Professional CEOs at startups: Quick wins or mission control?

As the Indian start-ups world matures, it is starting to imitate its US counterpart in many ways. Right from introducing business models that have been tested in the American market to going after aggressive market share acquisition, some would have thought they have seen it all.

And then change of guard happened. Poster boys of the Indian startup ecosystem, have come under pressure from investors to move towards profitability, lower the cash burn and get into cash conserve mode. As a result of this, many investors who hold large stakes in startups had to bring in professional CEOs to run the operations and founders stepped down (Read Flipkart, Zivame).

Many founders are now thinking if this trend will continue or was it a one off noose tightening exercise at one of the most heavily funded ‘startup’ of the country. Before we reach to any conclusion, it will be a good idea to examine pros and cons of handing over a passionately built startup to a professional CEO or if investors should let the founder be, because businesses are built with passion and conviction which only a founder brings to the table. Just exactly, what is the message being sent out by VCs to Indian startups?

Bringing in professional CEOs to take over management from founders has been a regular feature in the US’ venture capital-backed market for a long time. Now with Flipkart as the most talked about example, the trend is gaining momentum in India. While founders and professionals are both intellectual resources, managerial styles and skills differ. Passionate young founders tend to be either technologists who are product centric or hot-shot sales folks who deliver the first ten customers.

Such change is primarily born out of the Board’s assessment (read, the investors) that the founders cannot scale up according to the company’s growth pace and that the leadership needs a more refined approach. Investors, naturally, want to protect their interests and tend to cut risk by bringing in experienced management. Paradoxically, investors love founders when looking to invest and “professional CEOs” when seeking returns on investment. Sometimes, this is also done to resolve boardroom conflicts and issues related to co-founders.

There is a great deal of truth to the view from founders that as the person with the vision, they should be the one leading in the mission. Having been an entrepreneur who exited a business myself, I find the notion unpalatable that a founder is somehow believed to be unfit to lead his or her organization because he or she is a founder.

Of course, not all founders can become great CEOs, but most of the great companies in our industry have been run by a founder for a long period, often decades. As a VC, we cannot guarantee that a founder we back can be a great CEO, but we can help that founder develop the skills necessary to reach his or her full CEO potential and there are ways to guarantee a smooth transition.

This is a delicate matter, and decisions need to be taken with all the stakeholders involved. If the investors have strong evidence that the founder cannot lead the organisation in its current and future stages, then the Board and the founder should be able to arrive at a decision in the best interest of the organisation. I think it is imperative to keep in mind that in some cases such as Google, Apple and Starbucks, financial results took a massive hit upon the founders stepping aside (voluntarily and involuntarily), and this pretty much forced the founders to return to lead the companies again.

In India, the theatre of the startups is just starting to playout and as in Silicon Valley many a stories will be written on Founder-professional sagas, as we see it play out in the behemoth InfosysBSE -0.46 %.

(Bhaskar Majumdar is Managing Partner, UnicornBSE 0.00 % India Ventures)

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