Navigating Successful Founder-to-CEO Transitions
This article was originally published on the MMG website July 18, 2018:
Iconic founder-led companies such as Amazon and Facebook are heralded for preserving the soul of the original startup with their founding CEOs intact, and they have found successful formulas to scale. Yet this outcome is actually quite rare. A report from Harvard Business School revealed that less than half of founder CEOs continue to run the business after three years and fewer than 25 percent are in charge when a company goes public.
The odds are incredibly stacked against founders staying on as a business matures. Either they lack the capabilities or experience to scale their business, or it is too difficult to let go—or both. As Noam Wasserman wrote in Harvard Business Review, founders must decide whether “they want to be rich or be king” and how much they value scale vs. control. A critical test for an organization is whether it sustains its growth through this critical leadership transition.
As private equity firms continue to acquire or invest in private, founder-led companies, their boards are thinking about scale and how to double or triple their investment in a five-to-seven-year period. The board determines whether a company must bring in a professional CEO or COO who can help the company grow at an aggressive yet sustainable pace. And while there have been great transition success stories—think Microsoft’s Gates to Ballmer, Apple’s Jobs to Cook, and Walmart’s Walton to Glass—approximately half of leadership transitions fail, and the rate is even higher when a founder is involved.
A Proper Handoff
When considering the best way to make the transition from a company’s founder to its first external CEO, it is important to understand the psychology of most founders. These people may have become newly minted multimillionaires or billionaires, yet they have great pride in their legacy, having seen the business grow from the original entrepreneurial idea.