Technical CEOs, transitions, and growing organisations
Something I’ve been thinking about for at least five years (and last tried to articulate here) is the transition that happens as a technical founder’s business grows. Quite often, someone with what I’ll call “technical expertise” starts a business (for the purpose of this article, we will exclude “entrepreneurs” which start with an idea or funding but hire others to do the technical work). It doesn’t matter whether their expertise is in making hot dogs, litigating, writing accounting software or manufacturing steel beams – they start the business and are the expert in delivering that business’ product or service. Maybe they come from the industry and are able to identify a new niche or develop new products or services or find a new clientele based on their experience and ideas.
If their product is good and they can sell it to people, the business will grow. As this happens, they will need to hire people to help grow the business. Inevitably (and often, it seems, without conscious thought), the founder/s will become CEO-types and move away from their technical disciplines. They increasingly work ON the business instead of IN the business. This means, for example, hiring an overseer for the steel plant instead of interacting with the customers directly or being the plant manager. Over a year it probably doesn’t change anything. But over three, five, ten years (depending on how fast the industry moves), the founders become out of touch with the technical discipline that they came from.
This type of transition is typical in every industry and the canonically correct answer in the literature is that the founder should always do the highest leverage activities in the business – which is almost always being the CEO. (I assume the answer is different if you don’t want to grow your business or if you want a lifestyle business, but that’s outside the scope of this discussion). Generally speaking, I would guess that the technical founders are not usually a clearly outstanding practitioner of their technical discipline and, even if they are, they can often add more value to the company by learning to be a good CEO and hiring someone that’s 70-90% as good as they were to replace them in the technical role.
This is all fine and good and known. What is not well known is the opposite scenario, where the founder creates more value by staying in their technical discipline and letting others build the company around them. Investment management has some examples of this, as it’s quite common for those businesses to have distinct & separate technical and company leadership (CIOs and CEOs). This is because most(?) of the value in investment management is created by either marketing or investment performance (or both), rather than by operating the investment business per se. Outside of investing I have seen very few founders remain as technical leaders.
A Hypothetical Marketplace
Imagine that you are an expert on marketplaces and you build a new eBay that’s better for [various reasons] based on your deep expertise in building marketplaces. The business grows and you become a CEO. Does the business lose some of its competitive edge once you stop focusing on how to make a good marketplace, and start focusing on building a good marketplace business? Are you replaceable?
I started thinking about companies that buck this trend, and have a founder/leader figure in a technical role and not a CEO role. The only non-investment business I can think of with that happening is Ben Thompson of Stratechery. Ben does all of the writing even though he’s hired research and admin assistants to do the other things. His view (I infer) is that he creates the unique value for that business and the business would be a lot worse off if he stopped writing. He’s probably right. Some people on Twitter shared AF Legal Group with me as an example and there’s a short article here about how AFL founder Edward Finn stepped aside to focus on digital marketing while others run the company.
And that’s it. I can’t think of any other examples, outside of investing, where a founder has stayed as a leader in their technical domain and grown the company around them.
Technical, or CEO?
The question now is when should a founder stay in their technical discipline, and when should they become a CEO? I need to make some guesses. I will assume that the aim is to grow the business at least twofold, because anything less than that can often be achieved through optimisation of marketing, pricing, product mix, and costs – and thus there is no need for a change in the founder’s role. I will also assume that the decisions made will optimise for business growth. This necessarily means not optimising for happiness or lifestyle which would presumably change the answer.
My preliminary guess at an answer comes down to where the founder adds value. If they’re only in the top quartile of software engineers or hot dog makers, it would be better to learn be a good CEO. If you’re irreplaceable and unreplicable (Ben Thompson, Warren Buffett), you would be better off finding someone else to run your business. If your primary contribution is as what I’ll call an “inventor” (better capacitive touchscreens, artificial intelligence engineering, countersunk screws) you might also want to find a CEO. This is a static analysis which overlooks changes over time (e.g. building a better touchscreen leads to an interest in building a better mobile phone, which leads to being a CEO-type to assemble the team & assets to do that) but it is my best guess. Unique and irreplaceable is a good candidate for staying in the technical role. Otherwise, progressing to CEO adds more value.
As an aside, I think that this underlying conflict explains a lot of the issues with Oliver’s Real Food (ASX:OLI) from a couple of years ago. I recognised the issue (I think) with the multiple hats that the founder was wearing but wasn’t able to clearly recognise & articulate the logical results & second order consequences that would follow from that (short version: the business would not be able to scale).
As a divergence from our traditional programming, I would be interested to hear your thoughts on this phenomenon, especially if you’ve started your own business or seen this transition happen (I have not).
I don’t have any financial interest in or relationship with any company mentioned. This is a disclosure and not a recommendation.