We’re often asked how to establish fair market compensation when it comes to CEOs of privately held companies, often with venture capital or private equity backing.

Below is one method that can be employed as a jumping off point for this calculus:

1)     “De-risked,” how much is a CEO worth?  Is  $500 -$1M a year too much?  For our purposes here, we’re talking about a talented CEO.  Not someone below average, but above the average, one that a retained executive search firm, venture or private equity investor, or board of directors would be proud to put in the role.   Rather than pick some arbitrary number, this should be  ”market set,” by looking at what someone working for any global 2000 company (i.e. General Electric or other similar) earns annually.  From our executive search experience and database of compensation comparables in these companies, base salary is usually between 250K and 400K, depending upon how big the divisional P&L responsibility is, there is usually a bonus that is between 50-100% of base, and an LTIP (long term incentive plan) that-once partial vesting begins-can generate from 100K up to 250K or more a year in cash.

2)     So, the cash component of a comparable, including average base, annual average bonus, and yearly LTIP pay-out looks something like this:

Base ~ 300K

Bonus ~250K

LTIP (cash only) ~ 200K

TOTAL: 750K

* This does not include any meaningful RSUs (restricted stock units) that are usually also part of that package, which could add another 200K or more per year in value to a general manager’s package with true P&L responsibility for their division, group, or sector/segment.

* This is also not indexed to geography/cost of living.  If the position is in New York City tri-state area (New York, northern New Jersey, southern Connecticut), San Francisco, Boston, London, Singapore, Hong Kong, or Tokyo, a multiplier factor needs to be used to level-set for cost of living increase required for those metropolitan areas.

3)      Now, back out the cash portion of a CEO’s compensation for the company that they’re stepping into (say 250K a year in cash in smaller companies as all base, or combination of base + cash bonus).  So you’re left with say 500K that needs to be made up in equity, on a per anum basis.

4)      Over how many years is the liquidity horizon (and/or vesting rate, 3, 4 ,5 years)? Let’s say it’s 4 years, at net 500K, equals ~$2 million

5)      Now, this is with ZERO beta risk factor.  Add back the beta risk of an earlier stage company.  Let’s assume a global 200 company equals “1.”  A CEO role in a privately held, externally backed company is not “1″.  It’s probably a multiplier of 1.5, or 2.  For a pre-revenue, VC-backed company with high burn rate, it could be as much as in the 3 to 5 range.  Note that any illiquid company is inherently risky in terms of cashing in any equity at a reasonable price.  Let’s pick a beta risk multiplier of 2.5 times riskier than “average.” So, 2M * 2.5 = 5M.  Note that when there are preferences for the investors that create an exit hurdle rate before any common shareholders get paid, beta risk goes up accordingly unless the CEO participates in any exit event via cash carve out or other instrument.   As mentioned above, a recent IPO that represents a reasonable market comparable netted a CEO who joined the company 4 years ago $20M.  Using this number, the CEO’s compensation was $5M a year, or a beta multiplier of approximately 5.

6)     Then, are there any combat pay provisions you need to add in (warts that a CEO or executive team member is required to overcome and vanquish in their role that are above and beyond the normal call of duty)-reconstituting the executive team, or raising an outside round of capital because existing investors are tapped out, or starting up an Asia manufacturing capability that will require the CEO to take a dozen 15-hour flights one-way to get up and running.

7)      Finally, you have to look at what likely dilution there is going to be to an initial options grant for the CEO.  If you start with a 6% stake in an early stage company in a Series A funding, and you then raise a series B and C, depending upon valuation for those rounds, the CEO will likely end up below 3% as a “fully diluted” stakeholder.  There is an argument to be made that any of the management team critical to the success of the company will be “topped off” at later funding events in order to keep them motivated.  However, there is no guarantee that this happens.  It’s only good business sense to do it.  For the CEO, it is more important what s/he ends up with, not how much with which they start.

8)     Add water, and stir…

Notes & disclaimers:

