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Hiring a CEO for a Startup

May 2019
Arto Sormunen
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Key Considerations in a Unique Business Environment

Tom Savage is a British entrepreneur who founded 3Desk, Blue Ventures and Wholi, a list-based people search engine for which he acted as CEO for five years. Interestingly, Savage emphasizes that a successful entrepreneur — someone who sees a solution to a problem and builds it into a business — isn’t necessarily the right person to manage that business in the long run.

Why not? One reason could be that founding a business requires different skills from managing and expanding it. Of course, founders can certainly learn management skills — and many do. But for the ongoing success of the business, it can be far more appealing to hire a CEO who already has the required abilities and experience to build the business so that in the meantime, the company’s founder can concentrate on what he or she does best — innovation.

Hiring a CEO for the dynamic environment of a startup is a very different process compared to hiring a CEO for an established company. In this paper, we’ll outline a process for successfully hiring a CEO for a startup by addressing the different considerations that need to be taken into account.

 

1. Corporate Governance

The first consideration has to do with corporate governance. Initially in a startup, the governance model is extremely practical. It’s based on a setup where founders know each other both as professionals and as human beings. But when an external CEO is hired, things change. In this section, we’ll take a closer look at the existing roles and their interests when it comes to hiring a new CEO.

As long as the startup’s culture promotes accountability, operations run smoothly. People know what their responsibilities are and perform their duties accordingly. But when the company prepares to hire an external CEO, management responsibilities must be clearly defined and documented. This establishes the expectations and roles of the founder, the chairman of the board, the board members, the investors and the employees as they pertain to the hiring of the CEO:

  • The founder: The founder of a startup usually has a background as an innovator, R&D engineer or designer, which frequently leads to a rather innovation-centric CEO profile. While innovation is valuable in a business context, it has to be secondary to business execution. It’s important for the founder to realize that the R&D responsibility should belong to the founder or R&D director — and that the CEO’s ability to innovate the product or service doesn’t have to be higher than that of the average customer. The founder’s main concern should be whether or not the CEO has a proven track record of leading successful, innovative commercialization.
  • The chairman of the board: The CEO nomination is one of the most important tasks of the board, and the chairman needs to drive this process. He or she has to manage and prioritize the expectations of the board — and subsequently tailor and lead the hiring process. It’s all about finding a balance, a common will, and commitment to the search profile. Additionally, the chairman understands that the CEO is an organ — not an employer. This fact, along with the expectations, is reflected in the CEO profile and eventually in the contract.
  • The board members: Board members are equal decision makers in the CEO hiring process. In general, they have a wide range of expectations of the CEO, from outstanding analytical skills to personal management and relevant business domain experience. It’s critical to understand that all of these skills rarely exist in one single person. As a result, prioritization — managed by the chairman — is needed. These priorities need to be documented at the beginning of the search process, and the board must commit to them.
  • The investors: Investors are typically quite savvy and have high expectations of the CEO.  They will ask: Does he or she have the experience to commercialize and scale up the business with the resources at hand? Will he or she be able to make a business breakthrough? With insights into why other businesses failed and the roles their CEOs played in those failures, investors frequently are the best positioned to evaluate the success rate of the company and leverage their knowledge in the search process.
  • The employees: In a startup, employees sometimes have partial ownership or stock options in the company that are typically awarded at an early stage and at a low valuation. Employees want a new CEO to bring a higher level of leadership and management to the company that, together with hard work and a more structured operating model, will lead to company success — and higher-valued stock options.

Miracle-makers are scarce. With a management team built of operations, sales and marketing, R&D, production, and finance, it’s important to place a solid leader in the CEO chair who can get everyone working in the same direction, ensuring successful execution of the business plan.

 

2. Business

The business status quo is the next consideration. In this section we’ll examine the following business factors: competition, product maturity, sales and marketing, and finance as they pertain to selecting a new CEO.

