Passing the Baton Peacefully
Four years ago, when serial entrepreneur Michael Lyons sought inspiration for launching his next business, he had only to search as far as his computer screen. Like many Net surfers, Lyons was overwhelmed by all the text in cyberspace -- more so because he's dyslexic. An Internet search engine based on images instead of words might sell, he thought. So the 49-year-old Boston University MBA founded his fourth company -- ditto.com -- and started building such a product.
Then last year, ditto.com launched a more traditional search -- for a CEO to replace Lyons. Board members were beginning to question whether they had the right team to ensure the company's future. And with more than $30 million on the line, venture-capital backers were becoming anxious as they watched other dot-coms crash. So Lyons stepped aside for an outside CEO -- Wayne Willis -- and retreated to the role of chairman.
Such handovers of power have become almost a ritual of the startup culture, amplified by the recent tidal wave of dot-com failures. Technical or marketing visionary starts company. After initial success, company falters and backers seek someone to blame. With few exceptions -- Bill Gates and Michael Dell come to mind -- founder steps aside for professional manager and often leaves company.
Indeed, in a study of recent management changes at 173 high-tech companies in Silicon Valley, professors Thomas Hellmann and Manju Puri of Stanford University's Graduate School of Business found that more than half moved their founders aside within six years on average -- and that nearly 60% of the founders subsequently left. "If they aren't happy with the turn in the company or think things are too tense or aren't going well, they just leave," Puri says. "They still have equity. It's not like they are leaving with nothing."
More fascinating are the reasonably rare nonquitters -- those who find a useful niche and work with a successor to help make their original dream come true. For the founder, doing so means swallowing plenty of pride. "Let's be real," Lyons says. "Nobody gives up this job willingly. You've been here since Day One, and [now] you have to say, 'I'm going to let somebody else do that.'" And "that" can include sea changes in strategy -- and cutting loose original employees who are friends and family of the founder.
PAYING LIP SERVICE.
In an environment with so much potential for tension, the company also runs a risk. "Many of the qualities that you need to be an entrepreneur -- passion, charisma, self-confidence -- can make it hard to subordinate yourself to the CEO of your own company," says Scott Gordon, who, as managing director of the Internet practice at executive-search firm Spencer Stuart, places CEOs who displace founders. "Many companies have been destroyed because the founder pays lip service to being just a member of the team but never gives up the reins."
If such time bombs can be disarmed, however, keeping the company's creator on board may be beneficial for both parties. For the founder, there's the money. "It's a matter of weighing your self-worth against your net worth," says Alan Hu, founder of software company Collabria in San Mateo, Calif., who was bumped by an outside CEO last year. "You want your shares to be worth something." It also can be a relief to stop spreading yourself too thin. "Every time I needed to go out and raise a round [of funding], the operations suffered," Hu recalls.
For the company, there's the advantage of retaining someone who likely knows more about the core product than anyone else -- and is committed to it. In his new role, Lyons has been concentrating on finding new places to license ditto.com. Of late, he has been jetting back and forth between the U.S. and Japan, where he's in talks with several potential partners about bringing visual-search technology to Web portals.
Lyons says that after taking stock -- essentially, asking himself if he was still having fun -- he began to realize in January, 2000, that his days as CEO were numbered. Ditto.com had grown from a handful of acolytes to nearly 30 full-time employees and more than 60 part-timers, leaving Lyons with less time to do what he liked best: come up with new ideas. "When you get a company of 50 to 100 people, by definition the CEO is going to sit in management meetings the whole time," he says. "And you have to do things like budgets and employee manuals. I hate that stuff."
This was no revelation to the company's directors. "We knew from the beginning that Michael was the perfect person to take [ditto.com] to a certain stage," says Giorgio Ronchi, an adviser to the company's board and CEO of ETF Group, the European venture-capital firm that is ditto.com's lead backer. "He's a visionary. But when the company gets bigger, and he really has to manage, he isn't as happy. He is not the best person for this." Thus, the board -- composed mainly of outsiders -- reached a consensus on replacing Lyons.
