Post Category → Ethics

When You’re Not CEO Material

TL;DR: Before you even talk to VCs, know your own strengths and weaknesses as a leader, and work on them. Know your VCs by asking honest questions early on, and verifying answers in the market. And be proactive and honest about what you really want to be doing at your company, and what matters most to you. When CEO succession drama starts to damage a company, it’s almost always because the founder and the VCs failed to (i) align themselves on their approach to Company management and recruiting early on, and (ii) create an environment of trust and transparency where founders can give up some control without fearing that the fruits of their hard work are being given up as well.

Background Reading:

No matter how much certain investors market themselves as “founder friendly,” no competent VC can guarantee a Founder CEO that they will stay CEO. VCs have a job to do: to turn other people’s money into more money. To the extent they are convinced that keeping a founder as CEO will maximize their chances of doing that (long-term), they will do so. Otherwise, they will tell a founder CEO, sooner or later, that a new CEO is needed.

“Founder Friendly” VCs are the ones who’ve concluded that being friendly to founders helps them make more money.  They are not your BFFs, and you shouldn’t need them to be.

The below are some thoughts, from someone who’s seen it play out many times, on how founders should approach the “Are you CEO material?” issue; both before the hard conversation has arrived, and after.

First: Answer Your Founder’s Dilemma: Rich or King?

If staying in control of your company is much more important to you than achieving an excellent financial return, you should significantly reconsider whether venture capital is right for you at all.  Remember: VCs have a job to do, which is to make lots of money. You bring them on to align yourself with them so that when they make lots of money, you make lots of money.

It’s fine and common if you have a certain ‘mission’ that runs alongside the goal of building successful, profitable business; most great founders do.  But if you’re working with VCs, (i) that mission better be the kind of mission that unlocks lots of benjamins, and (ii) you better be OK at some point handing over the crown and becoming a part of, but not the leader of, management. Because, statistically, most founder CEOs eventually get replaced; voluntarily or involuntarily.

Second: Find Out if a VC is a Coach or Underminer

While all VCs are in it to make money, their philosophies regarding how much “coaching” to give founder CEOs vary wildly. Some VCs know that a founder CEO most likely will need to be replaced once the company has become a true enterprise, but they see value in keeping a founder in the CEO seat for some time and coaching them on their gaps, and also helping them fill some those gaps with other senior hires.  Other VCs virtually never let a first-time founder CEO remain in their position post-Series A. They are fine having them as CTO or COO, but they will almost always make their large check contingent on bringing in one of their preferred professionals.

There is no way to know whether you are working with a Coach or an Underminer other than to (i) directly ask (early) the VC what their perspective is on senior management post-closing, and (ii) examine the existing portfolio of the VC to see what has in fact happened every time they’ve closed a round. Trustworthy advisors who are active in the market are helpful here, as is LinkedIn.

If you’re working with an Underminer, and there are no other options, it is what it is. Work within that reality (see Step 4).

Third: Realize that you are being “sized up” from the moment you first speak to investors.

No one should pretend that “good CEOs” fit neatly into some contrived stereotype. Their personalities, appearance, backgrounds, etc. can vary significantly. However, the core jobs of a CEO, particularly at early stage, are quite uniform: (i) recruit employees, (ii) recruit investors and strategic partners, & (iii) manage and lead everyone to execute effectively on the strategy. From the moment you first interact with investors, they are asking themselves whether a founder CEO can do those things.

Fact: everything about your interactions with lead investors, from the tone and confidence of your communications, to body language and eye contact, and how you respond to push-back and calculated aggression, will influence their perception of whether you are “CEO material.” Complain all you want about prejudices, bias, judging books from covers, etc., but that is just reality. Leadership is not handed charitably. It’s asserted by behavior and results. The concept of “executive presence” is something worth familiarizing yourself with.

No, this does not mean you need to pretend to be some gun-slinging, type A alpha executive. Many great CEOs are calm and collected. But the fact of the matter is that being a CEO of any company requires the ability to have hard conversations and take some heat. If you can’t hold your own in a direct conversation with a VC, they will infer that you can’t do so in the many other key conversations that a CEO needs to have to lead a company.

I’ve lost track of how many times I’ve heard something like “That founder? He’s got a bit of an ego,” to which I usually respond, “What do you think it takes?” Ego? Thick skin? Stubborn? Chip on their shoulder? A little prickly? You better f***ing believe it.  Industries usually don’t get blasted open by people overflowing with tenderness and sensitivity.

Fourth: Focus long-term on transparency and influence. Not control.

I’ve found over time that many founder CEOs do not actually enjoy being CEO, especially as the company starts growing significantly (~post Series B). They insist on staying in the CEO seat, not because they truly think it best suits their skillset, but because of a fear that stepping down from the top automatically means totally losing influence and visibility into where the company is headed. A culture of transparency and clear communication at the board level can resolve this disconnect and avoid dysfunction.

