The CEO Shuffle

It’s an old story: Hot startups are created by clever technologists, but it takes a different kind of leadership to really hit the big time. Many of today’s smaller companies are following this well-worn path, with both Panasas and ParaScale this week replacing their CEOs with industry veterans. These changes show that the investors in these businesses are looking either for a path to growth or an exit as the economy improves.

The multitude of early CEOs swapped out their for industry pros make the exceptions stand out: Bill Gates’ amazing stint at Microsoft and Apple’s birth and rebirth with Steve Jobs are legend. The storage industry has similar Cinderella stories of its own, but Richard Egan’s 22 years at EMC, growing that company from furniture reseller to industry titan, is perhaps best-known.

Although these “American Dream” stories are attractive to entrepreneurs, most IT companies follow quite a different path:

1. The Founder’s Circle – A few visionaries get together around an idea and form a proto-company. They write some code, bolt together some hardware, and call their friends to be beta customers. Maybe they even raise a bit of cash, but no real money comes in at this stage.
2. Building A Real Business – The Smart Guys realize they don’t have the business acumen to really make a go of it, so they bring in some skills. Maybe the head smartie steps aside to become CTO, allowing a trusted partner to take over as CEO. A veteran VP of Sales comes along, too, and the investors pony up seven or eight figures.
3. Stuck In The Middle With You – Two years later and the business hasn’t grown. The hot-shot VP of Sales is long gone, as are all of his guys, leaving only their expense reports behind. The board is getting nervous, but they are sticking with it thanks to positive customer news.
4. The CEO Shuffle – The investors are tired of waiting so they go looking for “someone to take it to the next level.” Maybe they know just the right person, or maybe a friend of a friend plays golf with a guy who used to run a company something like this that went public. Either way, the early CEO is moved aside (or moved out) and the press releases flow.
5. Up, Out, or Repeat – The bets are placed and the cards are drawn, but there isn’t always a verdict. Sometimes the business grows like crazy, maybe even going public. Other times the new guy sells it, maybe to some of his old friends. But more likely the veteran team can’t make it work after all, and the company returns to step 3 or fizzles out due to a lack of funding.

This tale may sound cynical, but it’s actually perfectly reasonable. Even healthy. No one knows what is going to work, and the process is an efficient way of proving out a business.