Once decided, the board let the founder (who owns less than 10% of the company) help choose his successor -- a wise move. Lyons himself established the criteria for what kind of candidate would fill his shoes. He wanted an operations wizard with an ability to work with investors and the board. "If the founder is going to stay on, there has to be a personal fit as well as a background fit," Lyons says.
Although the board didn't set a deadline for the changing of the guard, it was clear sooner was better than later, Lyons says. Another adviser to the company introduced Lyons to Willis, 53, who had held a string of senior-management positions in high-tech companies, including a four-and-a-half-year stint as president of Voice-Tel, an interactive voice-messaging company. Voice-Tel was sold to Premiere Technologies in 1997 for about $200 million.
Lyons and the board liked what they saw in Willis, who holds a law degree from Yale University. But Willis says he didn't agree to climb into the driver's seat until Lyons assured him he'd also get the keys. He says he knew that for the management team to succeed with the founder still on board, the chain of command had to be established at the outset. "It doesn't work if somebody's going to say, 'Well, you come in and take care of the details, and you're responsible for everything, but I get to make all the decisions,'" Willis says. "This is, by the way, what a lot of founders say."
When a founder does remain, in fact, the relationship between the entrepreneur and the new CEO becomes a critical management test. Executives who have experienced this liken it to an arranged marriage, since love is rarely part of the mix -- at least at first. What matters, rather, is a willingness to work out differences for the good of the child -- the fledgling company whose survival depends on the availability of venture capital. Founders, therefore, must check their ego at the door, even as the outside CEO plays to the sometimes-capricious demands of the company's financiers. Not surprisingly, the likelihood that founders will be replaced increases by 15%, on average, when a firm is backed by VC money, Stanford's Puri and Hellmann found.
"CAREENING OUT OF CONTROL."
In sizing up the situation at ditto.com, Willis drew on past experience: He'd once been asked by a board to help rescue a company in the midst of a funding crisis -- and quickly realized the problems stemmed largely from a nasty conflict between the founder and the new CEO. "The founder was keeping his hands on the levers, and the CEO couldn't drive," Willis says. "They were just careening out of control. At that point, I negotiated an exit for the founder."
After joining ditto.com last March, Willis wasted no time in taking a hard look at the company's business plan. Soon came the first test of ditto.com's founder-CEO relationship: Willis proposed changing the direction of the company.
Lyons had envisioned ditto.com as a consumer Web site on the order of Yahoo! and other search engines. (Typing in the word "Bush," for instance, calls up pictures of the British rock group Bush, President George W. Bush, the President's mother Barbara, and an azalea bush.) Ads had been developed for such a site, and the staff was revved up for expansion.
Willis concluded, however, that the company's advertising-based revenue model wouldn't lead ditto.com to profitability. He quickly realized he had a sales job to do: persuading Lyons and the rest of the team that the search engine should be marketed to Web portals and other sites to implement as part of their existing services -- a business-to-business product rather than business-to-consumer. In essence, Willis' task entailed remaining true to the founder's vision, while adapting the plan to the changing dot-com market. "It was about being able to apply a fresh set of eyes to something and having the founder trust someone to nurture his baby," Willis says.
Lyons recalls that as a trying time. It took him about a month to come around to Willis' way of thinking: That the dot-com landscape had been transformed, making the world a frightfully inhospitable place for stand-alone Web sites. Before Lyons signed on to the change, scores of meetings were held. And outside advisers were brought in. "Basically, we had to come to terms with the fact that it was not the time to brand our own site but to license our index to the top players around the world," Lyons says. "That's a fundamental shift. And that took some doing."