The key issue here is not whether the Company needs a new CEO, but how to handle succession. The perfect way to create mistrust between founders and their board/management is for VCs to parachute in C-level hires with minimal founder involvement in the recruitment and selection process. It looks something like “We are getting a new CEO, and it’s X (often who was a CEO at a prior portfolio company).” In this scenario, the recruitment of new executives feels far less like the leveraging of much-needed, independent new talent for the benefit of everyone, and more like the investors taking control over management by hiring their loyalists under the pretense of ‘upgrading’ the team. 

When a founder CEO is able to propose her own candidates for the CEO position (and other C-level positions), and play a lead role in interviewing, vetting, and training the prospects, succession goes substantially smoother for everyone. In that scenario, much like a truly independent director, the founders will view the new CEO and other C-level hires as balanced people whose long-term vision and values are closely aligned with the original team. Trust is preserved, and that trust, along with a continued seat at the Board table and contractual protections around their equity and compensation, frees founders to move to positions in the company that are better suited for their skills (CTO, Chief of Product, Chief of Strategy, COO, etc. etc.), and which they usually enjoy more.

Again, different VCs have different philosophies on how to approach CEO/Executive succession, including timing. The only way to find out is to get a dialogue going early on, before term sheets are delivered, and verify the answers by talking, privately, to portfolio companies. As always, having your inner circle of advisors to, confidentially and off-the-record, help you gather that information is key.

Gatekeepers and Ecosystems

TL;DR: Relationships are important, but a business mindset that prioritizes ‘relationships’ over real value delivery enables gatekeeping and cronyism, both of which are contradictory to entrepreneurship, and can suffocate a business ecosystem.

Background Reading:

As I’m known to do on occasion, I’m going to get a bit personal with this post; because the backstory (my backstory) helps explain the message.

To say that, growing up, I did not come from money would be an understatement. When I was born, my parents (mexican immigrants) were selling tomatoes and avocados out of a pickup truck.

In a sort of american dream story, that pickup truck eventually became a moderately successful produce business, where I spent a good portion of my elementary school off-time sorting produce and invoices. Unfortunately, through a series of bad, misguided decisions, that business eventually ended in bankruptcy, and my parents in divorce. My sisters and I were raised by my single mother, who supported us by selling perfume at an indoor flea market; her small business, where I worked for most of my teenage years.

Yes, to get from there to where I am now took an enormous amount of work and hustle; hours a day commuting to public schools in better neighborhoods, days without sleep to get the grades that would get the scholarships that would pay for the colleges that I otherwise couldn’t afford, even while working, etc. But the real reason I tell that story, and this is where it connects to the crux of this post, is this: I would not be even close to where I am today if it weren’t for people willing to work with and support others purely because of their talent and merit, regardless of whom those ‘others’ knew or where they came from. 

Those people are the reason I’m here. And the underlined portion of that sentence is what makes all the difference.  Because I came from nowhere, and knew no one.

There are very few statements about business that I find more obnoxious than, “it’s all about relationships.” Not because I don’t value them. To the contrary, I think building trusting, deep relationships is one of the most important things CEOs can do. See: Burned Relationships Burn Down Companies. What truly unsettles me about that perspective is two-fold:

  A.  It reflects a pervasive mindset on how to achieve success that, when played out over time, concentrates opportunity in pockets of people who all know each other. People who go to the right schools, live in the right neighborhoods, etc. are able, despite being all kinds of mediocre, to leverage their ‘relationships’ to keep out those who are far hungrier, and far more talented, but simply don’t have the right ‘relationships.’ 

  B.  It creates gatekeepers, who can use their access to the right ‘relationships’ to control a market. And gatekeepers are the exact opposite of true business ecosystems. Gatekeepers, and the idea that you have to know specific people in order to succeed, are contradictory to entrepreneurship.

I’ve observed how, in a variety of markets and startup ecosystems, pockets of people have attempted to become gatekeepers. It never ends well.  Influencers/connectors, meaning people who serve as ‘nodes’ of an ecosystem by knowing lots of people and helping them connect with each other, are a great thing. Every town needs them. A gatekeeper, however, is an influencer/connector who has devolved into using their relationships to cut off the market from others who won’t go through them. Rather than facilitating an ecosystem, they use the “it’s all about relationships” fallacy to artificially centralize it. 

Relationships do matter. Relationship-building skills are important. But the people who most emphasize the supremacy of relationships, instead of prioritizing authentic differentiation and value proposition, are often the most mediocre. Fact. By stating that relationships are what matter most, you’re indirectly acknowledging that your success has come from whom you know instead of from what you can actually deliver. 

I remember as a kid driving through the “rich people” neighborhoods (upper middle class), imagining how amazingly talented everyone living in those homes must be. There’s no way they could be that successful if they weren’t the best of the best, right? Now, I’m nauseated by how many people I’ve encountered over the years who’ve coasted into success simply by (i) being competent, yet uninspiring, and (ii) leveraging relationships they built during their childhood and college years. Because it’s “all about relationships.”  When lawyers are coached on how to build up a client base, the first thing they almost always hear is “start building relationships.” And perhaps work on your sports trivia while you’re at it.