• * This is not intended to be biased in any direction, to any party, neither CEO candidate, nor company and/or investor.
• * This is only one way of calculating compensation, indeed there are many others.
• * There is no way an earl- stage emerging/growth company will be able to compensate a CEO in all cash, nor truly be able to offset the risks inherent in this stage of venture.  The CEO either accepts this, or is not truly capable of working successfully in this milieu.
• * Other than the impact of cost of living  adjustments to base compensation, each CEO candidate comes with what we refer to as their own subjective “keep the lights on” cash needs.  We calculate this simply as the amount of cash required on a yearly basis to cover their living/family obligations without having to write checks out of savings to cover it.  Some CEO candidates may have 3 children in private school or college, while others may have no children and no mortgage.  Cash needs therefore may range widely, and need to be adjusted for using equity as a “leveler” (less cash-needy, higher the equity, and vice versa)
• * Alternatives to paying bonuses in cash might be to pay bonuses in equity, upon achievement of key milestones for the company
• * This same calculus can be applied to the Vice President level as well, subject to appropriate adjustments downward in cash and equity
• * In a circumstance where there is a “turn-around” required, equity may not be enough of a certainly to attract a competent CEO for the challenge ahead.  In these circumstances, a cash carve-out may be warranted in addition and/or in substitution for a stakeholder role.  The cash carve-out may be just for the CEO, or for the key management team required to achieve the turn-around.  Often, the cash-carve out structure is a percentage of total sale price over a certain amount, with the possibility for an accelerator depending upon exit/liquidity circumstances/outcome.
• * Often the question of anti-dilution comes up in an effort to assure a CEO of a certain percentage of equity upon liquidity.  Granting 5% equity to a CEO at a Series A financing with anti-dilution would ensure that the CEO retained his or her stake across the growth and additional funding needs of the company.  However, this is rarely a good mechanism, as the CEO becomes less interested in new company valuations at subsequent funding events, and becomes misaligned with the company’s investors.

We are often asked to do some executive compensation “ciphering” on behalf of our clients.  Getting an accurate read on market compensation is always a bit of fuzzy math.  You can call around to those you think may know or are in those positions now, you can commission a survey, or dig into some of the executive compensation databases that pre-exist.  We often do all three on behalf of our clients.  However, the below numbers are based on the Dow Jones executive compensation data collected several times a year, targeting venture-capital backed companies in the U.S.  The companies surveyed cover early stage seed-round and Series A, through later funding stages, and companies that are pre-revenue through shipping product and profitable.  From an industry perspective, the below data is an amalgam of all venture-backed industry sectors in the U.S., including technology (software, hardware, services, interactive media, etc.), sciences (biotech specifically), medical devices, cleantech / renewable energy, and other related fundable venture sectors.

For this bit of ciphering, we’ve focused on three executive compensation comparisons involving CEO compensation–

1)     West Coast versus East Coast, and the differences that may exist between them

2)     “Founder CEO” vs “non-founder CEO”

3)     and early stage CEO compensation vs. later stage companies and associated CEO compensation within

This is always an interesting analysis.  Each category of CEO always feels as if the other is getting a “better deal”-CEOs on one coast think it’s likely better on the other, and founders and non-founders often feel the other has a better package.  Similarly, early-stage CEOs are often jealous of the “rich cash packages” that they seem to hear about in later stage companies, and late-stage CEOs always feel that early-stage CEOs get so much more meaningful an equity position than they as “hired guns” seem to be able to garner.

Note that below we’ve only included the analysis of the executive compensation data, in other words the deltas.  If you’d like more detail and the information on which we based the analysis, please email damador@bsgtv.com with your name, title, company and business email address, and we can provide you with the baseline full report.

Do keep in mind that this is only one set of data.  To draw the best comparables, it’s important to do all three data-grabs listed above.  Also, this is a “blended” sample set of all venture-backed industry sectors.  Some industry sub-segments may pay more or less than others with further parsing.

Highlights of the analysis

In the first “delta” table, we took a look at West versus East for early stage start-up/product development focused companies.   What was apparent in this earlier stage company setting was most recently, West Coast early-stage CEOs  on the whole have lower cash packages in both base and bonus. In addition, an equity analysis also returns 1-2% less on the West Coast than East in this data set in the lower quartile and median.  However, in the top quartile compensation range (those CEOs who have compensation in the top 25% of all CEOs surveyed), West Coast CEOs outearned East Coast in both cash (by only $13,000) and equity (a full 1% more).  Another interesting data point is that West Coast CEO’s have more upside in terms of bonuses (an average of 27% of their base compensation) than East Coast CEO’s whose bonuses are an average of 16% of their base compensation.

In later-stage companies where they are already shipping product, West Coast founder CEOs are paid less cash and ultimately hold less equity than East Coast founder-CEOs, except again for the top equity quartile, where West Coast founder-CEOs make up for less cash with +4% more equity on average than East Coast founders.  However,  West Coast bonuses for CEO are 29% of their base compensation while on the East Coast, CEO bonuses are 22% of base compensation.

West Coast non-founder CEOs (hired guns) make more than East Coast in cash only.  Equity is about the same, East vs. West.

On the East Coast in later-stage companies professional president/CEOs are paid less cash and hold less equity vs. similar founder CEOs.

