In the world of startups, there are few sure things–and one of them is that as soon as you are funded, the VCs will begin their quest to find the next CEO of the company.  It will often begin quietly, behind the scenes, and eventually make its way into the public eye.  It will cause contention with the founding CEO (no matter what) and can cause unrest in the ranks.  Big change is always hard.  Big change done poorly can be catastrophic.

The motivation, at least initially, was sound.  Let’s find a professional CEO who’s been there and done that– in theory, to increase the likelihood of us making a big pile of dough.  Sign me up.

The reality, however, has proven to be just the opposite.  It is worth spending time thinking about the reasons why.

There are a million ways things can go wrong in any business, but the presumption that you have to have an experienced outside CEO to have a shot is fatally flawed.  Overall, statistics will bear out the fact that if anything, the likelihood  of screwing up happens at a higher rate with an outside CEO than a founding one.  That’s an easy statement to make as it’s just numbers: most companies have outside CEOs and most companies fail, therefore, companies with outside CEOs fail more often than those with internal CEOs.

I am not suggesting that all founding entrepreneurs are quality CEOs–far from it–but those that aren’t tend to know they aren’t early on and are an active, vibrant participant in the process of finding the right CEO for the company.  That alone can be the most significant difference between success and failure as it relates to the CEO’s ability to create a positive outcome. If the founder is a believer to the very core, they are more likely to help find the right CEO.  If the founder is treated like a necessary evil by the VCs and is not vested in the emotional or cultural outcome of the hire, the odds of a company getting that hire right go down 80% in my estimation.

If you look at success stories, they almost always are ones where the founding team is actively participating in the process of finding “professional” management–not doing so with a gun to their heads.  James Lau and Dave Hitz at NetApp lobbied their board to find a professional CEO–for over a year!  When Dan Warmenhoven came aboard, it wasn’t because the VCs jammed him down their throats, in fact it was the opposite.

Nothing can kill a company faster than the wrong outside CEO.  Sometimes the only fix, if there is time, after the outside CEO ruins everything is to bring back the founder.  Steve Jobs got fired at Apple.  Closer to home, Sujal Patel watched as Isilon’s outside CEO took the company public and got trashed. Now, with Sujal coming back as CEO, Isilon is slowly rising back to prominence–and doing so the hard way–with honesty and integrity, and perhaps most important of all, with purpose.  Sujal has a way to go before he can stand on the same podium with Steve Jobs, but what they both have in common that you simply cannot hire, is belief.  Down to their very cores, they believe in the spirit and righteousness of their companies.  You can’t hire that.  It is or it isn’t. Whether Diane Greene of VMware or Michael Dell (who hit a grand slam, let the reins go to others, and came back), history tells us that the first level rocketship ride to glory is more often than not going to happen when the CEO is in early and is entirely vested in the whole enchilada–not someone that’s forced in along the way.

Outsiders fail for many reasons, but there are some common factors that you should pay attention too.

1. Past success: This is perhaps the best indicator of future failure.  Think about it: you know how hard it is to hit a home run in this world?  It’s hard.  It’s a statistical anomaly.  You know how hard it is to get hit by lightening twice?  It’s ridiculous.  Just from an odds perspective, you start out behind the eight ball by bringing in someone who’s already hit a home run.

   There is a big difference between bringing someone in because they have real world business experience–ideally successful and unsuccessful–and bringing in a “rainmaker.”  I am all for bringing in experience at every level, I’m never for bringing in a rainmaker.

   The “experienced” CEO is, to whatever degree possible, a person without ego (at least an outrageous one).  They are practical and pragmatic, and their experience can keep a company from making dumb mistakes (because he or she has probably already made them) and can course correct incrementally to keep the entity moving down the right path.  They don’t need to be the hero, at least in the eyes of the company itself.  They need to be the wise person who actually cares and supports all the great things that make up the company, without having to change those things to make themselves feel more in control.  Dan Warmenhoven was that person. Lend grown up, practical business counsel without destroying the culture and value systems (presuming they are legitimate, of course) by injecting your own forced agenda into those matters.  As simple as that sounds, it’s amazing how infrequently it happens.

   What happens most of the time is the new CEO comes in, looks for the biggest potential problem in the schoolyard, and challenges them to a fight:  “I’m the new king of the block people, make no mistake about it.”  Assinine bravado 99% of the time, perfect thing to do 1% of the time.  Joe Tucci had to get rid of Moshe Yanai at EMC (granted, not a startup situation, but the metaphor applies) because he had become poison.  He didn’t do it to assert his alpha male position, he did it to remove a cancer that prohibited the company from taking the next step.  People didn’t see it (eventually) as a power play as much as the removal of a gate to progress.

