How to Keep Founders Involved Once Companies Grow

Fred Wilson has an intersting post about how to keep founders engaged in the companies they started after they step out of CEO roles. He says:

I’d like to find a formula (like the one Yahoo! has found) and bottle it. 
Because I believe companies that can keep their founders engaged and motivated
are so much better off than those that cannot.

I think the key to this is to understand the mentality of founders. We are people who choose to start things instead of join things that already exist. We thrive on invention and the opportunity to disrupt existing systems. We are evangelists and communicators — we get the most satisfaction from being able to transmit our excitement to others. We are more motivated by the slight chance of huge upside than a guaranteed but limited win. We have no fear of personal financial risk — perhaps even irrationally so — we are eternal optimists and believe we will always prevail. We look to the future more than the present or the past. We are highly competitive and need to be in leadership roles but we hate beaurocracy and the inefficiencies of large organizations, which is why we start small ones. We are more interested in what hasn’t been built yet, than what is already working. We strive to be successful, but not merely in financial terms — acknowledgement for our ideas and creations from our peers is even more satisfying than making money.

Generally we are workaholics and we are comfortable wearing many hats — and in fact we often wear our many hats better than specialists who only wear one hat. Rather than wait for others to things, we tend to just get them done ourselves — a skill which is great for small companies but perhaps disruptive in large ones. We are generally not top-down managers and we don’t like to treat others as non-equals — another reason why we like startups where everyone is collaborating as a team.

What does all this mean? To me it means that VC’s and companies that wish to keep their founders involved, after they are no longer in the CEO role, need to find ways that their founders can do what they do best for the company, rather than somewhere else. In other words, they have to give founders the ability to invent and incubate new business, or lines of business, for the company. They also have to make sure that founders never feel sidelined our overshadowed by the hired management teams that come in when companies start growing.

I believe that it is often a good thing to bring in professional CEO’s — for example, when companies get large enough in people and revenues to require managers with large-enterprise management skills. But it’s also vital not to bring in hired leadership until the company is really large enough, and focused enough, to warrant it. If done to early, bringing outsiders in to run a company, can destroy the company’s DNA rather than replicate it.

I think the formula for managing this transition successfully is:

  • Only bring in outside CEO’s to take over leadership when a company has grown up (or is about to) — when it is large enough in people and revenues to need a new level of structure and management.
  • Keep founders motivated by giving them the freedom to innovate and incubate new businesses within the framework of the existing venture.
  • Utilize the founders as evangelists, keep them in the spotlight — don’t marginalize them internally or externally.
  • VC’s should make sure the founders have the last word, and veto power, in choosing the new leadership — even if they technically don’t have an equity majority in the company anymore. Additionally the choice of a new CEO should be carefully tailored to fit the personality of the founders. Some founders don’t like to be in the spotlight, others do. It’s important that the new CEO’s ego is compatible with their egos, or lack thereof.
  • Make sure the founders are made a part of the new leadership team so that they continue to feel a sense of ownership and control in their companies.
  • Instead of the founders reporting to the new management team, it should be the reverse. The new management team should report to the founders (not on a day-to-level — but perhaps on a quarterly level).
  • The transition from leadership by the Founders to leadership by a new CEO and management team has to be handled carefully. Often there is a strong bond of loyalty between the Founders and key employees who were there from the early days. In order for key employees to accept the new leadership, and not see it as a negative sign, there has to be an unambiguous communication to key employees and staff about the benefits, and support of the Founders, of the change. If not managed well such transitions come across as "management shakeups" rather than positive developments for the business.
  • Make sure the founders still have as great or greater opportunities for huge upside within the venture, as they might have by starting something new outside the venture.

I think companies that follow these principles make a successful transition to professional management while continuing to harness the tremendous energy, inspiration and initiative that their founders can provide. The best combination, in my opinon, is when the new CEO is less of a star and more of a manager. Founders usually provide the charisma and media savvy. What they need is someone who can build the structure and discipline to back them up.

I think the case of Google is a great example. Larry and Sergey get to be the guys in front of the cameras. Eric, who has always been a speak-softly-but-carry-a-big-stick guy, is the man making things run. They don’t compete — it’s very complementary. In the case of Yahoo, it’s a different arrangement. I rarely ever see the original Yahoo founders in print or elsewhere — they seem to have vanished — yet they are still there it turns out. In Yahoo — which has become a media company — it’s Terry Semel who is the media star in the spotlight. It seems to be working, but clearly the personal goals of the Yahoo founders are quite different from the Google founders because they were willing to take more of a backseat role.

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