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Dear Founder, You Don’t Have To Be CEO

Picture this: you founded a company after identifying a lapse in the industry. As the company grows with more investor dollars pumped in, you find that sitting at its helm is becoming increasingly challenging. After all, leading a company isn’t quite the same thing as founding one.

Which brings us to the question of whether a founder should be the CEO. There are no easy answers, but a close look at both sides of the argument can make that decision more informed and less risky.

Founder vs CEO: What’s the difference?

The founder is the person with the original idea for a company. They set it in motion and mapped out the early vision of what it should be and where it should go. They are in charge of innovation, product development, culture, long-term planning, and other core responsibilities that ultimately shape the company’s success.

Meanwhile, the CEO is the most senior executive, but they focus on the details – managing the employees and executing the strategies that will turn a founder’s vision into reality. 

They’re entirely different skill sets. A founder may thrive amid the chaos of ideas and innovation, while a CEO dedicates themselves to turning this chaos into order. 

An incredible idea without sharp execution is a lost opportunity. An ability to execute without a new idea is the absence of opportunity.

The challenge is to find the perfect mix for these skill sets. Take Apple as an example. When a sales executive from Pepsi replaced Steve Jobs as CEO in 1983, the company suffered a period of steady decline until Jobs returned ten years later. 

According to this anecdote, it was a bad idea to choose an outside CEO. But it’s not quite that simple because if we stick with Apple as an example, we see something utterly different unfolding when Tim Cook became CEO in 2011. 

Instead of a return to decline, Apple grew rapidly, adding more market value than all of its peers over the next decade and prompting The Economist to name Cook the most successful CEO ever.

The same company. The same transition to a non-founder CEO. But wildly different outcomes.

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What does the data say?

A founder today must discover the perfect balance for their vision. While this will vary from company to company, there is a pattern emerging that suggests a turning point once a company goes public.

According to a study on how long a founder should remain CEO, nearly 2,000 companies discovered that founder CEOs are linked to an almost 10% higher company valuation at the time of their IPO. But this slight advantage quickly begins to disappear, falling to zero within three years and turning negative in the years to follow. 

This tends to support the idea that founders are key to shaping the vision that early consumers love, but a capable CEO is key to transforming that vision into products that many more consumers will buy. 

With this in mind, let’s take a closer look at the pros and cons of founder CEOs, and why some decide to hand the reins over to someone else. 

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Pros of founder CEOs

Some venture capital firms prefer founder CEOs because few can equal them for the energy and commitment that make a company successful. They are the beating heart of a business. They will sacrifice evenings, weekends and a life outside work to achieve success.

Founder CEOs are particularly valued at technology companies. In an industry where rapid innovation is key to survival, it’s essential to have an innovator at the wheel. They will continue to create products and take risks long after a CEO trained on spreadsheets will be pressing ‘pause.’

There are numerous examples of founder CEOs accelerating through a cloud of uncertainty and emerging successful on the other side. Len Schleifer at Regeneron Pharmaceuticals, Fred Smith at FedEx and Jeff Bezos at Amazon remained CEO well beyond their IPOs and all grew their companies’ valuations to over $50 billion.

Of course, it doesn’t always turn out this way. The startup landscape is littered with founders who took one risk too many. This brings us to the things about founder CEOs that keep investors up at night.

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Cons of founder CEOs

Some investors steer clear of companies that depend too much on one individual, especially when their aggressive risk-taking isn’t tempered with immediate concerns about cash flow, hiring and other vital requirements of a successful business.

Founders can also be too emotionally attached to an idea and the people around them. They may lack the clear-eyed objectivity to see that a problem can’t be overcome with yet another risky idea. 

When a founder with infinite energy and drive becomes committed to impossible goals, it can be a volatile combination with explosive repercussions. The collapse of WeWork is but one example of many.

At other times, an over-committed founder CEO can result in a company’s slow death as they tackle more tasks than they can finish. This is an outcome the founders of HashiCorp considered and managed to avoid.

It was a role that we were willing to do, but didn’t necessarily love,” HashiCorp CTO Armon Dadgar said in an interview. “Could we do it? Sure. Would it be death by a thousand paper cuts? Probably. And so the thinking was, bring someone in who instead of having a thousand paper cuts, is going to have twenty or fifty paper cuts.”

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Founder or CEO, it all depends

Company founders are heroes of the modern world. They’re the engine of progress, generating products and services that improve the lives of billions of people.

When they have the drive and brilliance to create so much beneficial innovation, it can feel natural that they are the best people to nurture and grow this innovation in the years and decades to come. 

And yet, the data suggests that this isn’t always the case. Starting a company is not the same as running a company. The talent required to create ideas may not be the ideal talent to turn these ideas into reality.

“Let us focus on our superpower,” Dadgar says. “The product side, the customer advocacy, the community evangelism. The things we actually enjoyed.”

Deciding to bring in an outside CEO isn’t easy. The best decision for one company will be the worst decision for another. But it’s a decision that all founders must face at some point, and thinking about it now will help prevent more problems later.

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