ACTIVIST VC BLOG
We believe the CEO is the single most important success factor of a startup.
And the most important way for a VC to add value for a typical portfolio company is to
- ensure having the right CEO in charge and
- helping her to succeed.
So, it should not be a surprise, that the CEO is a key part of our Company Canvas. (We use Company Canvas to standardize our portfolio monitoring process, read more from the blog entry How we monitor and help our portfolio.) When we assess the CEO, we try to understand the following:
What are the weak and strong areas of the CEO?
- Can the management team or the board fill the potential gaps (skills, experience, network etc.) of the CEO? This is very important as it is quite rare to find someone who is an expert in every aspect of company management. A strong CFO, COO, VP Sales or an active hands-on Chairman can be a good complement to the CEO.
Does the CEO fit the current stage of the company?
- The seed stage is typically about finding a scalable business model: fearless buzzing around potential markets in search of the recipe for hyper growth. Being agile and customer-centric is a key success factor for the CEO and the whole team – modes of operation and processes copied from large corporations are often damaging here.
- The previous experience of the CEO – is it a good match with the current setup and the challenges we are facing next year? Especially when growing very fast, relevant experience is a plus: even the most talented individuals have a hard time learning a lot of new things at the speed required by hyper growth.
- If the company is looking for an IPO, new requirements pop up again: stability, predictability and credibility in the eyes of the markets are required. A successful CEO needs to moderate the risk-taking while still remaining bold and decisive.
We think it is important to have an open and deep discussion with the CEO and management team even before our initial investment. A discussion where we bring up a potential and fairly common need of not only adding new key team members but also making some changes in the current team during the long and painful path to the success. We have some good examples where the CEO has recognized his limits and is actively supporting the process of bringing in a new CEO.
A few factors are shared by all successful CEOs:
- Ambition, motivation, and a high energy level. A successful VC-funded company needs a CEO who wants to be a winner, thrives under pressure, and can give a 110 % effort.
- Ability (and courage) to build a world-class management team around him. This is very important: often the single most important skill of a successful CEO in a high growth company.
- Trust and respect of the team. To have a full and balanced picture of the company development and team dynamics the board needs to have fairly deep and regular contact directly with the key team members, not only with the CEO.
- Trust and transparency between the CEO and the board. It is imperative that the CEO feels her and the board’s interests are aligned and informs the board about potential issues early and openly. No politics and games are needed here – our only agenda is to help the CEO succeed.
Some additional factors to consider:
- Are incentives on the right level and in sync with our interests (base salary, bonus structures etc.)? How much money would the CEO make in different exit scenarios with his current shareholding and option pool? Making sure the CEO’s interests are aligned with our interests is imperative. We truly believe that incentives drive behaviors and try to make sure we reward the behaviors that benefits all of us – the company, team, and the shareholders.
- What do we do if we lose the CEO? What is plan B?
Do we need a new CEO?
This is crucial: we need to do (and we do!) our homework to be sure we are right when we start thinking about a CEO change. Since we believe the CEO is the critical success factor, we do not contemplate changes lightly. To make sure, we have all the facts and make the right decisions, we ask ourselves a lot of questions:
- Have we lately made enough probing among the management team, board, partners, customers etc. to verify our view?
- Do we need more data here? And if we do, how can we get a deeper view on things?
If a CEO change is really required, procrastination and waiting for the “right moment” are not helpful; our experience is that direct and fast action is the way to go even if it is sometimes difficult and unpleasant.