Some people are better at founding and starting companies than running them.
In the startup world, there is an undeniable myth that founders make the best CEOs. This myth was probably started by founders looking to retain their control over their baby, which is usually supported by only telling half of the story of the heroic founder-CEO.
It is commonly forgotten that founders like Steve Jobs, Jack Dorsey, Larry Page and Sergey Brin, were either ousted as CEO or stepped down to allow a professional to lead their companies. In their time off, all reported on having the same humbling experience, understanding self-reflection and taking the time to learn the skills required to become effective leaders.
As the world now knows, all of these founders returned as CEOs and their company’s fortunes skyrocketed. By stepping down (or being ousted), these titans of tech have proven that the Founder-CEO is a myth.
Fortunately, we now have real data that shows that founder lead companies are less productive, have higher turnover and are generally poorly managed than those being lead by a professional CEO who did not start the business.
Researches from Harvard, Duke, and Vanderbilt universities collected data from the World Management Survey which reviewed over 13,000 medium through enterprise-size companies across 32 countries. Not surprisingly, they found that companies led by founders were 9.4% less productive, on average, and had consistently lower management scores on average.
“Founder CEOs were by far the worst type of CEO,” said Victor Bennett, an assistant professor of strategy at Duke’s Fuqua School of Business and a co-author of the paper. “We found that some managers opt for less transparent management practices—nepotistic hiring, et cetera—partially because that’s the reason they got in the game,” Bennett said. “They might be fully aware that this is a less efficient style of management, but that’s the reason they got into being a CEO.”
Not only does the Founder-CEO struggle building the company they envision, but the dual role can also threaten one of their primary functions, securing investments. Data has suggested that Investors typically don’t want to invest in companies with a Founder-CEO with limited to no executive experience. They will often require the Founder to hire a CEO as a condition of funding. This really comes down to the issue of skill set; the traits and talents necessary to conceive and launch a product are often very different than those that help a business expand.
During my second and third startup I experienced this directly – my lead investor immediately placed a condition on financing that we had to hire a professional CEO before going forward. At first this felt like a shot to the ego, but upon realizing that it was just that – sore ego and nothing else – the idea was quickly embraced and we ended up finding incredible talent to lead us onward. Upon seeing first hand what a professional manager can do, versus my founder skills, it was clear that the path to success must be paved by a leader who knows how to build companies. Thinking back on those days the comparison would be like taking a cross-country road trip in a beige 2004 Toyota Corolla versus a 2024 Mercedes-Maybach.
It is important to remember that one of the core reasons founders’ fail as CEOs has to do with the kind of person who is crazy enough to start a company in the first place. People often start companies precisely because they want the freedom to run things as they wish, and have the risk profile to take big leaps – which sometimes includes poor managerial decisions. Taking big risks is encouraged when starting, but when dealing with investor’s cash the risks taken must be carefully weighed and considered. Unfortunately, this type of introspection and quite frankly lack of experience leads to less than stellar results when helmed by founder.
Not surprisingly, most founders are shocked when investors insist that they relinquish control, and they’re pushed out in ways they’re not prepared for. But understanding one’s own limitations is what makes a great CEO. They know when to call in help, how to delegate and how to build an inclusive corporate culture.
Corporate culture is one of the most important roles of a CEO – if not the MOST important role. Without a strong corporate culture, you cannot build a strong company. The Virgin Group is living proof of this concept in action. Each and every one of Virgin’s companies starts with the focus on the employees.
“Clients do not come first. Employees come first. If you take care of your employees, they will take care of the clients.” This is probably the best management quote from Richard Branson, and explains how Virgin consistently breaks customer service records across all industries. By building the right culture, the team will preform at their best, in turn bringing happy customers along for the ride.
One needs to look no further than the toxic ‘Bro Culture’ associated with tech startups. Not only is the frat mentality an anchor to growth, but it is one that actively discourages women from joining the ranks. In a time that the startup ecosystem is trying to support women in tech and as founders themselves, we are still lionizing founders who have never developed a big tent culture to lead a diverse group of professional employees. This is a recipe for dissatisfied employees, higher turnover and can potentially lead to the company’s failure to find traction. Does anyone really want to work in the poisonous culture that Mark Zuckerberg perpetuates?
So how can this founder dilemma be solved?
Solutions
Hiring a CEO is by far the easiest solution. Sounds pretty challenging? There are a surprising amount of very senior executives in the later stages of their careers who are looking to try out entrepreneurship for the first time. And why not? This is the golden age of startup and they want in on the action. Startup networks like AngelList and CoFoundersLab are good resources for networking and finding a leader. If your startup is already talking with investors, they have large networks of talented professional managers who can be introduced to your company. The investors most likely have an idea of who they believe would be a good fit and will help facilitate the introduction and planning. However, it is important to establish a hiring process to ensure that the founder and CEO will make a good team before making a commitment. And don’t forget to include the one year cliff on the CEO’s options incase they don’t work out.
The other option is to bring on a COO. Someone who can be tasked with running the day-to-day of the company. Building the culture, establishing the corporate structure and overseeing corporate governance. Having an operations leader can free up time for the founder to focus on fundraising, and/or leading product development. After all, the product is their baby and allowing the founder to focus on what they do best while leaving the operations of the company to a professional manager gives everyone the opportunity to shine in their own light.
Final Thoughts
Most founders actually don’t want to be CEO; their passion lies in the product or another area of the business such as sales or marketing. In these cases, they are better off taking the role they want and hiring smart people to do the rest.
Founders often refer to companies as their babies. If that’s the case, they should remember that knowing when to relinquish control and let a child grow on its own is one of the most important decisions a parent can make.
One way to retain significant control over your company, even if you step down as CEO is by being an investor. Learn why this is so important in our article about Why Founders Should Invest In Their Startup.