Blood, sweat and tears, that’s what it has taken – everything you have. You have established your startup from its fledgeling foundations into a stage of maturity. Letting go of the reins seems to be the furthest thing from your mind. But the question must be asked, when is the right time to let someone else captain the ship? This guide will share the best practices to answer that very question, alongside valuable insights from our founder, Jeff Lynn (Jeff L).
In 2017, Jeff L, co-founder of Seedrs, announced that he was stepping aside as CEO and promoting Jeff Kelisky (Jeff K), the company’s COO, as his successor. After raising a Series A round, Jeff L understood the necessity for aggressive growth that required a CEO with experience of what has worked elsewhere; someone with a demonstrable record of running a successful high-growth business.
His decision began with self-introspection, thinking about whether he was the right person to take the company to its next stage, as there are varying complexities throughout a startup’s lifecycle. Most founders not only aspire to create and run the next breakthrough business but also of staying with the startup throughout the company’s growth cycle, such as Jeff Bezos and Mark Zuckerberg; the world’s poster children for tremendous, long-term entrepreneurial success. However, these titans are the exception rather than the rule, as the skills needed to start a business and grow it to a certain level, and then to expand it to a very large company, are very different. The skills at each stage vary, and it should be considered a strength to realise that you might not be the best person to move forward at the helm later on in the company’s life.
The Founder’s Dilemma
At the crux of the issue, a founder’s opposition to change is simply down to their inability to let go and understand that they are no longer the right person for the job. While passion and dedication are integral for a founder to take the first leap of faith to build a startup, when it comes to implementing large internal structures (those that allow a business to run smoothly), the old run and gun attitude can cause significant and sometimes fatal problems for companies trying to transition.
These natural biases can cause you to view circumstances through rose-tinted glasses, causing an overestimation of your own chances of success, ideas, ability and knowledge. In a like manner, you might underestimate your competitors, lack the understanding of the resource requirements, and fail to foresee and plan for emergencies. Often, in the early days, founders excel at fighting fires they start from moving swiftly, but later on, the goal is fire prevention, not reaction. Reluctance to hand over day to day control of the child you have nurtured and raised is undoubtedly a difficult step, but more often than not, a necessary one.
Here’s how the founder role typically evolves over the startup lifecycle:
At the start, a startup’s growth is strongly connected to the founder CEO, who is usually very hands-on and inwards facing. Leadership is usually a ‘hub and spoke’ style, with the founder at the heart of decision making and integrating the various pieces of the business model. It’s hard work, it’s long hours and your touch can be felt across the entire business. The role relies on a deep appreciation of the industry and the startup’s vision and opportunity. Business operations are adaptable and dynamic as the startup learns how real-world complications affect the business. As we’ve already mentioned, you’re fighting fires from products that are shipped the minute they are ready, to dealing with the unexpected consequences of a rapidly expanding but still small and intimate team.
Mature Growth to Exit Strategy
Hiring a CEO is both high stakes and risk, but it has the potential to have a transformative effect in catapulting your company to the next level of growth.
As the business evolves, products become more solid, technology matures, revenues increase, and the next stage of planning for growth and expansion begins. These signal another phase of evolution into new products/service lines, or a readiness to exit. This ‘growth; demand more consistent integration, coordination and sharing of leadership with a wider senior team, and the CEO must be sensitive to the several people to whom they are responsible – shareholders, consumers and employees.
It is here where the roles diverge, the founder cannot be involved in every single decision, leaving the day-to-day decision making to the senior team instead, and acting more as a conductor. They become more of a figurehead and statesman/stateswoman, guiding and developing ideas whilst promoting the business. Whilst the CEO turns their hands to selling, marketing, support, finance and legal problems. These aren’t always the skills that a successful early-stage founder are equipped with, or perhaps the startup is moving too fast for the founder to have the necessary time to develop them.