   If the new CEO has feelings of inadequacy, you are doomed.  They will immediately fire as many as they can and replace them with known quantities (read, “yes men”).  Don’t get me wrong, if there is a legitimate upgrade to be made at any position, you make it–but the way you do it speaks volumes.  Doing it first and trying to piece it together after is a sure sign of death.  Being smart and assessing the situation from every angle first and giving people the opportunity to come to the right conclusion on their own will pay off in spades.  No one wants to be told how good looking you are, how smart you are, and how ugly and dumb they are–even if they are.

   The biggest reason past success is often a guarantee for future failure is that the world is not static.  Things change.  What made company A successful in the past might be valuable to company B, but will it really be exactly the same?  Of course not. Yet many post successful CEOs act like their formula is the only formula–regardless of current market/business/economic/people conditions.  You are almost better off taking a formally successful CEO from a totally different industry than you are from the same one.  If it’s the same industry, they are more likely to be inflexible to the possibility that their strategy that once shined is now flawed.  It’s hard for humans to accept things like that, and thus they will cling to their “glory days” strategy even as the boat sinks.  In a new industry, they are forced to learn the idiocynracies as they go and, as such, can’t be so rigid in their thinking–which can only be good.

2. Good versus lucky:  A good CEO will always admit they were lucky.  Sure, you have to have the experience to act properly and recognize opportunity and potential disaster, but above all, you were successful because you were lucky.  If you don’t believe that, you shouldn’t get hired.  If you are smart enough to know that you were lucky last time, you won’t assume you will be lucky this time.  You’ll use your experience more than your bravado and ego.  No one hits a home run without being lucky.  No one.  There is not a single case, ever, that can be made that states a company executed brilliantly in such a way that it required zero luck. Yet many of our successful CEOs of yesterday actually believe their own bullshit so much that they can’t see reality.  This will kill your company.  Look at Bob Nardelli: came up a superstar at GE, but almost completely destroyed Home Depot.  Carly Fiorina did the same at HP.  Success is not a birthright.
3. Irrational moronity: While this should be the simplest to see, it continues to happen every day.  Companies get so caught up in having to find the next CEO that eventually once they figure they can’t get Ross Perot or Mark Hurd, they settle on a total, unadulterated shithead.  This is normally someone who did succeed at some level in a big home run–but not as the CEO.  They were “lucky sperm” as Roger Marino (the “M” of EMC) used to say.  They come in and not only bring all their “boys” with them, they immediately adopt the only playbook they know, which typically was from a far gone era.  Let’s hire 800 expensive direct sales people and attack the enterprise even though our product sells for $100 through the web.  This breed tends to appear where the VCs and existing management team are weakest–they get bullied into believing the bullshit.  They hope and, as some wise person once said, hope is not a strategy.  They also tend to be the ones who get bullied into investing outrageous amounts of money into the company–to support the absurd strategy from 1984. I continue to find this class most astounding, yet I get a call a week from someone asking about some clown I wouldn’t hire to wash my car who made $2M selling for (fill in the blank: Oracle, SAP, IBM, EMC, NetApp, Sun, etc.) back in the day as the next great CEO hope.  The fact that a monkey with a basketball could have also ridden that wave gets lost on would-be hiring managers. Success begets success, right?

History is littered with companies killed by CEOs who were formerly wildly successful.  Sometimes, the market kicks you in the head and even Superman would end up bleeding, but most of the time, if you do forensics, you’ll find a CEO who is ego and belief system fundamentally doomed the company.

In short, a CEO, no matter when they join a company, has to have:

• Absolute belief in their abilities along with an absolute knowledge that they can and will be wrong.
• The absolute knowledge that luck matters more than skill.
• An absolute desire to embrace and perpetuate the positive elements of the company’s culture.
• A desire to assimilate, not overtake.
• The experience to recognize and ac–and the ability to bring in smarter, more experienced people in areas where they lack that experience.
• Confidence without ego.  Empathy without attitude.
• A truckload of luck.

Related posts:

1. Fail Factors – Why Startups Die: Hiring
2. Fail Factors – Why Startups Die – The Zealot
3. Fail Factors – Why Startups Die: The Market of One
4. Fail Factors – Why Startups Die: My Personal Failure(s)
5. Fail Factors – Why Startups Die: Revenue versus Valuation

Tags: Bill Nardelli, Carly Fiorina, Dan Warmenhoven, Diane Greene, EMC, HP, IBM, Isilon, Joe Tucci, NetApp, Oracle, Sujal Patel, VMware