TL;DR: Most founders (75%) get replaced as CEOs before their companies go public. This paper breaks down why this happens and what founders can do about it. The key to staying CEO? Level up your leadership skills through training and coaching, learn to adapt as your company grows, and build strong networks with customers, talent, and investors.

Introduction

Founders play a crucial role in startups. They are the first groups of people to get obsessed with the customer problem and build the first version of a solution. They lay a clear direction on what problem to solve and why it is a good time. Their domain knowledge sets up technical and business foundations on how to solve the problem and what to build in products. What’s more, their personal characteristics bring a unique spice to the way they deal with setbacks and the company’s initial genes.

However, we have observed a notable frequency of founder departures and transitions in startups. The startup stage changes after the organization reaches a former milestone and receives investments from investors. In the meantime, founders often face new challenges due to a perceived lack of skills in the new startup stage. Data indicates that founders are often replaced when investors perceive deficiencies in their key leadership skills and capabilities. These skills include managing relationships with the board, overseeing growth, allocating resources, handling crises, and motivating staff. In venture-backed companies, investors wield significant influence, and fewer than 25% of these companies remain founder-led by the time they reach an initial public offering (IPO) (Picken, 2017a). This number is concerning to startup founders.

In addition, Adams, Almeida, and Ferreira (2009) demonstrate that, on average, founders can significantly enhance startup performance. Their transition into leadership positions, such as a CEO, can dramatically impact the success of the startup. However, there is insufficient research on the challenges founders face across the startup journey and how they can better position themselves in CEO roles. Thus, the objective of this white paper is to explore the root cause of founder departures and how founders can transition and remain in CEO roles as the organization evolves in its lifecycle.

Problem Definition

To understand the founder’s challenges at different startup stages and how to transition and remain in a CEO role when the startup grows well, we focus on venture-backed technology startups. Our emphasis is on the early and scaling stages of companies.

Picken (2017a) divides the startup life cycle into four standard stages: startup, transition, scaling, and exit. Here are the definitions and unique characters of each stage.

Figure 1

Startup Stages through Lifecycle

(Note. Adapted from Picken, 2017b.)

Startup Stage: In this stage, the company typically consists of only a small number of people (e.g., 1-10), often just the founders. These founders frequently take on multiple roles. Their primary responsibilities include defining and validating the business concept, understanding the need and opportunity in the market, developing the offering, and creating a business model to deliver that offering to the target customers (Picken, 2017a). The main goal for the startup founders is to find product-market fit by collaborating with early pilot customers. During this stage, the environment is usually fluid and flexible, and decision-making processes tend to be informal.

Transition Stage: It is the phase between the startup stage and the scaling stage. Founders need to establish a proper foundation for a scalable enterprise in the scaling stage. A proper foundation includes hiring key recruiters to hire enough staff in a scaling stage, building technical infrastructure to support more engineers, and preparing to raise more venture capital.

Scaling Stage: This stage involves rapid growth and expansion in both the market size and the number of employees within the organization. During the scaling stage, the company focuses on building a competitive advantage and establishing a leading position in the market (Picken, 2017a).

Exit Stage: At this stage, a company exits through an IPO, private sale, merger, or acquisition. Stakeholders, including investors and founders, can realize the value accumulated during the venture’s life cycle (Picken, 2017b). We will focus less on this stage in our white paper.

Challenges for Founders in Transitioning to CEO Roles

Many founders of early-stage startups are unaware of the necessary transition from an early-stage company to one that achieves sustained and profitable growth. There are various internal and external barriers that can hinder their progression into the role of CEO.

Figure 2

Internal and External Barriers for Founders in Transitioning to CEO Roles

Internal Barriers

Strategic Vision: Founders may lack the skills to establish a clear strategic direction and maintain focus on it. Additionally, communication regarding the strategic direction may be ineffective among founders, key stakeholders, and essential partners. (Picken, 2017b)

People Management: Some founders are university dropouts or individual contributors in big technology companies. They may lack extensive experience in people management skills.