“When you start a brand new business, particularly in an innovative space, you need to be a little bit crazy, a little bit willing to take a lot of chances to see what works, and a lot of flexibility and agility to tackle things as they are thrown at you. Whereas leading a business as it grows requires a much more planned, thoughtful disciplined approach to leadership. There are a few people out there who are able to do both, but in my mind, they are very different personality types and skills.” – Jeff L
Simply put, early-stage founder CEOs typically concentrate on the what, while growth founder CEOs focus on the how. Recognising these differences, respecting them, and realising their power to become a harmonious force-multiplier is one of the top reasons founder CEOs consider hiring a growth-stage CEO. Yet, sometimes this process is out of the founders control. A later stage investors may require you to step down as a precondition of continuing the funding.
What a Step Back Means
A step back can be one of several things. It might mean being less included in the day-to-day decision making of the company and taking more of a strategic outlook concerning the company’s future and empowering others to make decisions.
For others, it might be stepping away completely, and hiring someone else as CEO to run the company. This is sometimes voluntary, as founders understand that it’s the best choice for the business. However, it can also be a point of contention in certain situations, investors demanding new leadership, either wanting to bring someone new in or promote someone internally.
A large part of Jeff L’s decision to hire a CEO was the increasing difficulty managing both organic growth and strategic “moonshots” (big bet opportunities). By constantly switching between the two mindsets and cadences, Jeff L felt he could no longer be as effective as he wanted to be, and the CEO role needed to be split into two. He told the Board that he thought he could execute the moonshot work effectively, hire a CEO for overall leadership of the company, and stay at Seedrs as Executive Chairman.
“Both in terms of experience, but also what I think I’m good at and where I thrive, I could see that it would add a lot of value to the business to bring in a new CEO. But at the same time, I thought that there was a huge amount that I could still contribute to the business, and I’ve never had an ego about titles.” – Jeff L
Managing the Transition
Once the decision has been made, the next step is working out when the transition should take place, to avoid the costly error of doing it too early or too late.
Jeff L believes that after Series A can be a good time to make the transition, as your business enters a world where the challenges you face are increasingly similar that other companies have faced, so bringing the experience where someone has managed that elsewhere is very valuable.
Seedrs initially started the process by hiring a COO role, with the plan to promote the successful candidate to CEO after a year; however, it only took six months before it was clear that Seedrs was ready for Jeff K to move up.
“A lot of difference between voluntarily and involuntarily stepping down is just timing. If I was right in my thinking that there would be someone else who would make a better CEO for the business, then eventually the Board would have figured it out too. And instead of me going to the Board saying “this is what I’d like to do”, it would have been the Board coming to me saying “this is what you have to do” then that becomes a much more complicated situation…
… First of all, it becomes much harder to stay on in a full-time role and I would probably have held far less authority in hiring the new CEO. I’m a big believer, from a founder’s perspective, in trying to control the timing and the process. If you do it before you’re forced to do it, things can actually work out pretty well for everybody. But, if you get into an acrimonious situation, then it’s not a whole lot of fun for anybody.” – Jeff L
As a rule of thumb, six months of initiating and managing transition time is ideal. You should work closely with your Board to locate a suitable replacement and manage the transition, using the following six steps, as recommended by the Kauffman Foundation (2015).
1. Define the startup’s culture and core values
This might sound like an obvious one, but it shouldn’t be overlooked. You must clearly define core values and the specific components of the culture that should remain sacrosanct, and this shouldn’t just live in your mind, they should be visible to your whole team and communicable to CEO candidates. Otherwise, finding the right culture fit and aligned values will be left to chance.
Establish the next-level strategy for your company and the CEO skill sets and experiences needed to scale. The suitable CEO will have experience scaling and managing a business that has reached its strategic targets and will complement the current team’s set of skills and experiences. Before joining Seedrs, Jeff K previously worked at Multimap, where he was promoted to CEO and led the company for five years before selling it to Microsoft in 2007. Following the sale of Multimap, he joined Microsoft and then later, Picsolve as CEO, where he executed the business’ transformation from an analogue to a digital company.
He was the perfect combination of what Seedrs was looking for: a balance of historic success and hunger to do more. Jeff L was specifically looking for the experience of building, scaling and then selling or exiting a technology-led business. It was important that the new CEO understood how tech businesses worked, and the slightly peculiar dynamic of venture-backed tech-enabled businesses.
