Leadership Change in a Lean Startup: When Does It Make Sense?

by Kyle Lui

Founders of lean start-ups often focus on rapid iterative testing, proving out your concept and hypothesis, product market fit and managing cash burn. Leadership is often ignored because, as a founder (or co-founder), you are the leader. But what happens when lean start-ups reach an inflection point and management change is on the table? From The Entrepreneurial Manager course (TEM) at HBS, we’ve learned that most technology start-ups change leadership either due to poor performance or exceptional performance. The business is failing so the VC investor wants to kick you out. Alternatively, the business is exploding and has outgrown you. Are there generalizations to be made with regard to leadership change?

Looking at various examples, Facebook is perhaps one of the most well-known (and exceptional) of a founder staying on as CEO through several rounds of funding and explosive growth. Mark Zuckerburg continues to lead the $50 billion company today and brought in experienced senior executives like Sheryl Sandberg under him to scale and grow the business. Facebook was all about the user experience and Zuckerburg understood the user psyche better than anyone, and that apparently was enough for all stakeholders involved to keep Zuckerburg at the top. Google founders Larry Page and Sergey Brin were obviously experts in the technology behind Google, but decided it would be best to bring in Eric Schmidt to lead the organization and develop Google into the largest internet company in the world today. Just last month, Schmidt announced his resignation from the CEO position as Page finally appeared ready to take the helm. In Mochi Media, we saw VC-investors pressure Jameson Hsu into resigning as CEO and bring on an executive experienced with running a $2 billion. But in the end, the executive was booted and Hsu had to return. The same can arguably said for Jerry Yang and Yahoo, but with limited success. Jack Dorsey, co-founder and former CEO of Twitter, isn’t shy about his passion for coming up with potentially disruptive start-ups and creating a business with huge potential – he just doesn’t enjoy leading the scaling and growth part. Resigning as CEO in 2008, he started Square in 2009, a well-funded mobile payments company where he again resigned in 2010 to bring in experienced executive Keith Rabois of Slide. A friend of mine, Kevin Chou, co-founded Kabam (a social gaming company publicized as the “anti-Zynga”) and continues to be the CEO today even after a sizeable funding round and explosive growth. But all of these appear to be the exception rather than the rule. Neuralitic, a leading MDI (mobile data intelligence) solution provider for mobile operators closed a Series B round of financing last week and brought in experienced executive Luc Filiareault as CEO. The former CEO has moved into a newly created “Chief Strategy Officer” position.

When assessing whether or not to bring in outside “professional” management, what considerations are important? First, as a founder or co-founder, I think it’s important to assess your own strengths and weaknesses and how that fits with the future growth of the company. The important questions to ask would be:

1)    What does it take to grow and scale the business?
2)    Are my strengths and interests aligned with the growth plan or does it make more sense to focus on [technology, strategy, fill in the blank]?
3)    Is there someone else who can lead this organization more effectively that I like?
4)    Do I have a choice?
5)    Will the value of my shares be worth more with someone else leading the organization?

In the case of Mochi Media, George Garrick had experience with scaling a business to a $1 billion, while Hsu did not. Furthermore, Hsu was concerned with his lack of managing sales which was crucial to scaling Mochi. But it ultimately did not work out but it doesn’t necessarily mean the logic was incorrect. In the case of Neuralitic, the former CEO Larocque clearly wanted to focus on strategy rather than growth despite being an experience entrepreneur. In the case of Jack Dorsey and Twitter/Square, he clearly wants to create disruptive businesses, but not necessarily scale them. So during any inflection point, be it a new round of funding, a pending liquidity event, or simply entering the “new stage” of a company, it is important as a co-founder to assess your strength, experience and interests and how it relates to the company’s growth strategy. You just may find that you might actually be the right person to lead the Company despite reservations from others. Or, it just might well be time to step aside and let a “professional” handle things.

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