Organization and Culture Design: Founders often lack the necessary skills in organizational design, process management, and discipline, which can lead to communication gaps between engineering, sales, and other departments. Additionally, while culture is invisible and intangible, it is crucial for fostering a shared purpose and vision among all members of the startup. If founders do not cultivate a culture in which the shared purpose and vision are clearly communicated to everyone in the company, they risk losing the standards and boundaries of acceptable behavior both internally and externally. (Picken, 2017b)

Scaling Operations: Founders may struggle to position their product effectively and adapt operations in a larger market, which can differ significantly from the initial market they entered during the early stages of the company. The skills required for successful scaling may quickly surpass the founder’s capabilities.

Financial Management: Many founders struggle with financial management, often lacking the skills necessary to handle financial resources effectively. They may find it challenging to concentrate their efforts and resources on the right activities, efficiently manage capital and cash flow, and consistently meet financial projections (Picken, 2017a). Additionally, during the scaling stage, founders face the challenge of reorganizing their venture’s internal structure to enhance efficiency and capitalize on economies of scale (Van Lancker, Knockaert, Collewaert, & Breugst, 2023).

Personal Character: Strong personal qualities such as competitiveness, persistence, and drive for early success may later become blind spots for a growing company. Founders might find it challenging to fulfill the role of CEO as the business expands (Picken, 2017b). One example of this is the founder’s emotional attachment to the work. A startup is like a founder’s baby; they work tirelessly on their company. When issues and challenges arise in the early stages, the founder is always the first to step in and solve the problem, often taking on multiple roles. However, as the organization grows, this can create issues. Without trust and effective delegation of tasks, the founder risks burnout from managing too many responsibilities, while employees may become frustrated if they constantly find the founder jumping in for assistance.

External Barriers

Investor Pressure for Professional Leadership

Venture capitalists play a crucial role in both supporting and controlling founder-CEO turnover. According to Hellmann and Puri (2002), a founder-CEO can be replaced by venture capitalists. To understand the founder-CEO replacement, we first need to understand the goals of investors and founders. Investors aim to maximize value of shareholders, who are usually limited partners (LP) of their venture fund. Investors’ goals often conflict with entrepreneurs’ goals of maximizing their own benefits. These benefits may include not only the firm’s profitability but also various private advantages, such as control and voice power within the company. As a result, investors exert significant pressure on entrepreneurs if progress does not meet expectations within a predefined timeline.

To meet the expectation of return on investment in venture funds and under pressure from LP, investors take action to enhance the firm’s value. The investors can play a supportive role or controlling role in the founder-CEO replacement.

When the investor is in a controlling role, it usually means they can collect more than half of the votes from board members. They will replace the founder by hiring a professional CEO, even if this decision may decrease the entrepreneur’s utility. The support and actions of investors may involve personal costs and can sometimes harm the company. Data from Chen & Thompson (2015) show that the startup survival rate after management change is about 35% when there is a founder turnover, while this rate is about 76% without a founder turnover.

In cases where investors assume a supportive role, founders who wish to focus on other aspects of the business, such as technology and product, may be amenable to relinquishing management control to an outside professional CEO. In this scenario, venture capitalists can lead the support process (Hellmann & Puri, 2002).

Organizational Demands that Exceed the Founder’s Expertise

Each new round of investment marks a significant milestone for a startup. One challenge that founders face in the CEO role is that if their personal and professional capabilities do not grow at the same pace as the company, they may struggle to lead a high-growth organization effectively. When a startup lacks a solid foundation for rapid growth, it often fails because the volume of transactions can overwhelm insufficient systems and infrastructure, surpassing the management team’s capacity (Picken, 2017b). During periods of rapid growth, founders must quickly acquire managerial and leadership skills, which typically require years of progressive development for managers and executives in an established organization (Picken, 2017a).

Required Skills at Different Startup Stages

Before finding out the solutions for founders to transition and remain in the CEO roles, we first need to understand the skills needed for the CEO role across the startup life cycles.

