When exit stage left becomes exit series B

24th September 2019
By Reecho

When is a business resilient enough to survive the exit of its founder?

Sit in on any startup meeting and you’re bound to hear the term ‘scalability’ at least a couple of times — and rightly so, as making scalable decisions is crucial to the growth and sustainability of a business. For those unversed in startup lingo, a scalable business is one which is able to maintain (or increase) its performance even when tested by substantial organisational demands.

Image sourced from parody book “100 Tricks to Appear Smart in Meetings: How to Get By Without Even Trying”

So how does this relate to the article’s title? Well, let us compare our startup to a Broadway show. Last summer, I was lucky enough to watch Hello, Dolly! in New York. Approaching the queue, my mother asked a fellow attendee if we were in the right place “to see Bette Midler”. Her priority was not seeing the play itself but its star, the iconic Bette. Had the understudy taken Bette’s place, she would have been sorely disappointed and likely wouldn’t have booked tickets in the first place.

Nichola Irwin, 2018

In a similar vein, people have an understandable tendency to heavily associate businesses with their founders — particularly in the startup world. What is Facebook without the indomitable Mark Zuckerberg? If we think of investors like theatre-goers, the departure of an iconic founder can be compared to the retirement of a famous Broadway actor. Yet if the core of scalability is the ability to handle growing pains, then excessive reliance on any individual is an existential threat. The loss of a founder is perhaps the most challenging test of scalability a company can endure. So, at what point is a business resilient enough to survive the departure of its founder

Some case studies

The founder exits which make it into the press are the larger scale, more controversial ones. Travis Kalanick’s fiery exit from Uber, the unfortunate circumstances surrounding the departure of Brandon Truaxe from Deciem… in both cases, pressure from shareholders was a key factor. These are cases in which the shareholders do wish for the founder to leave. Perhaps there are fewer examples of the converse simply because of the overwhelming pressure not to leave.

Take Apple. The immediate reaction to co-founder Steve Jobs’ resignation from Apple in 2011 was a share price drop of 7%. The press speculated wildly about the future of Apple without its ‘face’, the individual credited with turning the company’s fortunes around in 1996, the man who oversaw the release of the iMac, iPod, iPhone and iPad. Yet Jobs’ exiting statement that “Apple’s brightest and most innovative days are ahead of it” has proven prescient — if not from an innovation standpoint, then at least from a share price perspective. Stocks have increased more sharply in the period since Jobs’ departure than they did during his tenure.

What are some factors that we can pinpoint as aiding a smoother transition?

Observers commonly point to the strength of a company’s culture. This reasoning is theoretically sound, but in the Apple case at least, it is debatable. According to insiders, the exit of Jobs actually heralded a shift in culture from a chaotic-yet-innovative to more traditionally structured but less innovative company. Whether the veracity of such claims holds is dubious — there are bound to be detractors with any significant change to a business. Indeed, these changes could be seen as positive — could a chaotic company have survived the exponential growth that Apple has undergone since 2011? Either way, were the strength of Apple’s culture the factor that enabled a smooth leadership change, it likely wouldn’t have shifted with such ease.

The successor in question is instrumental to a smooth leadership transition. Internal recruitment is an obvious option. To return to the Apple example, Cook’s previous role as COO had him overseeing the majority of day-to-day operations for the firm, which he joined in 1998. Historically, he had stood in for Jobs throughout periods of illness — he was personally chosen and primed as successor. Choosing the correct successor can quell discontent amongst those loyal to the founder, and discourage turnover.

Nonetheless, the Apple case is the exception, not the rule. Particularly in small business contexts, it is rarely the case that leadership needs are met by the existing team. This is where you may need to enlist the help of an Executive Search firm (such as ourselves!). These firms specialise in placing senior-level executives in nuanced roles which require particular experience and expertise.

The succession of a founder is particularly challenging — nobody can ‘replace’ the individual from whom the original idea for the business came, nor can they replace the drive that comes from having been wholly responsible for its operation. The strategic vision of the founder is unique to them, but that is not to say that another’s vision can be equally if not more effective in guiding the business to success. These are things that can be tested in part throughout the hiring process, for example using task-based and team/investor/board interviews.

Ultimately, context is everything.

There is a world of difference between founder exits depending on the circumstances in which they take place.

A founder opting to pursue something else and carefully initiating the change process is vastly different from a founder pushed out by shareholders following a scandal.

In the former scenario, the stage is set for a collaborative ‘handover’ process in which the founder works with stakeholders and their successor to secure the best outcome. In the latter, the process is bound to be less harmonious; among other things, the very fact that the founder is being pushed out harks to trouble in the wider business (including culture). This simultaneously rushes the succession process and increases the difficulty involved in finding a suitable successor — it is difficult to find a captain for a rudderless ship.

To ask when a business is resilient enough to survive the exit of its founder is thus akin to asking “how long is a piece of string?”. A finite answer cannot be given. Some Broadway shows run successfully for decades with an ever-changing cast — such is their appeal that their roles always appeal to star performers. Others flop in the absence of their headline star. I’m pleased to report that Hello, Dolly! is currently enjoying success in its US national tour — with Betty Buckley playing Dolly.