Entrepreneurship · Fundraising

Why VCs change CEOs of growth stage startups?

Konstantin Voyku QA Engineer at StarOfService

February 10th, 2017

I advise the cofounder and CEO of a company that started a Europe based software service 5 years ago. The company makes inventory software for smaller supermarkets that helps them monitor their inventory, manage prices, and avoid food waste. The business has grown well year over year and they are now in about 15 stores in four different countries. The CEO manages 15 employees including sales and support staff.

The cofounders funded the business on their own for a year and then accepted early stage venture capital. Since then they have had 2 more rounds of financing to improve the product with more engineers and hire more salespeople to bring the service into more markets. The cofounder and CEO maintains board control because he had a personal relationship with the investors before which created trust around strategy and execution.

Now the company just accepted growth stage investment so that the company can compete for better market share in their 4 markets (CEO and investors agree the business offers significant benefits that the competing softwares don’t. They just have better funding for marketing and advertising).

The problem is this: the CEO did not have a previous relationship with the series B investor and now this new investor controls the board and wants to push out the CEO and bring in a supermarket executive from a large chain that has more experience with scaling companies.

Why does this investor want to change CEOs and how can the existing cofounder & CEO argue his case and prevent this change from happening?

Ran Fuchs Senior executive passionate about new tech.

February 14th, 2017

There might be many reasons for changing a CEO, the most common one is that building a startup and scaling a startup require completely different set of skills, and too often the founding CEO cannot do the scaling up CEO work. The way to convince investors (if they have the controlling stake) is to prove to them that the CEO can do the job. But are you sure he or she can?

Denise Corcoran CEO, Leadership & Organizational Game-Changer | CEO Advisor | Consultant | Coach | Growing Leaders that Grow Companies

February 10th, 2017

I appreciate your question and it is not unusual for VC (esp. at growth stage) to want to bring in a more seasoned CEO to scale the company further.

There is an assumption (not always correct) that bringing in an outside seasoned CEO has a better chance to successfully scale and to do so more quickly.

You did not share if the current CEO has ever had prior experience, even as a VP, in a fast growing mid tier company. Is this the first time he/she has scaled a startup?

Managing 15 people is not alot and still pretty much in startup mode. I work with CEOs and leaders in growth stage companies to scale their leadership capacity to drive double/triple digit growth.

In my experience, until the company gets to at least 50 people and/or $10 mil., the CEO still operates as an expert/doer rather a C-level leader. There is a whole shift in mindset, thinking capacity and capabilities for a startup founder to truly be able to scale the company further. There is equal need to scale the organization and culture. Managing/leading a company as it grows in size, possibly hierarchy and in complexity requires a much different set of capabilities.

If the CEO has never had that kind of experience, I would recommend that the CEO do 3 things: 1.) have a conversation with new investor to build a relationship and understanding of what's most important to them; 2.) put together a vision and plan of how he/she will scale the company (internally) in next year that is presented to the investor; and 3.) work with someone to accelerate your leadership capabilities.

Michael Bittle Operating Partner - Independent Sponsor - Polymath

Last updated on February 10th, 2017

There are three possibilities: 1) The new investor is a jerk and just wants to install "his guy" to protect his investment. Nothing you can do here. 2) Investor knows his stuff and recognizes shortcomings in the founder/executive team that the current board has missed due to being too close to the founder. Nothing you can do here. 3) Investor perceives shortcomings in the founder executive team but is missing information. In this case the current board members should meet with the new investor to understand concerns and provide support (concrete examples) to sway the new investor. If that fails you have a case 1 or 2 situation.

Juan Zarco Managing Director, Silicon Valley Ventures Growth Partners llp

February 10th, 2017

I just read about a nyc tech company replacing its cfo with ipo experience. The company seeks the ipo since larger clients prefer to deal with publicly traded companies. Now the argument is made that a new ceo or cfo who has had prior experience managing larger operations or public markets provide comfort level to investors as such experienced executives will commit fewer mistakes at that growth stage. Then a founder takes a back seat to the company's operations and learn from the newly appointed exec. Then when that founder starts another company that argument no longer applies as he/she already apprenticed.

Juan Zarco Managing Director, Silicon Valley Ventures Growth Partners llp

February 10th, 2017

I agree with Corcoran. Even though i explained why the new investor recommends a new CEO, I have witnessed companies retaining founders. Look at Steve Jobs retaining control at Apple. 2 ways to retain control: a) corporate board like Melissa Meyers did b) prove to new investor the strategy for growth with timelines and achieving then.

Dane Madsen Organizational and Operational Strategy Consultant

February 11th, 2017

It may be as simple as the new money thinks the old CEO has taken it as far as his skills can and and industry intimate is needed to expand the customer base. If the company has superior software but limited market penetration there is an issue; it may be the current CEO.

Bill Flynn Catalyst Growth Advisors - We help startups and scaleups with People, Strategy. Execution and People

February 10th, 2017

The issue is fear of failure. New investor wants his guy since he is known entity. One question I would ask new investor is how much experience does he have in building a company of your size to whatever size you are looking for. There is not a one size fits all CEO And industry specific experience could be a detriment as you may need to think about new ways to grow. Also, what specific experience and behaviors does he have that the new investor likes And thinks will win. How do one avoid this? The best way I know of is to put in a system that can scale and prove its worth even at a small level. If you can show that you consistently hit difficult targets, have a cohesive team and a plan that is working, it would be hard to replace that. The four main decisions you need to revisit are Strategy, Execution, People and Cash. This may be a foregone conclusion since new investor controls board but he does not control the team and that should also be a factor. Good luck.