At some point in the life cycle of a start-up company, the founder, board members and investors face a critical decision: Is it time to hire a new CEO?
Different situations can precipitate the recruitment of new leadership, according to David Brophy, finance professor and director of the Center for Venture Capital and Private Equity Finance, or CVP, at the University of Michigan’s Ross School of Business.
“If the founder flounders and the company is not doing well, replacement management may be needed to get things back on track,” Brophy explains. “On the other hand, if the company is ready to fly, and go to the next level of growth, it may need an increase or improvement in that particular resource. In the first instance, it is a turnaround situation. In the second instance, it is an expansion.” In both cases, a new CEO can lead the freshening of the management team, either by realigning or incentivizing the existing team or by attracting new team members with more experience.
Recruiting CEOs to lead start-ups in Michigan has been a challenge in the past, due to the cultural misalignment in the state’s economic base between large corporations and early stage companies. “Historically, it was difficult to attract executives from big companies, because they were not accustomed to the start-up and early-stage company landscape,” Brophy explains. “Many found it unappealing to work without a staff or a large salary, and to put everything on the line and work for stock options. No one could imagine an auto executive suddenly running a start-up. Even though Henry Ford did it, that’s almost the last reference we have.”
In recent years, these dividing lines have begun to blur, as Michigan’s economic structure has changed and evolved. “Big companies have become technology enthusiasts, and their executive management has become aware of, and friendly toward, technological advances and start-ups,” Brophy says. “Increased interaction with Silicon Valley and the East and West coasts in general also has broadened the available pool of talent to fill CEO positions at Michigan start-up companies.” Increasingly, he notes, start-up founders and their boards are enlisting the help of traditional headhunters to cast a broader net for promising chief executive candidates.
The executive recruitment situation in Michigan remains challenging and fiercely competitive, however. Founders must be able to make a compelling case in order to attract the most qualified CEO candidates. Key considerations, according to Brophy, include:
- Ensuring that the company’s technology is unique and its intellectual property is properly protected
- Presenting strong evidence that the marketplace values the product or service the company is producing
- Demonstrating that the needs of the company are evident and can be defined and measured
- Prioritizing the selection of CEO candidates based on compatible industry experience and prior success in raising growth capital, managing company growth and orchestrating exits through sale or IPO
- Securing financial backing from committed investors to help pay executive salaries and fund future growth
CEO candidates from other parts of the country who are considering job offers to lead start-ups in Michigan also must perform their own due diligence, and be willing to relocate. “A candidate should determine the connectivity of the start-up founder and his/her team to relevant people in whatever geography is hottest for the product or service the company is offering,” Brophy says. “In other words, the company has to have something unique that rings the bell with those people in the wider marketplace who would be strategic connection points. It’s all about whom you know and who knows you.”
Red flags should go up for a candidate if the recruiting company lacks a disruptive technology or patented intellectual property with strong commercialization potential; a capable team of sub-managers to oversee its IT and operations; or adequate financing from angels or venture capitalists.
Brophy contends that more needs to be done through the University of Michigan, its alumni base, the business community and the entrepreneurial ecosystem to attract top-level start-up management talent to Michigan.
“At the University, we often talk about IP and research as if the idea and the science project were the most important aspects,” he says. “We behave as if ‘you invent it and they will come.’ But inventors still need to find someone to turn their idea into a product; to make the product at a consistently high-quality level; to find buyers for the product at a price that gives the company a good margin; and to continue building on the technology and bringing forth new products. That can only be done by the jockey, not the horse.”