Bringing in an External CEO

To CEO or not to CEO? It’s a tortured question for startup founders, and the decision on whether the product founder maintains a CEO title or not is far more complicated than you might think:

On one hand, the product founder — having traveled through the idea maze, earned their secret, or just plain built the company through blood, sweat, and tears — should know the technology, the product, and the market better than anyone… and is therefore assumed to be in the best position to build the right organization around that vision.

On the other hand, as a company transitions from product to sales, and scales its operations, the skills required change. And if you’re bringing that talent in from the outside, having the CEO title will not only attract better talent… but empower an outsider within the company.

What happens is many founders either discover that being the CEO is not always the best place to drive the vision (nor is it necessarily always the best thing for the company); and on the flip side, some founders and boards believe that bringing in an external CEO is the ultimate solution to all the problems with the business (which is often wrong).

So how do founders navigate this mental maze? In this post, I share my own experience as a tech founder of an enterprise company that went through three CEOs before I decided to run the business. And while every situation is different — and may vary across industries somewhat too — it’s an incredibly important decision for all founders, with nuances and repercussions far beyond the mantras around “founder-led companies”. I hope founders find this post helpful as they navigate their own paths, but here’s my story… and some advice for thinking through it.

The technical founder maze

I was the primary founder of Nicira Networks (now part of VMware); it was focused on bringing software-defined networking and virtualization to industry. I co-founded the company with Scott Shenker and Nick McKeown, who were my professors and advisors when we came up with the core concept at Stanford University.

By “primary”, I mean I was the only founder with a long-term, full-time commitment to the company — which is typical of many startups founded out of academia, where advisors remain involved but only some go full time. So while Scott initially took the CEO role, he only planned on staying at the company a year or two. And while Nick took a board seat, he didn’t have any day-to-day responsibility. I had the largest equity ownership, and I had a board seat.

I was also the founding CTO. But looking back, I don’t recall a lot of discussion about the initial titles. I guess we figured that with a pipsqueak startup with a handful of academics, titles didn’t really matter, and Scott was well known and had leadership experience. Plus I really didn’t care about any of this back then: My view was that my job was to figure out what to build, build it, and then sell it. (Little did I know how non-linear, riddled with mixed messages, and difficult that process — of going to market where there was no market — would be.)

Over the course of the company, I was asked many, many times — by members of my team, by early investors — if I wanted to take the CEO role. The first time this came up seriously was when Scott transitioned back to academia. But I was still pretty damn naive about what it even meant to be a CEO. Watching others, it seemed to deal largely with overhead, contracts, finance, payroll, facilities, legal, and banking. So I felt even more strongly that I didn’t have time to be CEO: The company needed me to focus on what mattered.

We were struggling for survival — it was just after the economic downturn of 2008, we were having a hard time raising money — and we had yet to find product-market fit. Most importantly, we needed to get customers. This was all playing out against the backdrop of one of those classic industry architecture wars, because legacy networking companies weren’t ceding ground to our software-defined approach lightly.

It was clear to me that the company was going to live or die by a techno-strategic chess game. As the technical founder, I felt that it was on my shoulders to drive that.

So we first hired an interim CEO who helped the company part time while we waited to bring on a full-time CEO. And then, within a year, we hired Steve Mullaney (who was previously interim CEO of Palo Alto Networks). Together, we raised institutional funding, found product-market fit, scaled the company, and sold it in a record deal three years later.

That part was hard. But through it all, one of the most difficult decisions for me and the team was deciding what to do with the CEO role.

To be or not to be?

Seven years after we started the company, I decided to assume the leadership role as General Manager within VMware, the company that acquired us, and to really run the business — on all fronts, not just technical. Over the course of three years, I scaled the business from roughly $160M in revenue to $600M, and grew the organization from around 400 to 1000+ employees.

Since then, I’ve thought a lot about my decision to hire external CEOs and what I would have done differently.

As the only founder with a long-term commitment to the company, should I have pushed to take the CEO title when we started the company? I think it’s fine that I didn’t. Having Scott — a legend in academia and in the networking industry — at the helm helped us enormously with recruiting, not to mention getting research grants (funding which doesn’t dilute the cap table!) from the government.

However, CEO transitions are hard on a company, and we forced our team to go through two transitions; three, if you include my rise to the GM position (which for all intents and purposes is a CEO of a huge business unit). Given that I was the de facto leader that had to manage through all the transitions at Nicira, you could make the argument that I should have taken the title to begin with. But our company was still pre-product-market fit — and the business involved enormous translation challenges in moving from academia to industry — so it was probably fine, better even, that I stayed as CTO.

So far those decisions seemed sound, and may have worked out either way. But for sure the decision to bring in an interim CEO was a mistake. The rationale at the time was that Scott had to transition back to academia, and I was too busy fighting the war for (startup) survival, on a few fronts — we were in the worst economic period since the Great Depression.

Now, however, reflecting on it with some distance, I realize I was shirking my responsibility. Because it’s incredibly difficult for an interim CEO to lead a company under the tough conditions we were in, while on a part-time schedule and no long-term commitment. The interim CEO becomes the person “who’s here just for a little while” and has no real accountability for decisions. As a result, it’s very difficult for them to earn the trust of the team. Ours certainly added a lot of value in the form of guidance, but that could just as easily have come from a part-time advisor, and with far less disruption to team morale and the business.