  • Competition: Every business has competitors — if not domestically, then abroad. However, in the intensive environment of a startup, leadership sometimes fails to realize that other companies are making similar innovations in the outside world. And when a limited understanding of the market is combined with thoughts of unlimited global market potential, the founders’ expectations can be unrealistic. In contrast, investors usually have a much more realistic perspective based on the added value of the product or solution compared to those already on the market. As a rule of thumb, the more innovative a product or solution is, the more the company has to operate as a market creator. This not only has an impact on the resources that need to be spent on marketing, but also the competences the CEO needs to possess.
  • Product maturity: How market-ready is the product or service? Maturity has a direct relationship to how much time and effort the new CEO needs to invest in marketing and sales. In general, startups are overly optimistic about maturity, but it’s important to understand that if the product or service hasn’t been tested by end users, there’s still a long and likely bumpy road ahead. To make a successful CEO hire, it’s critical to have a realistic and fact-based understanding of product maturity and market-readiness before the search begins.
  • Sales and marketing: Many startups are weak in marketing and sales. The uncompromising belief in the uniqueness of the company’s product or service and its ability to sell itself is a relatively common trap. As a result, sales competence and experience in sales process building either as a direct seller or reseller are highly valued in the new CEO.
  • Finance: The financial status of a startup is seldom stable — and that has a tremendous impact on the CEO’s daily responsibilities. Consider whether he or she must focus on building the business or in contrast on spending a significant amount of time negotiating with current or potential investors. Honesty and transparency from both the company’s side and the candidate’s side are crucial guidelines in this process. The numbers on which the valuation is based and with what valuations different ownerships have been built in the past have to be discussed, and key information regarding cash flow and cash burn rate is critical.

 

The effects of the business status on the CEO profile

External:

Market size and geographical reach
Market maturity
Consumer behavior

Internal:

Board capability to support the CEO
Management team competence
Financial status
Readiness of the product/offering for the market
Sales model

3. The CEO’s Competencies

The competencies the CEO must demonstrate will depend on the responsibilities he or she will assume in the organization. In this section, we’ll take a look at the CEO’s duties and qualities.

While the company’s board sets goals for value growth and strategy implementation, the CEO is responsible for the systematic rise of the company’s value. As the leader of the management team, his or her objective should be to make the strategy both fresh and realistic.

The new CEO must have business management experience in an unstructured and fast-paced environment. The dynamic setting of a startup requires that the CEO can remain motivated during uncertain times, learn quickly, and continuously develop new tools and practices. In addition, CEOs often have an overloaded schedule, so prioritizing, logical decision making, strong communication skills, and the ability to work well under pressure are all vital skills. Plus, since the new CEO should be authorized to adjust the management team, it’s crucial to find a candidate with a common alignment to the company’s values.

As such, qualified candidates must have a strong background in:

  • Business management in practice
  • Providing measurable feedback as a manager and leader
  • Performing a critical role in a business transformation or turnaround process

During interviews, the recruiter must obtain a clear picture of the environments where candidates have been successful, assess their experience in these areas and evaluate how those qualities transfer to the new environment. Since no two startups are identical, the best candidate will be someone who is highly adaptable. Moreover, the open discussion of the company’s financial status with the candidates is also very informative for the recruiter.

 

4. Compensation and Benefits

Finding a good candidate is only part of the journey — it’s also essential to offer a salary and benefits package that match his or her expectations. In this section, we’ll offer some practical tips for establishing attractive compensation and benefits.

Determining the appropriate compensation for a new CEO is inherently difficult. That’s why companies must define a suitable level before starting the hiring process. Unfortunately, there’s a common tendency to offer too little. To avoid this, the company should reflect on the simple question, “What are we looking for?” As detailed above, the organization needs a courageous business manager with relevant experience, as well as enthusiasm for and commitment to a challenging journey whose chances of success may be limited.

The salary should be a combination of fixed and flexible salary and ownership. Before starting the search, the organization should settle on the fixed salary and agree on the range of flexible salary that can be used in negotiations with the final candidates. Ownership should be optional after 12 months.

Work With an Executive Search Firm

Ultimately, the qualities a startup needs its new CEO to possess will depend in large part on the abilities that are already present in the company, the status quo of the business and the organization’s specific business goals. And since it can be challenging to find candidates with the required skills and experience, it’s advisable for startups to work with an executive search firm that can connect them to the top talent that can help them grow and advance to the next level.

About the Author

Arto Sormunen is a Partner in the Stanton Chase Helsinki office. To learn more about how Stanton Chase can assist with your startup leadership needs, visit: https://www.stantonchase.com/industry-specializations/technology/start-ups-executive-search/.

 

 

 

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