Why Some Founders Fail as CEOs

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We tend to idolise founders who are able to take their company from the ideation stage to multibillion-dollar organisations. But the truth is, founders like Bill Gates, Jeff Bezos, and Mark Zuckerberg are rare to find -- they are, in fact, an exception and not the norm.

 

A study conducted by the World Management Survey revealed that companies that are led by the very people who founded them are 9.4% less productive with consistently low management scores. Both of these factors typically increase when the founder-CEO is replaced.

 

Another study that took into consideration 212 US startups that launched between the late 1990s and early 2000s revealed that only 50% of the founders were still in control of their companies, three years after launching it. 40% of them were CEOs after four years of the launch and only 25% of the founders were CEOs when it was time for the company’s IPO.

 

There have been many cases when the founder’s desire for control overtook their motivation for profit and due to this, they couldn’t get any investors to come on board. As a result, almost 80% of the founders out of the 212 US startups were forced out of their position, instead of leaving willingly.

 

But why do most founders fail at being CEOs even when their winning ideas caused the business to exist in the first place? Let’s find out.

 

The Attitude Towards Investors is Part of the Problem

 

Founders often consider their companies as their own child because of their attachment to it. They’ve conceived the idea and usually have gone through a lot to see it come to fruition. Due to this reason, it is very difficult for them to give up control. In fact, most of the founders are shocked when investors ask them to relinquish control, at least to some extent. Many founders give investors some pushback, putting the overall future of the company in jeopardy.

 

When we view things from the investors’ perspective, it is only natural for them to ask founders to leave the CEO position in order to make way for an experienced CEO who can seamlessly handle the day-to-day business processes.

 

Most investors aren’t keen on financing companies that are heavily dependent on a single individual. They want to make sure that the operational model is systematic and that it functions just as well without the founders. Investors usually allow founders to remain on the board or have a vote in key decisions, however many investors insist on hiring an external CEO before they confirm their funding.

 

Handling Managerial Decisions is not Easy

One of the biggest reasons why most people want to start their own company from the ground up is because they want the freedom to run their business exactly the way they want. However, many of them have limited management experience and lack the necessary skillset to be at the healm of a growing company. As a result, they may let their emotions get the best of them and take emotionally-driven business decisions instead of making rational choices. This can often be detrimental to a company and cause damage that sometimes can’t be undone. 

 

Some CEOs may even partake in ethically questionable practices such as nepotism and hire people they are most comfortable working with instead of hiring candidates who are actually qualified for the position.

 

Founders also may not be able to manage stress as well as a seasoned CEO can, especially in the initial stages when you aren’t even sure if it’s going to survive. As the CEO and leader, it is important to regulate emotions and keep up the morale of the rest of the team - which can often be difficult for founders because they are too attached to their company.

 

Lack of Strategy

The strategy for starting a company is very different from the strategy needed to scale it. For CEOs to get the support of investors and the board, they need to have the ability to develop and explain a logical, data-driven business strategy that can actually scale. 

 

For instance, Facebook didn’t generate any revenue in its founding years. But 22-year old Zuckerberg had a step-by-step monetizing strategy in mind for the company that the board and investors agreed with.

 

The board believed in his vision so much that they turned down any offers to sell the company during its early days. Zuckerberg’s strategy ultimately proved to be correct when Facebook introduced its advertising plan and the company brought more money than anyone could have anticipated.

 

Final Words

Coming up with an idea that can actually attract customers and generate revenue is an immensely difficult task. Once founders get there, they usually do not want to renounce their position. They sometimes forget the fact that the company is bigger than one individual and must continue to grow around, and sometimes over them.

 

Founders need to remember that the rules change when investors come on board. If they want to scale their startup successfully into a big enterprise, they must be able to do what’s right for the company and its employees. A true founder is one who is able to identify when their value to the company would be better served if they put ego aside and allowed the company to grow, scale, and thrive – even if that means bidding adieu to the coveted CEO position.