The success paradox

Source: Trends (24/10/2018); Author: Veroniek Collewaert

Doesn’t this sound familiar: the quiet, industrious worker who is rewarded with... even more work? Research has even shown that it isn’t just colleagues who are all too eager to use (or abuse) these hardworking souls, but their romantic partners too. Hard workers of the world, be warned! I hardly need point out that this obviously doesn’t have positive consequences for the hardworking person in question in the long term. They know to expect more and more work with the feeble excuse “yes, but it’s easy for you, isn’t it?” Usually we still have the fairness to add that the hard workers in our team take on more than their fair share, but apparently we don’t manage to acknowledge that the person in question experiences that as a burden that gets heavier and heavier. So although the hard worker may initially see the ongoing addition of extra tasks as a kind of recognition of their work, the chances are that sooner or later it will turn into a feeling of being punished for working hard and getting good results. That is the irony of working hard and doing well.

A similar success paradox exists in the world of entrepreneurship, albeit in a slightly different form. Every young company works towards important milestones such as successfully completing a first product or raising a round of financing (although of course the latter shouldn’t be a goal in itself). A study of internet companies by Harvard has demonstrated, ironically enough, that a founding CEO’s success in achieving those milestones increases that person’s chances of being replaced as CEO. So although those chances are obviously higher when the CEO performs particularly badly, performing very well can have a detrimental effect. We are of course assuming that most founding CEOs would like to continue in their role as CEO.

But in a sense it is hardly surprising. A founding CEO who pushes their team in the direction of a successful product development might have the perfect technical skills to reach that first milestone, but not necessarily the skills (or the motivation) required to lead the company through the following steps towards growth.

When obtaining new financing, the power is often – although not always – in the hands of the investor. If the investor is not convinced of the founding CEO’s qualities to lead the company in the direction of major, rapid growth, they may set the replacement of the CEO as a condition during negotiations. If the CEO is not replaced, there will be no money. Although the figures show that it does not happen here as often as in the US, for example, it does happen. If not at the negotiation table then soon after the round is concluded. Investors do not like to let grass grow over possible latent problems. Finally, it will come as no surprise that this happens more when more money is being raised (i.e. larger amounts) and when investors already have a larger percentage of the shares in their hands. In other words: when they have more power.

“Is that a bad thing, then?” I hear you ask. No, not necessarily. For the founder in question, much will depend on how they feel about it personally. Most founders see their company as their child, and leaving also means distancing themselves from that child. That isn’t easy, to say the least. Incidentally, if you are a founder who sees the storm clouds gathering, I advise you to take a proactive stance and get the process going yourself. In fact we also see here that founding CEOs who initiate their own replacement process stand a better chance of staying involved in their business in a later stage, albeit in a different role: through the board of directors for example, or in a position that answers to the new CEO. People who are asked to leave usually leave the business completely.

For the company in questions, transitions of this kind tend to have a positive impact. Founding CEOs who gradually give up part of their control generate higher company valuations (approximately 20% higher) and raise higher amounts of investments (up to as much as 50% more). However it can be useful for the company to keep the founder close by. Founders are still founders, after all, which means you usually only have two or three of them per company. Their knowledge, experience, image (both inside and outside the company) and genuine concern for the business are irreplaceable. Take good care of them!

Veroniek Collewaert is a Professor of Entrepreneurship and partner at Vlerick Business School and KU Leuven. She is the director of the Entrepreneurship 2.0 programme for scale-ups, programme director of the Masters in Innovation & Entrepreneurship, an advisor to various scale-ups and a member of the Board of Directors of BAN Flanders.

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