Fortunately for ditto, the new strategy shows signs of working: Its technology -- which competes with Alta Vista, a search engine owned by Internet investment company CMGI -- is now being used by such sites as NBCi, Momma, Dogpile, and MetaCrawler. Lyons and Willis decline to discuss the company's finances. But Lydia Loizides, an analyst at Jupiter Media Metrix, an Internet consulting company, says ditto.com has a solid business model and calls the company "one of the leaders" in the field. "They have been at this for quite a while and have, in my opinion, a robust offering that can really provide value to people who are trying to improve Web searching," Loizides says.
WHY BREAKUPS HAPPEN.
Venture capitalists say the founder's willingness to support a major tweaking of the business plan is perhaps the biggest test of the founder-CEO relationship. "Breakups mostly have to do with differences over what to do with the direction of the company," says Roland Van der Meer, a partner in ComVentures, a Palo Alto (Calif.) venture-capital firm with $1.2 billion under management. "Everything else is noise."
Still, Willis hasn't embarked on a cakewalk. With a change in command inevitably comes the reviewing of the troops. Sometimes, the friends or family of a founder don't fit in as the company matures. Or they're made vice-presidents but aren't qualified to do the job. Laying off the loyalists is one of the most distasteful tasks an outside CEO faces, but it can be necessary -- and Willis played hatchet man on several occasions.
"They've built the company through the first phase, which is very hard, and I have a lot of respect for that," says Willis of the casualties. "I try to find another seat for them either in or outside the company. But it's my decision." (Ditto.com now has 47 full-time staffers, as people have been hired to implement its new strategy.) Notes Lyons, who saw several of his early employees fired: "That's a hard thing for me, O.K. Because let me tell you, I've got a bunch of combat troops."
Ego is the enemy that can turn friction over such moves into a war. And both Lyons and Willis admit to having healthy egos. The key to managing ego, Willis says, is to transform governance of the company from the exclusive preserve of the founder into a shared responsibility. "You need to have decision making and leadership derived from the enthusiasm of the entire management of the company, including the board," Willis says. "Then no one's ego is dominant."
Indeed, companies in which the founder-CEO relationship appears to work have controls that keep entrepreneurs from overstepping. At ditto.com, Lyons doesn't commit the company's resources until the management team has given its O.K. "It works because he has the authority to represent the company in a complete way, but he also has boundaries," Willis says.
During the 75% of his time when he isn't seeking overseas customers, Lyons pitches ditto.com's technology to corporate Web sites. "In general, it has been a positive shift in my role in that it allows me to do what I am best at," Lyons says. "If I had to manage the day-to-day operations, I would not have been able to do this."
MAXIMIZING FACE TIME.
In fact, Willis and Lyons are working well together despite a major logistical challenge: Much of the time, they're 2,000 miles apart, Lyons at ditto.com's technology center in Naperville, Ill., where the company was founded, and Willis at the firm's Burlingame (Calif.) headquarters, which the company opened when it discovered that the marketing and business-development talent it needed was clustered in Silicon Valley. The execs frequently shuttle between offices to maximize face time.
Despite the relatively smooth road so far, Lyons concedes there are bumps. To help him deal with the occasional frustration, he depends on his peers at the Young President's Organization, a group of CEOs and former CEOs in noncompeting businesses. Four hours every month, the band gets together to compare notes and occasionally let off steam -- a sort of group therapy for execs. It was Lyons' YPO cohorts who persuaded him the time had come to pass the baton. "These folks know me better than most anyone on the planet," Lyons says. "They helped me focus. They helped me differentiate between ego and vision."
Lyons doesn't hide the fact that he may leave ditto.com one day. "I am perpetually thinking about a new venture," he says. But he maintains this has nothing to do with his new role. In fact, leaving the CEO chair has helped him come to terms with his limitations, he says -- and, in the future, will help him prepare earlier for the leadership transition. (In fact, he wonders if his company might have died had it clung to its original business model.)
"My other advice is take a vacation," Lyons adds. "Let the other guy run it for a minute. Seriously, founders are neurotic. They do not take vacations. It'll give you a little perspective."
By Eric Wahlgren in New York