EASING OUT THE FOUNDER

Managing a Successful Founder/CEO Transition

EXECUTIVE SUMMARY

June 2002

© June 2002 Spencer Stuart. No part of this document may be circulated, quoted, or reproduced for distribution without prior written approval from Spencer Stuart. © Spencer Stuart

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Top Level Findings Close to one-half of venture-backed companies replace their Founder/CEO in the first two years ⇒ Success and timing of this transition is likely the most critical issue to company success Poorly handled transitions abound and account for many unnecessary company failures ⇒ Biggest mistake is not launching a replacement search early enough Early warning signs of a Founder/CEO reaching the upper limit of abilities ⇒ Symptoms of “Founderitis” surprisingly consistent © Spencer Stuart

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Top Level Findings (continued)

Best Practices Approach ⇒ Hard won experience has provided key lessons on what helps and what hinders a successful Founder/CEO transition Definition of Success ⇒ There is a direct correlation between the new leader, quality of the handoff and return on investment

© Spencer Stuart

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The Study

Detailed analysis of Founder/CEO transitions

Qualitative Interviews/ Case Studies

• Is there an optimal time for Founder/CEO replacement? • What are the early warning signs? • In a Founder/CEO transition, what specific skills are most important?

© Spencer Stuart

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Current Issues

Things are going wrong - but why? Some early warning signs... Company State  Research and Development driven organization

 Sales and marketing driven organization

 Good initial traction but now stalled out

Founder/CEO Symptoms • Limited people skills and narrow focus apparent • Product not solving mission-critical problems • CEO seen retreating to own technical expertise • • • •

Charismatic founder personality lured investors Inexperienced friends hired in operational roles Founder’s strengths are in the pitch, not in the detail Financial fluency and discipline lacking

• Growth curve passed inflection point; Founder unable to positively redirect resources • Procrastination on upgrading senior team that can move company to next level • Founder unable to move past or sticking too long with start-up mentality © Spencer Stuart June 2002 Scott R. Gordon - 5

Current Issues

Founderitis symptoms also differ depending on stage of company development Seed Fundamental Fundamental blind blind spots spots exist exist in in marketing marketing and and finance. finance. Management Management has has an an incomplete incomplete picture picture –– “They “They don’t don’t know know what what they they don’t don’t know.” know.” Staffing Staffing has has been been handled handled awkwardly awkwardly and and ineffectively. ineffectively. There’s There’s no no clear clear understanding understanding of of working working capital capital requirements. requirements.

B-round Too Too many many priorities priorities have have diluted diluted focus. focus. Management Management overwhelmed overwhelmed by by need need for for clarity. clarity. Fire Fire fighting fighting consumes consumes everyone’s everyone’s attention. attention. Key Key gaps gaps in in the the team team remain remain unfilled. unfilled. The The Founder/CEO Founder/CEO reverts reverts back back to to his/her his/her own own core core function function and and inappropriate inappropriate style style of of management. management.

C-round Senior Senior team team not not being being given given enough enough decision decision authority authority and and feeling feeling micro micro managed managed Lack of cohesive cohesive strategy strategy uLack of to to rise rise above above competition competition and and emerge emerge as as category category leader leader Board Board meetings meetings still still uncovering uncovering unpleasant unpleasant product/financial product/financial surprises surprises Cash Cash burn burn not not in in sync sync with with capital capital plan plan © Spencer Stuart

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Current Issues

Founderitis, left untreated, can lead even the most promising early-stage company to an early death

What then should boards do when they recognize the symptoms?

© Spencer Stuart

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The Cure

Getting Started Handle with care

Develop Develop aa board board consensus consensus around around the the need need and and timing timing of of the the transition, transition, and and build build aa thoughtful thoughtful plan plan of of action action with with advice advice from from qualified qualified consultants. consultants.

