Is It Time For Your CEO To Go? (Part 2)
A New Model for Silicon Valley

By guest author Tony Scott of ChampionScott Partners

For technology companies, the biggest change that has happened since the burst of the dot-com bubble is their likely path to exit. In the late 1990s, it seemed like any company with not much more than an idea could go public. Venture capitalists invested in companies looking for “100 Xers” – companies that would return 100 times their investment. The entire Valley was obsessed with the dream that any company could – and should – have an initial public offering. If you talked to any entrepreneur about the goal for their company, it was always, “We are going IPO”.

When the dot-com bubble turned into a massive dot-bomb, IPOs weren’t so easy to sell anymore. Investors in the public markets realized that the public markets aren’t actually appropriate for investments in companies that really need venture capital. After the tech bust there were still companies that went public, but the older public market models of showing six to eight quarters of revenue growth and profitability applied, so not many companies made it through the gate.

Over the past few years it has become increasingly difficult for any company to go public. With the advent of the Sarbanes-Oxley regulations combined with a decrease in the willingness of investors to buy shares in newly public companies, the IPO market for tech companies has come to a near standstill. The necessary threshold in terms of revenues to consider going public has skyrocketed. Many investors and investment bankers today would say that unless a company has well over $100 million and preferably closer to $200 million in annual revenues, it just doesn’t make sense to be a public company.

Venture capital investors still want to have an exit in any company in which they invest. They need to achieve liquidity from their portfolio companies so that they can return capital and gains to their limited partners, and go on to make new investments. Yet in today’s environment, the only path to liquidity for well over 90% of companies will be through an acquisition by another company.

If the board and entrepreneur realize that the path to liquidity is very likely going to be a trade sale, why not think about a different leadership model?

I believe that if the likely exit is going to be a sale, that founding entrepreneurs may not need to be forced out of the CEO role nearly as often. Of course there will always be entrepreneurs who can’t lead or delegate, and those whose personalities are destructive will have to go. But even founders who are serving as CEOs for the first time can provide a lot of value to companies as they grow.

While board directors can provide useful advice and guidance to an entrepreneur, most early stage company boards are comprised exclusively of investors other than one or two of the founders. Entrepreneurs typically never feel comfortable being completely open with investors, and vice versa, as their goals and interests are not always completely aligned.

Independent external board members are a great idea, and can be very useful as their interests are usually not aligned with either the investors or the entrepreneur. They should be able to look at issues from a more neutral and unbiased perspective. However, independent board members of early stage companies rarely receive enough compensation (either cash or equity) to make it worth their while to take on the task of helping truly mentor an entrepreneur.

What every first-time CEO needs most is someone with deep experience building companies to scale; someone they can turn to on an on-going basis for unbiased advice and coaching. That person needs to be someone the entrepreneur can open up to without fear of being reprimanded or possibly even fired for making a mistake. Even more importantly, they need to be someone who can tell the entrepreneur when they are wrong, and suggest a better way to do things – and someone to whom the entrepreneur will listen.

There are many experienced former CEOs in Silicon Valley who have had great success but no longer want to take on the challenge and burden of devoting 110% of their time to one particular company. Sometimes that is because they already have “made it” financially, and want to spend time with family or pursuing other interests. Other times it is because they realize that creating a portfolio of equity by working with multiple companies usually has a higher probability of some positive return than taking the chance that two or three years of hard, full-time work will come to nothing. After all, venture investors have a portfolio of investments to manage risk – why shouldn’t successful executives who don’t have to work for a living anymore do the same?

I think almost every Silicon Valley company with a newly minted founder/CEO could benefit from having an active, engaged senior advisor. Whether the advisor is engaged as a consultant to work with the CEO on specific issues, or serves as an executive chairman to help with all of the major issues the company faces, the basic parameters are essentially the same: an experienced former CEO who will devote one to several days per week helping the founder on issues where he or she has little or no experience.

If a founder has someone like that helping out, the founder, company and investors can benefit from a depth of experience that is highly unlikely to be recruited to the company otherwise. The founder can learn from the advisor through on-the-job, hands-on guidance, and not worry about asking questions or doing things that might make them look stupid to investors. The company overall will benefit by keeping the passion and vision of the founder in the leadership role, but with the added benefit of a highly experienced, successful former CEO watching over the founder’s shoulder to give course corrections as needed, and ready to step in to take the wheel if the founder gets off course. Investors will benefit by having highly capable “adult supervision” in the company.

Of course, all of this does come at a price – advisors aren’t going to work for free. However, highly experienced former CEOs serving in an advisory or executive chairman capacity will work with early-stage companies they find interesting for far less total cash and equity than would be required if they were to take on the full-time CEO role – if they could even be enticed to consider that at all.

If this model is implemented by more companies, I believe we’d see much lower turnover of founders/CEOs to “professional managers” – and perhaps higher success rates for start-ups overall.

This segment is part 2 in the series : Is It Time For Your CEO To Go?
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