2. Select the CEO for leadership, interpersonal skills and experience of creating a supportive culture of collaboration
Outline the qualities your startup needs, both from a personality standpoint based on your own strengths and weaknesses and around the most critical areas of growth for your company. What experience is needed – is it growth experience? Larger company experience? Public or private equity experience? Strategy or leadership? Functional expertise? Channel or sector knowledge?
The new CEO will have a pivotal role in mapping out your business’s ecosystem. So they must be able to interface effectively with C-Level executives and make tactical changes to emerging challenges and lead the company to sustainable and robust growth. No hire will be tailor-made for the role, but you should look for sharp business acumen and a capability to execute the business model.
Trust your instincts; the role is more than just a resume, and it’s essential that the replacement understands the culture and is passionate about what the company does. Hiring a CEO is not too dissimilar to dating; you’ll meet and spend a lot of time with people to get a feel for what’s out there while simultaneously building a better comprehension of what you’re looking for.
“If it didn’t go to plan, we wouldn’t have promoted [Jeff K] to CEO, we were under no obligation to do that. That was the initial idea, but there was no legal requirement. You’re taking a gamble, and you need to make sure upfront that it’s someone you’re happy with.” – Jeff L
3. Facilitate close relationships between the founder, the new CEO and the team
It is crucial to build an empowered executive team with the right chemistry and relationship with the new CEO. Typically, start-up teams are close-knit units where it can be difficult to tell where one role starts and another ends. They work in informal groups and the structure is more of an ‘all hands on deck, we’ve got a problem’ style of work than compartmentalised and formal separation of roles and responsibilities that a new CEO will need to implement in order to successfully take the startup to the next stage.
The CEO should have interpersonal chemistry with you, and also match the character of the startup that you have built. So, aside from the interviews, you should invest in time getting to know prospective hires in a more casual setting, such as dinners or lunches. The time spent before hiring will instigate trust, which will be crucial to the long-term viability of the partnership.
After beginning the hiring process for a CEO in July 2016, Jeff L instantly clicked with Jeff K when they met, before a period of interviews with executives, non-executives and shareholders.
“We spent a good bit of time together before he even joined, so we went through a formal interview process where he met the exec team, but then we also did a few lunches and breakfasts to get to know each other, and the chemistry of it was really important, particularly because I would be staying on at Seedrs.” – Jeff L
4. Transfer knowledge
One common pitfall in CEO transitions is a knowledge vacuum caused by an interrupted information flow, which can cause chaos and confusion. So, suitable knowledge must be documented to the highest degree possible, with folders including all the information on the business’s customers, largest contracts, investors, product technologies, sales, and marketing activities. This should be supported by partners, and built into a company wiki or intranet so that the knowledge is easily accessible by the new CEO and any other new hires.
However, for Seedrs, the situation was slightly different as Jeff K was hired as COO and later promoted to CEO…
“There wasn’t any one big handover guide, a lot of it was operational and organic – I talk at various events, and he [Jeff K] would come along as a member of the audience to hear how I talked about the business, or I’d bring him to meetings to meet the people I was building relationships with. It was quite an organic process as we had that window of crossover. It’s a much tougher thing when you hire someone that is CEO from day one, that can be a much trickier arrangement”.
“My nature, the way I work, and what makes me a good founder and not necessarily a good CEO is that I do a lot on an emergent basis, and I don’t keep detailed records and process documents. A lot of it sits in my head, and I manage it there. Generally, if a founder stays on the Board, they’ll stick around for a bit and help manage things. But if it’s an acrimonious situation, you just have to start picking up the scraps which would be very difficult, and I think it would require a detailed set of planning…”
“… During that time, we [Jeff L and Jeff K] basically co-ran the business. Week in and week out, Jeff K was increasingly taking on more and more responsibilities, and I was shifting more towards the work I wanted to do as chairman. So having that transition period of working together was a critical element in the success.” – Jeff L
5. Minimise the handover period
The handover period is the greatest opportunity for you to pass on your vast amounts of knowledge and ensure there are no knowledge gaps. Although dependant on the complexity of the transition, this process should take about a couple of weeks, and no longer than 30 days.