People who truly believe it’s “all about relationships” do not become successful entrepreneurs. Great entrepreneurs focus first and foremost on developing a legitimate, differentiated, and defensible value proposition, and then building the right relationships from there. Be so good that the right people – the ones who don’t think it’s all about relationships and quid pro quo – can’t ignore you. The relationships will follow. 

When clients approach our firm, I am happier when I hear that they have scoped the market. It serves as a great starting point for explaining how and why, instead of following the old playbook, we’ve built our reputation by completely re-tooling how law firms run: better technology, a unique culture built through unique recruiting, billing rates hundreds of dollars per hour below market, extremely high client satisfaction, strong policies against conflicts of interest, and competitive market compensation for top lawyers who work 25% fewer hours than the firms they leave.

Many don’t realize it, but that last part has been part of my core mission the whole time. Our firm is built, from the ground up, to allow lawyers to have healthy personal lives, instead of pushing them (for the enrichment of partners) into workaholism. So that they don’t end up overworked and divorced. Like my parents. I told you the backstory mattered here.

Yeah, we’ve got relationships. But they were and are earned; not given, and not bought. To this day, I shut down any suggestion that we establish economics-driven (as opposed to merit driven) referral arrangements with anyone. Not everyone is happy about it. You can’t make everyone happy. It is not all about relationships.

A true business ecosystem cannot be controlled. And true entrepreneurs cannot be held back by gatekeepers; they find a way around them, eventually. It’s what they do. Give people a chance if they are hungry, and can demonstrate real skill. Even if they come from nowhere, and know no one. 

Your Best Advisors: Experienced Founders

TL;DR Nutshell: While great advice for a founder team can come from all kinds of sources, nothing comes close to matching the value of advice from other founders (preferably local ones) who have been through the exact same fire themselves, and made it to the other side.

Related Reading:

Suddenly, everyone who just shows up to school gets a participation trophy, every lawyer with small clients is a ‘startup lawyer,’ and everyone who can pull a few strings is a startup ‘advisor’ or ‘mentor.’ While there are truly great advisors/mentors out there, I see founders constantly wasting time, equity, and in some cases money on people who have very little substantive value to deliver to an early-stage technology company.

While the above-linked post gets more in-depth into the source of the problem, this one is about one specific type of ‘advisor’ that every single founder team should have: other experienced founders; specifically founders who have gone through a successful fundraising process, dealt with the nuances of founder-investor relations (preferably with the same/similar types of investors), and either achieved an exit, failed (you can get great advice from people who failed), or are still going strong.

Cut Through the PR

Given how easy it is to orchestrate personal branding and online PR that obscures the truth, every founder team needs people to talk to, privately and confidentially, to get direct, relevant, unvarnished advice; the kind that doesn’t make it onto twitter or blog posts. And there’s no better place to find that advice than experienced founders. 

Want to know what it’s actually like to work with a lawyer? You don’t ask other lawyers, or google, or other people in the market who know her; you ask her clients. Want to know what it’s actually like to work with a specific VC? You don’t ask twitter, or angel investors, or people who run accelerators. You ask their portfolio companies. And more specifically, within those companies you don’t ask the CEO put in place at the first large round and who managed to negotiate the ‘founder’ title for himself; you ask the original founder team that took the first check.

I can’t tell you how often founders will ask the wrong people about a lawyer, a VC, an accelerator, or some other service provider, and then get a complete 180 degree, unvarnished perspective when they ask, off the record, the direct ‘users’ of those people. That’s how you find out that the X lawyer who is ‘extremely well respected and well-known’ happens to take a week to respond to founder e-mails; or that Y ‘well-connected’ VC uses shady tactics to coerce founders into accepting unfair terms. You won’t get it from twitter. And you won’t get it from people who didn’t sit directly in the founder chair. 

There is a world of difference between talking to people who know about the challenges of being a founder v. those who lived them.

Finding Experienced Founders

Don’t expect seasoned founders to be running around town doing free office hours for random founder teams with an idea and hope. They’re not mother teresa. They’re sought-after, extremely busy people, and expect to have their time respected just like anyone else. So hustle to connect with them just like how you hustle to connect with other important people. Meetups, LinkedIn, Twitter, Accelerator Alumni Networks, etc. While I have serious reservations about lawyers connecting clients directly to investors, I think great VC lawyers are excellent connectors to experienced founder teams, as long as the ‘intro request’ makes sense.

But you can know that most excellent founder CEOs I know, even the ‘tougher’ ones, have a special, soft place in their heart for other founder CEOs fighting the same fight. Despite the fact that their advice is probably some of the most valuable you’ll ever find, they’re often the last people to ask for ‘advisor equity’ in exchange for their advice. Although that doesn’t mean you shouldn’t voluntarily offer it to them.

In short, very very few founder teams can make it very far purely on their own judgment. They need independent advisors to consult with on relevant issues. But most advisors don’t have first-hand knowledge of the core challenges of being a founder, and therefore aren’t qualified to advise on those issues. That knowledge lies with experienced founders. Find them.