On the West Coast, the pattern that Noam Wasserman at HBS has observed does prove out–  that non-founder CEOs get paid less cash compensation, but hold much more equity than their non-founder CEO counterparts (see http://founderresearch.blogspot.com/)

Below is the hyperlink to our latest CEO peers “speed-survey,” exclusively for growth-stage CEOs.  Topic– “Preparing for Recovery?”

http://surveys.polldaddy.com/s/D3642F14267CCC14/

We at BSG Team Ventures periodically take the temperature of the markets we serve. This speed survey is no more than 10 questions, simple multiple-choice.

Knowledge is power.  Aggregated peer-provided knowledge is “actionable power.”

We make an effort to survey only those who fit the category (in this case, sitting CEOs or board member/founders of technology/science-driven growth-stage companies). [Note, if you don't fit the aforementioned description, please refrain from responding.]

Feel free to forward to the qualified CEOs in your sphere of influence.  The more data generated, the more accurate the trend lines.

All responses are anonymous due to the web-based survey technology employed.

We will forward the survey results within the next two weeks to the email address on file.  Please let us know if there is another email address you wish us to send the results to as well.

August 7th, 2009

INmobile.org released their first collective intelligence research paper today, titled “Harnessing Collective Wisdom to Forecast the Near Future of Mobility.”

INmobile.org – Harnessing Collective Wisdom to Forecast the Near Future of Mobility Aug 2009

The Idea in Brief

A problem presents an opportunity: Periods of economic slowdown such as the one we are currently operating within offers us the unique and incredibly valuable opportunity to reflect upon past periods of expansion and prepare strategically about the upcoming period of recovery and growth.�This practice should be universal but often is not and too often the methodologies used are flawed, outdated, or both. The remarkable opportunity for assessment and planning may in part be unintentionally squandered when companies continue to rely upon the same perspectives and methodologies that have disappointed in the past regardless of where they are in the economic cycle.Previous techniques to forecast vary historically based upon cost and theory.Some rely upon internal perspectives, outside or analyst input, and market data.Often they range greatly in their level of sophistication, objectivity, and conjecture.While many remain valuable, they are perhaps too often relied upon.Here we begin to offer a more innovate and arguably more accurate means to acquire that knowledge.It is the tool of collective intelligence.

The idea of collective intelligence: Collective intelligence can perhaps be best understood as the intelligence which results�from the competitive collaboration of a group of individuals. Published in 2004, The Wisdom of Crowds � Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations by James Surowiecki argues that the aggregations of information in groups results in decisions that are better than those which could have been made by any single member of the group. In Surowiecki�s book, he argues that under the right circumstances, groups are remarkably intelligent and often smarter than the smartest individuals within them. When faced with a cognition problem such as, Who will win?, the idea of posing it to 100 experts was suggested as a collective �wisdom of the smart crowds exercise.As we currently seek to gain more informative and credible insights into the next five years of mobile technology, we should begin to take hold of this incredibly useful and adept tool called collective intelligence and apply it to the task.

The power of INmobile.org: INmobile.org is a private, global community of senior executives focused on mobility and convergence.This vital community of global wireless industry leaders enjoys both on-line and in-person events. Its private forum is fueled by a genuine and generous exchange of ideas, informed observations, timely information, empirical knowledge, and analysis.

The opportunity taken:In order to harness the collective intelligence and predictive abilities of INmobile.org, we interviewed one hundred senior executives from within this on-line community.We independently asked these executives the identical question during a one on one conversation and under similar circumstances.No previous conversations or predictions were referred to during these interviews in order to avoid the potential problem of group think.Based upon this methodology, it is our expectation that the whole of the INmobile.org community represented by these one hundred executives will show itself to be significantly more than the sum of its many parts.

The question:We posed the question, What industries will be most affected by the growth of wireless technology over the next five years? This question was suggested during the INmobile.org member reception held on March 31^st at the Wynn Hotel in Las Vegas, NV.�Over 200 senior executives attended the private reception where the concept of �capturing the collective intelligence� of INmobile.org was initially discussed.

The executives who answered:�The identification and selection of the 100 interviewees was done in two stages.The initial selection targeted fifty senior executives to represent the vital components of the mobile ecosystem with the broadest and most relevant perspectives for this specific question.These included mobile carriers, handset OEMs, OS vendors, and mobility focused venture capital and private equity.A call to action was then sent out to the INmobile.org membership requesting additional participants in this research project. Those additional participants provided increased geographical reach and diverse areas of mobility.Telephone interviews were conducted from April to June of 2009 and were conducted by either Matthew Corbett or Mark Newhall.

The results:Consensus predicts industries most likely affected by mobility because the predictive likelihood is heightened if and when a majority of experts independently think the same industry will be affected. These findings have been aggregated and documented in the report.