Start with a proper onboarding plan to incorporate the CEO into the culture, and settle on a strategy for working cohesively upfront, which entails an unemotional conversation of ground rules and possible pitfalls before they happen.
Also be clear about goals and how you will establish measurable objectives to reach each year, and plan regular check-ins to assure ongoing communication and alignment. It is also a good idea to have your Board or other advisory vehicle set up that can help tie-break and smooth conflicts. Obviously, safeguarding the quality of this relationship must be a top priority for both parties, for as long as you are involved, but you could look at pre-negotiating a contractual exit if either side violates significant desired behaviours.
6. Determine the strategic significance of the transition and keep communication channels accessible
The rest of the company need to be supported throughout the transition, particularly those who have been there since the very beginning. Communication about the new structure, roles, responsibilities, and how the new management plan to take the company to the next level must be done effectively. Not only does it need to be presented to employees, but also sold to them, as a successful transition will rely on genuine and authentic engagement.
One of the Seedrs Board members had direct experience with a company who made an inappropriate choice of CEO hire, and it ended up setting the company back by several years. In terms of Jeff L’s communication with employees, the executive team were aware of the plan to hire a COO, to then become a CEO; however, it was never officially announced publicly:
“One of the reasons we chose to hire a COO initially is that if it didn’t work out, and they weren’t the right person for the job or they don’t like the role, there is significantly less public embarrassment in the press for a COO to step down than a CEO after 6 months of tenure. So we never made an official statement about the plan, but the savvier members of the team picked it up. It wasn’t any secret; I wouldn’t have lied if someone had asked, I just thought we’d have lost some of the value if we’d announced it publicly first.” – Jeff L
The Founder’s Future
There are several options for founders once they have stepped down, but the majority of founders stay on to become directors of the businesses. Other succession paths include taking on another role that reports directly to the new CEO, or moving on entirely to something different; whether that’s founding a new startup, joining another company, or taking time out of work.
So, when handing over the reins of a startup, it doesn’t have to be an all-or-nothing decision and more of a reconsideration of involvement. You can still play a very valuable and worthwhile role in the team and company. Further, the CEO may require a mentor during the transition phase, giving legitimate counsel and shaping the vision of the business and leaving the implementation aspects to the new CEO. However, it is essential to understand that sharing leadership can be challenging, and the transitional period should be as short as possible. It is vital to have only one CEO.
“If you founded a successful business, it doesn’t matter if you’re the office cat, you will get credit for the fact that it is your business.”
“One of the key things about having the ex-boss and the boss work together is that it’s always really important that the new boss runs the company and that is never to be challenged in public. At the same time, it’s great that he [Jeff K] has always been open to being privately challenged. I will always support him, but if we don’t agree on something, from day one he has always been very happy to sit down and discuss it. Being able to have that debate dynamic has been a big part of fostering a relationship.” – Jeff L
Founder – CEO Arrangement and Understanding
As the founder, you must be able to agree to the following:
- Respect that the new CEO will come with experience and will likely do things differently to you.
- Understand that some decisions will take longer. Founders are commonly opportunistic and prone to turn to instinct, whereas a CEO groomed in a corporate domain may work through decisions more methodically and strategically.
- Empower the CEO to make their own decisions and not to undermine them.
- Redirect employees who try to go around the CEO.
In a similar fashion, the new CEO must agree to the following:
- Respect you, your strengths, and what you have built.
- To appreciate entrepreneurial procedures while introducing best practice skills and experiences.
- Be a cultural fit with the company and embody the same values as you.
- Put the company’s best interests first.
- Ensure your confidence that they are acting in your startups best interest.
- Allow you to continue to take centre stage at public-facing events.
- Have complementary skills to you if you are remaining with the business.
As demonstrated, stepping down and hiring a new CEO is tough and emotive decision which is both high in stakes and risk. Because at some point, the demands of your role as a founder are likely to exceed your business acumen and skills, and the cost of hiring or managing the process poorly could be drastically detrimental to your company. However, it has the potential to have a transformative effect in catapulting your company to the next level of growth. By following best practices for when and how to transition founder leadership to growth leadership, it puts you in a far stronger position to manage it successfully.