What I should have done was taken the interim-CEO role myself, and then pulled in the right talent below me to handle operations — so that I could continue to focus on finding product-market fit.

Of all the decisions so far, though, the one to hire an external CEO was probably the single best decision we made in the journey of the company. While we had an extremely strong technical founding team that pioneered a lot of the core IP in what was slowly becoming an industry movement, we were also selling into the enterprise against incumbents with proven playbooks and deeply entrenched relationships. One of the most fundamental things technical founders very often overlook is the critical need for sales and go-to-market; without it, you have no real customers, you have no business. And frankly, we didn’t have the knowledge to do all that internally. So after speaking with dozens of candidates over nearly a year (during which we reached out to Ben Horowitz, who politely declined but offered to invest instead, with Marc) — we ended up hiring Steve.

Steve was a 20-year industry veteran, so he was able to hire executives quickly from his own network. He brought the deep enterprise go-to-market expertise and leadership we lacked, and was instrumental in developing our GTM and post-sales strategy. While he was building on a strong technical foundation and many customer lessons learned over the early years, in the end, it doesn’t matter how technically strong or even revolutionary an idea is. People have to use it, and buy it, for it to matter.

Steve was not only the right person at the right time, most importantly, he trusted the founding and technical team: He was there to help build a company, not make a power play. He was a team player, which was incredibly important to me as the one person who had been there full-time from the very beginning (and as the one person who couldn’t leave without destroying the company). Steve and I did everything together, from fundraising, hiring, and sales to board management and company strategy. Without him, our outcome would have been very, very different.

What works, what doesn’t

Since Steve made the effort to be a co-leader and a partner, not a dictator, why not just hire the same style and know-how through a COO or a CRO? I’ve seen that model work as well. But the decision really comes down to the following three questions:

  1. What title will attract the best talent in the industry?
  2. What title will best position the person to effectively lead?
  3. As the one piped into the central nervous system of the technology and market, will the technical visionary be able to retain sufficient control to still drive strategy throughout and ensure the company’s success?

For me the calculus worked out like this: as the creator of much of the technical vision, and the builder of the existing team, I wasn’t worried about losing control as the primary founder. I was, however, worried that without the CEO title for Steve we couldn’t get the best talent — and whoever we did get wouldn’t have the clout, given their non-founding status, to drive the company forward.

For technical founders who face this dilemma, I will add that this worked well for me for two reasons: (1) My position was so well-cemented in the technology with customers and the team, that it would have been near impossible to marginalize me; and (2) Steve was such a natural leader and collaborator, that bringing him on board didn’t dramatically change the decision processes of the company because he didn’t cut key people out.

Each founder has to weigh their own situation, and their calculus could come out differently. For me, bringing in an external full time CEO was an enormous win.

I’ve also witnessed situations where bringing in an external CEO was disastrous. The CEO is the most visible and most leveraged role in the company, and a bad fit can leave massive wounds. But fit is not just a matter of personality or skills, it’s also a matter of timing in the lifecycle of a company. Bringing in a professional CEO is particularly difficult during the product phase of a company. Because finding product-market fit requires a broad understanding of the technology and the customer; macro trends (many of which influenced the idea maze in the first place); relevant influencers and partners. All of that is best done by the technical founding team.

Building a product in a new category especially involves lots of choices of what to do and what not to do, because there are no guideposts: It’s like a ship in the middle of a dark sea where no market exists. Technical founders are best equipped for steering that ship, because they have the centering vision it takes to stay steady in such conditions.

Finally, professional CEOs who are brought in by a board want to show their value very quickly, and so often risk pushing the company in product directions that don’t make sense, or scaling sales prior to finding product-market fit. Scaling sales too early is particularly damaging — not just to company culture, but to product and long-term viability. It distorts the company’s view of the market through false signaling from sales reps relying on relationships to push a product into a customer base that doesn’t need it, resulting in massive churn down the road.

Many external CEOs also come in and run the company as if it were a company they built, vs. the one that was built. But that doesn’t work if the existing company differs in DNA from that CEO: e.g., a direct sales to bottom-up company; on-prem company to SaaS; closed source to open source. (It’s not an accident that Satya Nadella came from inside Microsoft). It’s just too hard for a CEO to hold back their strengths and experiences, and a bad fit would be asking them to do just that.

*    *    *

So what does this all mean for the cult (heck, even we propagate it!) of the technical founding CEO? I do believe, along with many of my partners, that company/product founders are in the best position to lead a company, especially early on. And product founders with a long-term commitment to building a company, not just a product (this is an important distinction!) should have the CEO title.

As a company transitions from product to sales, however, it’s incredibly important that the company also bring on the talent that understands enterprise go-to-market, and how to scale an enterprise company. While that talent can be brought into the organization many ways — as a COO, a CRO, a president, a CPO — it’s worth thinking about bringing in an external CEO to attract the best talent, and to enable them to lead as effectively as possible. But you also have to consider the impact on the team morale, your own psychology, and ensure your ability to continue to drive the vision and strategy.

Whatever you decide, just remember to understand, but not fetishize, the title. Just because you are CEO, doesn’t mean you’re an effective leader; and just because you’re not CEO, doesn’t mean you can’t lead.

 

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