Startup-Stage Skills

Lean Startup Methodology: In the early stages of a startup, founders utilize the lean startup methodology (Blank, 2013). This approach involves a structured process of exploring, validating, and refining their business concept. Founders assess marketing opportunities by evaluating needs, identifying target customers, determining market size, and considering timing. They develop a product offering by establishing a clear value proposition for their product or service. Additionally, they formulate a business model that outlines unit economics and economic structures, as well as a go-to-market strategy to deliver their offerings profitably to customers.

Sales Skills: Founders need to have a clear strategy for several key areas. They must sell their mission to investors to secure funding, articulate the company vision to attract employees willing to join, and promote products that may not yet exist or are only partially developed to convince potential customers to pre-order. None of these can be successful without good sales skills.

Hands-On Execution: Founders are responsible for building and managing small teams. They wear multiple hats across various functions, including engineering, product, sales, marketing, and finance. They act as problem-solvers whenever issues arise. Founders adopt agile and fast-moving methods to tackle tasks efficiently, quickly adapt based on customer feedback, and iterate on their products.

Transition-Stage Skills

Organization Management: When a startup begins to transition, it must shift from its informal and loosely structured environment to a more structured and disciplined approach necessary for rapid scaling. Founders play a crucial role in this process, as they help bridge the gap between informal and formal communication and between unstructured and structured operations. It is important for founders to create an organization with a clear structure, processes, and discipline. (Picken, 2017b)

Scaling-Stage Skills

Long-Term Thinking: Founders are increasingly moving away from a narrow focus on daily operations and are adopting a broader, more global perspective. This shift includes considering the diverse viewpoints of customers, suppliers, competitors, and other external stakeholders. They are also embracing a longer time horizon to strategically plan for the future and position their companies to reach their desired goals.

Operational Management: It is crucial for founders as they seek to acquire extensive resources and utilize processes and partnerships to foster business growth and build a sustainable model (Picken, 2017b). To achieve this, founders must scale their teams from single-digit to double-digit sizes, establish structured processes and infrastructure, and develop revenue models that generate recurring income from customers rather than relying on customized solutions and consulting fees. Additionally, founders should balance internal and external communication effectively, as this stage provides an opportunity to lay the groundwork for structured communication, preparing the organization for future scaling. In the meantime, founders must transition from being problem-solvers to delegators. They should trust their employees, assign tasks, and ensure accountability.

Solutions for Founders to Transition and Remain in the CEO Role

After identifying the necessary skills for founder-CEOs at different startup stages, we provide several solutions to help founders develop personal skills and build the right networks and resources to successfully transition and maintain their roles as CEOs.

Personal Development

Invest Time in Leadership Training, Coaching, and Community

Many founders are graduates without full-time working experience or have worked in large organizations with strict hierarchies and reporting lines, lacking prior management experience. By investing time in leadership training and coaching, founders can enhance their leadership skills. Participating in in-person or virtual workshops can improve key areas such as communication, decision-making, and emotional intelligence. Founders might also consider hiring a professional CEO coach for personalized guidance and support in their business operations. Additionally, joining a community of fellow founders offers a safe space to discuss challenges and share learning experiences. Engaging with other founder-CEOs who are further along in their startup journeys can provide valuable insights on overcoming obstacles as leaders.

Cultivate a Growth Mindset and Adaptability

The startup journey is filled with ups and downs, presenting new challenges and uncertainties at every turn. By embracing a growth mindset, founders can view these challenges as opportunities for learning. During periods of mental pressure, consulting trusted advisors, coaches, or therapists can be beneficial. Downtime should be seen as a valuable opportunity for reflection, allowing founders to assess their past actions and strategize changes for future challenges. Over time, this practice helps founders build resilience and adaptability as their muscle memory*, allowing them to guide their team members through changes and setbacks more effectively.

Seek Feedback and Adjust Leadership Style Based on Company Needs

Feedback is crucial for growth. Founders should consistently seek input from team members and stakeholders to evaluate the effectiveness of their leadership style. As companies evolve, it’s important for founders to be open to adjusting their approach based on constructive feedback, ensuring alignment with the changing needs of the organization and its employees.

