June 10, 2019 by Fred Haney
The Fundable CEO
Many company founders want to be the CEO of their firm, but is that the best approach? Most successful CEOs work for 15-20 years to acquire much-needed expertise. A study of 2.7 million startup companies tells us that the average age of the successful startup CEO is 45. Venture capital investors have many opportunities to invest in companies with proven management teams. Startup founders need to consider all these factors when deciding who will make the best CEO for their company.
“Founders make the best leaders” – Steve Jobs Law
Who is the most fundable CEO of a startup company?
James Kwak, in an article in The Atlantic, wrote that Steve Jobs’s Law says, “Founder make the best leaders.”
Well that’s easy for Steve Jobs to say and for him it was true at least his second time around at Apple. And there have been other notable successful founders like Bill Gates and Mark Zuckerberg. But is “Steve Jobs’s Law” true in general?
In my experience as a venture capitalist, about half of the founding CEOs I observed were eventually replaced by more experienced executives because they simply were not meeting their objectives.
Steve Jobs’s Law states that an inexperienced founder can do a better job of running a startup company than an experienced CEO. Does this really make sense? Who will be the most fundable CEO for a startup company? Let’s address this question from four different points of view.
- Logically speaking, what does it take to be the CEO of a startup company?
- What career path do successful CEOs follow?
- What do statistics tell us about the age of successful CEOs?
- What kind of CEO do venture capital investors look for?
“Talent is the No. 1 priority for a CEO. You think it’s about vision and strategy, but you have to get the right people first.” Andrean Jung, Grameen America
What Does a CEO Do?
If you look at the long list of skills that a CEO must have and the amount of time it takes to acquire them, it’s hard to see any logic to support the premise. Of Steve Jobs’s Law. Do passion and perseverance really make up for a lack of sound experience?
My book, The Fundable Startup: How Disruptive Companies Attract Capital, lists 13 very broad skills that a successful CEO must possess. These skills require extensive experience to develop. For example, it can take years to become adept at long range planning or corporate planning. And it can take many years to develop the skills required to manage other managers or understand financial statements.
One very critical skill that more experienced managers have is financial forecasting. This is an area where many first-time CEOs fail. Being a good forecaster requires that the executive traverse numerous cycles of over-forecasting revenues and under-forecasting expenses before they begin to forecast profits accurately.
Studies show that it takes at least 15–20 years of training for an executive to become the CEO of a larger firm. Examples would be Ann Mulcahy of Xerox Corporation and Jack Welsh of G.E.
According to a 2002 Forbes article Want to Be a CEO? Stay Put, half of the CEOs in the United States spent over twenty years working their way to the top. The average age of a CEO in 2001 was 48.8 years-old.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett, CEO of Berkshire Hathaway
What Are the Paths to Becoming a CEO?
Most CEOs start at the bottom and work their way up through an organization, according to a Spencer Stuart study. The 2015 CEO Transitions,” spencerstuart.com study reports that in 2015 the average age of an incoming CEO was fifty-three, while the average age of an outgoing CEO was sixty-two. Further, 84 percent of CEOs were promoted from within the company.
So how do we expect an entrepreneur founder with no management experience to have the skills required to be successful?
There certainly are examples of first-time CEOs who succeed because they have most of the required management experience even though they have not operated at the CEO level.
A case study in The Fundable Startup describes Lori Torres as “likely to succeed as a first-time CEO” because of the extensive management experience she had before founding her company. Lori had never been a CEO before, but she had extensive experience as a manager with the Irvine Company, a very large owner of commercial and residential properties in Southern California. Based on an interview in 2015, I predicted that Lori would most likely succeed when she founded Parcel Pending, Inc., a manufacturer of automated locker systems for delivery of packages. Lori sold her company in January, 2019, to NeoPost for $100 Million which represents success by any measure. But most experienced CEOs have followed a long and tortuous path to obtain their skills.
The Fundable Startup contains two case studies that show the career progression of highly successful executives. Webb Castor progressed from being a salesman for IBM to one of the top sales and marketing positions in the Xerox Corporation. Webb’s climb took about 23 years. Van Honeycutt worked his way from computer programmer to CEO and chairman of Computer Science Corporation, Inc. His climb to CEO spanned approximately 30 years.
“Bootstrap for as long as you can.” Ron Conway
What Do Statistics tell us about Steve Jobs Law?
In an article titled “Age and High—Growth Entrepreneurship,” the authors used a combination of SEC K-1 data combined with U.S. Census Bureau data to study 2.7 million startup companies and determine the average age of the most successful founders. The answer is, “Older than Steve Jobs’s Law might suggest.” The average age of the most successful founders was 45.
The authors also found that previous experience within the same sector as their startup increased a founder’s success rate by 125%.
What Kind of CEO Are Venture Capital Investors Looking For?
Most professional investors see an enormous number of opportunities—in some cases dozens of startup business plans per month. If several of the startups have compelling business concepts and a management team with prior success, which business plan is the investor likely to choose? Why would an investor choose an inexperienced first-time founder over a CEO with previous success?
What Should a Founder Do?
First, perhaps, a founder should not rush into a task for which he or she is not well prepared. Many successful startups pursue a combination of two strategies: They create as much value and traction in their business as possible before approaching investors and they work to attract a fundable management team.
This “bootstrapping” approach gives a founder and his or her team the opportunity to demonstrate their managerial skills. If the founder can create an initial team, develop a product and obtain customers, then the founder might be able to persuade investors that he or she can manage the business successfully.
Finally, some founders find a way to attract a fundable CEO to their company. They might do this by partially bootstrapping the company, or they might use the part-time services of a qualified CEO to build the company until it is able to attract a full-time, fundable CEO.
“The average age for a CEO across industries is 58.” Korn Ferry Institute
Does this mean that founders should not try to emulate Steve Jobs or Bill Gates? Not necessarily. There will be more superstars. The facts do suggest, though, that founders should have their eyes wide open about the challenges before them and they must develop strategies for competing with proven management teams for the capital they will need to be successful.
About the Author
Dr. Fred Haney is the founder and President of the Venture Management Co., a firm that provides assistance to high tech companies. He is the author of “The Fundable Startup: How Disruptive Companies Attract Capital,” published on February 6, 2018, by Select Books of New York. Download the first chapter for free below: