• What we do
  • The People
  • About Us
  • Why Innovation Africa
  • Contact Us
Innovation AfricaCreating the Future Today
  • Feature Articles
  • Innovation
  • Agriculture
  • ICT
  • Technology
  • Entrepreneurship
  • Health
  • Store
  • Contact Us
Menu
  • Feature Articles
  • Innovation
  • Agriculture
  • ICT
  • Technology
  • Entrepreneurship
  • Health
  • Store
  • Contact Us
  • VCs’ Strange, Instinctual Need to Replace Founders

    July 30, 2012 Editor 0

    Venture capitalists exhibit some strange behaviors, but none is more bizarre than the near-inevitable scheming to remove a company’s founder-CEO. Odder still is that these plans are often hatched just as the company begins to really perform.

    The process, instituted by a particular stripe of venture capitalist, represents the acme of “adult supervision” by the VC, a destroy-the-village-to-save-it moment of investor heroism. The show trial brings rote charges — the CEO is too autocratic, too visionary (crazy), late on monetization, late to exit, and far too young — with succession by a gray-haired realist as the inevitable penalty. The CEO, the VC reminds us, serves at the pleasure of the board. Sensible in theory, this strategy almost always destroys value in practice.

    Let’s dispense with the case where the founder-CEO has tragic flaws, like corruption or wild incompetence. Those CEOs should be removed, although awkward questions linger about how so egregious a CEO could have slipped past investor diligence. We can also set aside the case where the founder and investors agree on a CEO for any number of reasons; those situations can also succeed (Schmidt, at Google, probably falls into this category). The more interesting case is where the founder-CEO is removed by investors in the name of progress. This case is surprisingly frequent: almost 40% of all CEOs are gone within three rounds of VC investment, usually in that way. Is this the right course?

    In the most straightforward instance, VCs remove a CEO because his company underperforms. Doing so may be gratifying but it is irrelevant because young, failing companies can’t recruit external executive talent. Turning around GE or Yahoo may be prestigious and lucrative; at a minimum, big companies have the cash flow to ride out a turnaround. Start-ups are different — reforming a small company brings little glamour or money; it also brings fewer qualified candidates.

    The weirder, more important instances come when a company is doing well. Frequently, VCs disagree with a key element of strategy, often how aggressively monetize the company at the expense of other growth. The downsides to doing so are several-fold. Founders have the moral authority to stick to a grand vision but also the flexibility for the sorts of radical experiments young companies must undertake but external candidates have difficulty imposing. If investors had been able to swap out Mark Zuckerberg in Facebook’s early history (considered the prudent course by many at the time), it’s not clear the company would have evolved into a world-bestriding giant. Equally, if VCs had succeeded in totally sidelining Page and Brin (again, an option considered at the time), Google’s brilliantly successful landing page would probably devolved into a tatty Times Square.

    Founders also understand their companies in ways outsiders cannot and they possess an essential connection with their employees. CEOs brought in by VCs have much weaker intuition for the company and conflicting interests. Young companies depend on evangelism as a competitive advantage; carpetbaggers need years to establish credibility.

    There’s a moral dimension, as well. In private equity — the world of Bain, and LBOs, and Gordon Gekko — replacing the CEO is part of the deal. The core of standard private equity is finding good ideas that are mismanaged by bad executives, so eliminating the CEO is often an essential part of the bargain and good for the company. In the case of venture-funded companies, which have little operating experience and untested ideas, the bargain is both the idea and the people, with the latter more important than the former. Why, then, destroy one asset to “improve” another?

    Not every founder goes the distance, but it’s important that founder-led companies perform significantly better — a suggestive metric is that companies retaining their founders have produced substantially better returns than the S&P. There’s nothing surprising about this because thoughtful investors see no reason to interrupt a successful run and successful founders see no reason to leave their companies. Sometimes, the most adult supervision is no supervision at all.


    Go to Source

    Related Posts

    • Innovators need to sweep investors and customers off their feetInnovators need to sweep investors and customers off their feet
    • If You’re Out to Change the World, How Do You Know When to Move On?
    • The Need for Research and PrototypesThe Need for Research and Prototypes
    • Innovation Portfolio Management: A Synthesis and Research AgendaInnovation Portfolio Management: A Synthesis and Research Agenda
    • Kenya: Microsoft Thinks Global and Manages LocallyKenya: Microsoft Thinks Global and Manages Locally
    • South Africa: First Meerkat Telescope Foundation LaidSouth Africa: First Meerkat Telescope Foundation Laid
    Sovrn
    Share

    Categories: Insights

    Tags: founder, vcs, venture capitalist

    New Research on Why CEOs Should Use Social Media Why Your Organization Isn’t Ready for Open Innovation

    Leave a Reply Cancel reply

    You must be logged in to post a comment.

Subscribe to our stories


 

Recent Posts

  • SL Crowd Green Solutions September 21, 2020
  • Digital transformation in the banking sector: surveys exploration and analytics August 3, 2020
  • Why Let Others Disrupt You? Take the Smart Self-Disruption Journey! August 3, 2020
  • 5 Tips for Crowdfunding During the Pandemic August 3, 2020
  • innovation + africa; +639 new citations August 3, 2020

Categories

Archives

Popular Post-All time

  • A review on biomass-based... 0.9k views
  • Can blockchain disrupt ge... 697 views
  • Prize-winning projects pr... 692 views
  • Apply Now: $500,000 for Y... 612 views
  • Test Your Value Propositi... 537 views

Recent Posts

  • SL Crowd Green Solutions
  • Digital transformation in the banking sector: surveys exploration and analytics
  • Why Let Others Disrupt You? Take the Smart Self-Disruption Journey!
  • 5 Tips for Crowdfunding During the Pandemic
  • innovation + africa; +639 new citations
  • SME Innovation: 10 Priorities for Support Post-COVID-19 
  • Africa RISING Annual Progress Report 2018 – 2019 now available
  • Fodder beet feed supplementation delivers dairy success for Ethiopian farmers
  • Using theory of change for outcome-oriented research
  • Africa RISING partners publish soil fertility management guidebook

Tag Cloud

    africa African Agriculture Business Business model Business_Finance Company Crowdsourcing data Development East Africa economics Education Entrepreneur entrepreneurs Entrepreneurship ethiopia ghana Health_Medical_Pharma ict Information technology Innovation kenya knowledge Knowledge Management Leadership marketing mobile Mobile phone nigeria Open innovation Organization Research rwanda science Science and technology studies social enterprise social entrepreneurship south africa Strategic management strategy tanzania Technology Technology_Internet uganda

Categories

Archives

  • A review on biomass-based hydrogen production for renewable energy supply 0.9k views
  • Can blockchain disrupt gender inequality? 697 views
  • Prize-winning projects promote healthier eating, smarter crop investments 692 views
  • Apply Now: $500,000 for Your Big Data Innovations in Agriculture 612 views
  • Test Your Value Proposition: Supercharge Lean Startup and CustDev Principles 537 views

Copyright © 2005-2020 Innovation Africa Theme created by PWT. Powered by WordPress.org