Building Network and Resources

Building the right network and resources can greatly assist founders during challenging times. There are three major networks a founder can develop: the customer network, the talent network, and the investor network.

Customer Network: One of the CEO’s key responsibilities is selling products to customers, who are essential for a company’s success. Engaging with customers at industry events, seeking referrals to introduce potential new customers, and requesting testimonials from satisfied customers can help build trust and provide valuable insights for early product development. Additionally, these connections can lead to increased sales through positive word-of-mouth.

Talent Network: Another crucial job for startup CEOs is to hire and retain the right talent for their organization. The right team members can complement the founders’ skill sets and provide specialized knowledge that aligns with the company’s goals. Building a talent network can assist founders in finding suitable candidates. Founders can discover talents through in-person meetups, referrals, and recruitment agencies. However, recruiting high-quality professionals in specific fields can be nearly impossible solely through agencies or online platforms. Personal connections and referrals from friends are usually the best approach, as mutual trust has been established. Once the right talent is on board, founders must also consider how to retain them by delegating effectively and empowering team members. To achieve this, founders can assign responsibilities that match talents’ strengths while allowing founders to focus on overarching company goals. Establishing clear expectations and accountability for delegated tasks is essential in this process.

Investor Network: Investors are key financiers for venture-backed startups. While generating revenue from customers through product sales is more sustainable, startups often need funding support when scaling up or competing with fast executions in market penetration and product development. Founders can attend founder-investor networking events or get help from network referrals to connect with potential investors. After securing funding, it is important for founders to maintain open lines of communication with board members and investors, involving them in strategic discussions and decision-making processes. Additionally, creating opportunities for collaboration can help build trust and align objectives with investors.

Conclusion

In conclusion, the role of a founder CEO is a complex and demanding position that presents numerous internal and external challenges, especially for first-time founders. By concentrating on developing essential skills such as leadership and emotional intelligence, founders can more effectively navigate the changing landscape of their organizations. Key traits such as adaptability to shifting market conditions, resilience in the face of setbacks, and a commitment to continuous leadership growth are critical for success in this role.

However, there may come a time when it is prudent for founders to step back from the CEO position, particularly when the business reaches a stage that requires specialized skills or industry experience beyond their current capabilities. Recognizing this need is vital for the long-term health of the organization.

To support founder-CEOs in overcoming these challenges and growing with organizations, we have outlined various development solutions focused on personal growth, networking, and resource building. By investing in these areas, founders can enhance their effectiveness as leaders and ensure the success of their ventures in an increasingly competitive and dynamic landscape.

References

Adams, R., Almeida, H., & Ferreira, D. (2009). Understanding the relationship between founder–CEOs and firm performance. Journal of Empirical Finance, 16(1), 136-150.

Blank, S. (2013). Why the lean startup changes everything. Harvard Business Review. Retrieved from https://hbr.org/2013/05/why-the-lean-start-up-changes-everything.

Chen, J., & Thompson, P. (2015). New firm performance and the replacement of founder‐CEOs. Strategic Entrepreneurship Journal, 9(3), 243-262.

Hellmann, T., & Puri, M. (2002). Venture capital and the professionalization of startup firms: Empirical evidence. The Journal of Finance, 57(1), 169-197.

Picken, J. C. (2017). From founder to CEO: An entrepreneur’s roadmap. Business Horizons, 60(1), 7-14.

Picken, J. C. (2017). From startup to scalable enterprise: Laying the foundation. Business Horizons, 60(5), 587-595.

Van Lancker, E., Knockaert, M., Collewaert, V., & Breugst, N. (2023). Preparing for scaling: A study on founder role evolution. Journal of Business Venturing, 38(4), 106315.

I would like to express my gratitude to Valerie Ross, Siyu Jia, Rich Cisek, and Michael Leung who provided valuable feedback and comments.