Eliminate minefields

Don’t Don’t begin begin aa CEO CEO search search without without buy-in buy-in and and support support from from the the founder. founder. An An unsupportive unsupportive founder founder can can sabotage sabotage or or infinitely infinitely lengthen lengthen the the search. search.

Don’t “cloak” the search

Confidential Confidential searches searches often often backfire, backfire, and and President/COO President/COO searches searches (CEO (CEO searches searches in in disguise) disguise) rarely rarely produce produce first first tier tier candidates. candidates.

“Avoid the Catch-22”

Although Although the the best best time time to to launch launch aa CEO CEO search search is is after after the the company company has has closed closed funding, funding, new new funding funding is is often often contingent contingent on on recruiting recruiting aa new new CEO. CEO. Superior Superior candidates candidates want want to to avoid avoid fundraising fundraising as as aa primary primary initial initial activity. activity.

Utilize objective & experienced resources

A A top-tier top-tier executive executive search search consultant consultant becomes becomes an an extension extension of of the the company, company, its its people, people, culture, culture, and and strategy. strategy. Identifying Identifying the the right right candidate candidate and and achieving achieving closure closure is is always always challenging challenging but but especially especially so so in in aa founder/CEO founder/CEO transition. transition.

Calibrate early and often

Quality Quality feedback feedback between between the the search search consultant consultant and and board board will will align align expectations expectations and and allow allow for for the the inevitable inevitable interactive interactive adjustments. adjustments. © Spencer Stuart

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The Cure

Best Practices 1

Prioritize Skills and Experience

Make the search priority-one

4

4It is especially critical that the board has a clear idea of the type of leadership and background needed with clear priorities identified. 2

3

Enlist support

4 Founder replacement searches involve high stakes, and can fail without the close attention and participation of the board. One member should be selected to lead the search and work closely with the search consultant.

4 Many venture capitalists hold that the relationship between the Founder and the new CEO is the single most important success factor in passing the baton.

5

Give the Founder a new role

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4 Don’t wait until the last minute to decide the future role of the founder. This is a concern to all candidates. Many board members feel that having the founder give up the CEO role during the search eases the transition.

Choose a Closer 4 Prime candidates usually need 11th hour persuasion. Identify the best closer on the board who can convince a dream candidate to accept.

Stay Close to the New CEO

4 Every incoming CEO has to deal with surprises -- facts about the company that did not surface during due diligence. The board should expect this and prepare to provide appropriate assistance. Don’t become complacent after the CEO arrives © Spencer Stuart

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Conclusion Founder/CEO leadership transitions are always complex and challenging ⇒ Overseeing a smooth handover requires good faith and responsible, dedicated efforts on the part of the Founder, the new CEO, and the board There is no standard prescription for success, but following a best practices approach will help ⇒ We know the pitfalls that can plague a Founder/CEO transition. This knowledge can significantly enhance the odds of a successful handoff To maximize returns, use a proven methodology ⇒ There is a direct correlation between the quality of the Founder/CEO handoff and return on investment © Spencer Stuart

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About the Study’s Author

SCOTT R. GORDON Managing Director, Internet Specialty Practice, and Director, Technology, Communications & Media Practice Frequently quoted in the Wall Street Journal, Business Week, and Fortune Magazine, Scott Gordon brings an industry leading perspective and entrepreneurial spirit to Spencer Stuart that has helped him recruit star performers for clients such as AOL/Netscape, Yahoo, Handspring, Cisco Systems and Microsoft. As leader of the Internet Practice and key member of the Technology Practice, Scott is a vital resource for finding leaders in e-commerce, Internet infrastructure, software and venture capital firms' portfolio companies. Scott brought years of senior level executive search experience combined with senior level management experience to Spencer Stuart when he joined in 1999. He was previously with another leading executive search firm, and was earlier with Hay Management Consultants and Homes & Land Publishing. He began his career as California Land Manager for The Nature Conservancy. For more information regarding the study, or a copy of our white paper, please contact Scott Gordon at (650) 356-5585, or email [email protected]. © Spencer Stuart

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