this discussion around early stage or startup companies, where either a founding scientist or a company’s Board is seeking a CEO. The first question that comes up is how to go about finding a new CEO. I would advise them to first use their network before engaging an expensive executive search firm. This includes their legal counsel and financial service providers who often have relationships with many companies and know people who may be available and suitable (e.g., from firms who have recently exited).
The next question is what key characteristics should the ideal candidate possess. Here’s a list that I use as a starting point:
Someone you are comfortable interacting with, and whose judgement you trust
Understands the market in which you are operating (or plan to operate), and has strong relationships with customers and key opinion leaders
Understands your product and it’s compelling value proposition, and can develop crisp messaging and a concise business plan (including product development and commercialization strategies) and associated slide deck for investor presentations
Has successfully raised funds in the past, and has a network of investors who will back them at least through the seed stage (and ideally are able to go further)
Is a strong public speaker, passionate about the company’s mission, and able to be the public face and missionary for the venture
Can assemble and lead a team of high quality people capable of executing on the plan (has done it before)
If the company is a biopharma entity developing new drugs, the candidate should have experience taking drug leads through the pre-clinical and clinical trial process, obtaining regulatory approvals, obtaining reimbursement – and/or developing partnerships with other entities who take on these responsibilities.
Having said all this, more often than not you can’t find someone who fits the description provided above. Or you may know of someone, but there are insurmountable issues with timing, location/relocation, noncompete agreements, compensation sought, etc. It’s thus likely that you’ll need to give in on something, and take a step back from your list of ideal characteristics. Start by considering what you personally offer, as well as what’s offered by the rest of the team you have already assembled, that can compensate for things a given candidate doesn't bring to the table. Bear in mind that time is the great equalizer, so it’s more important to make progress and get your business started than to wait to find exactly the right CEO. As is often said, in one form or another, don’t let the search for perfect get in the way of good enough.
I was once on a Board with Lloyd Smith and we were seeking a new CEO for an early stage company based in the Midwest. Lloyd pointed out that you want to find a CEO who's had prior success, but unless they have a particular passion for your project, and likely a willingness to relocate, they probably won’t be interested. You can probably find a former CEO who did not have a successful outcome, but that’s not who you want to lead your business. As a consequence, your best bet is to look for someone who has never been a CEO but is considered “up and coming”. This individual likely has broad operating experience, good judgement, a track record of success in the roles they’ve played to date, and strong internal drive. Someone who is ready to step up into a CEO role, hungry for the opportunity to be successful, and who can at least get you to the next value inflection point if not further.
Bob Palay, a fellow Board member at a different company, had a very different approach: find the person you want most, and be as persistent as possible in removing all barriers to get them to take the job. Let them live where they want; give them more stock; allow them to work part time; whatever it takes to get them to "yes" - assuming you have a well-defined set of goals and are extremely confident they can deliver on what you really need in the next 1-2 years. Examples of such goals might be raising a next round of financing, securing key IP via license, pulling together a superb core management team. Really whatever matters most to growing the company.
Lastly, you’ll need to consider the issue of compensation. Market comparables for both equity and cash are generally a good place to start and not hard to find. The companies you choose to compare with need to be given serious consideration as to whether they are proper proxies for your situation. The candidate’s own compensation history also comes into play, as does their level of prior experience, and in particular their ability to raise funds going forward. Finally, the company’s capital structure needs to be considered. It’s a very different situation if one is a founding CEO as compared with a replacement CEO joining a company that is already several years old, gone through a few rounds of financing, hired 10s or 100s of people, and has a limited stock option pool to work with.
At the earliest stage of a business, a CEO candidate should be prepared to work with equity as the primary driver of compensation (and incentive), with lower than market cash, and perhaps no bonus or significant benefits. Often you can structure a deal under which their cash compensation gets moved up to a "market" rate after they close on sufficient financing. You can also provide a variety of creative non-traditional benefits that larger companies can’t consider because of the precedents they may set, or laws that may get in the way once the company grows beyond some level of employees (e.g., flexible location and/or hours; above-market vacation time, sick days, or parental leave; choice of computer systems; etc.).
If, on the other hand, you already have initial financing in hand, or the candidate brings that financing with them, then higher cash compensation (market comparable) may be warranted right from the start. Having said that, I'd preach an austere approach to spending early on, including CEO compensation. The right CEO candidate should understand and agree with that approach, and be willing to be compensated with equity instead. It’s critical that the new CEO strongly believes in their ability to grow the value of that equity, for themselves as well as all of the shareholders – and that the Board believes so too.