For more imformation, contact Matthew Corbett at mcorbett@bsgtv.com or at 1-617-266-4333 x241.

www.bsgtv.com

www.inmobile.org

Registration is Now Open

3rd Annual Benefit

VCs vs. Entrepreneurs – Davis Cup Challenge

NEW DATE:  Thursday, September 24, 2009
Longwood Grass Courts  /  2:00 – 7:30pm

Welcome Back!  BSG Team Ventures is proud to once again host the 3rd Annual  Benefit: VC vs.  Entrepreneur Tennis Tournament – Davis Cup Challenge, and we are thrilled to have you join us.

The VC/Entrepreneur tennis community has been growing every year so please register now so we can build the teams early.

Entry is by donation of $175.00.  *Payment must be received in advance of the tournament.  Please go to our PayPal link , it gives you the option to either pay with your PayPal account or with a credit card.

Register by email to Cristina Vieira Abramson at cvieira@bsgtv.com or call 617.784.4987

Agenda Overview

VCs vs. Entrepreneurs - Thursday, September 24, 2009

Format - Round Robin, Doubles

Time - 2:00 – 7:30pm (includes tournament, finals, cocktails, dinner and networking)

Location – Longwood Cricket Club, Chestnut Hill, MA 

After quite a bit of discussion was sparked on an earlier blog post in March around the 7 Reasons why early and growth-stage CEOs fail (http://www.bostonsearchgroup.com/blog/7-reasons-ceos-fail/ )in technology-driven innovation-stage companies, we thought we’d get the venture capital perspective.  Below are the results.  The two biggest reasons behind CEO failure revolved around a CEO’s inability to balance revenues and burn-rate (23%), tied with the CEO’s inability to hire well at the VP level, with repeat VP-level failure/turnover (also ~23%).  The balance of forced ranking of CEO failure include categories such as–

- New CEO didn’t integrate with rest of incumbent team

- Business model changed (different horses for different courses)

- Leadership fatigue (plateauing company for too long a period)

- CEO “Peter Principle,” and

- CEO getting sideways with Board of Director(s)/ board chemistry

We’ve just compiled the results from the most recent CEO survey we sent to our Rolodex of CEO relationships.  The theme for this survey was a combination of economy-oriented questions like “What three cost reductions are you planning” and  “Do you continue to anticipate further staff reductions,” to following results to the opposite question, “What are you spending more on this year than last?”–

Great feedback and insights were provided by all, and thanks to all those who participated.  Below are the slides of the responses, along with some of the content of the responses to questions like “What questions would you like to ask your peer CEOs if given the opportunity?”

When it comes to prognostications as to when the recession will end for innovation-stage companies these CEOs are leading, there was an overwhelming opinion that we still aren’t out of the woods, with more than 60% voting that it won’t be until 2010.

CEOs who responded were overwhelmingly venture-capital backed (~60%), with the balance of CEO respondents spread pretty evenly between private-equity backed, bootstrapped, and angel-funded.

When CEOs responded to the question of what other cost cuts outside of staffing they felt were the most likely, the top 3 responses were:

1)     Delaying specific new project or product development

2)     Outsourcing of key responsibilities (development, testing, sales, etc.) to make variable that cost, and

3)     Reduction of cash compensation for staff, replaced by more equity (options or other stock grants)

As for other areas CEOs were considering cutting, or other ways in which CEOs are considering burn-rate reduction, these included the following:

• – External legal and accounting fees
• – Eliminate bonus and reduce benefits
• – Delaying office expansion
• – We made adjustments in Q4 2008. We are judiciously incrementing investment as traction increases in 2009. We have already added headcount.
• – Taking-on contract-development work to keep developers attached
• - Salary freeze

When CEOs were queried as to the potential for further reduction to headcount in Q2 2009, three-quarters of them responded “No,” which was an encouraging sign that they feel that perhaps the bottom of the economic miniscus had been hit.

For the 25% or so who said that they were indeed considering more staffing cuts, more than half of these CEOs were looking at staff reductions of less than 20%.

When CEOs were asked what questions they’d like to pose to their own peers, the most popular topic was funding-related questions (38%), followed by questions about the economy (28%), staffing (17%) and burn-rate/expenses related questions (also 17%).

Some of these CEO peer questions in each category are listed below:

• -burn rate  | How are you lowering non-core costs such as health, insurance, WC etc?
• -burn rate   | What are companies doing for benefits. How much does the company pay, versus employee. What are innvovative ways to contain, reduce cost
• -burn rate  | I’d want to explore issues around forecasting revenue in a non-linear world.
• -economy   | When will you start spending money at a normal pace
• -economy   | What are the drivers for economy to  turn around
• -economy   | Do you think that eliminating benefits such as a 401k match or bonuses will have a significant impact on employee morale or will they be happy just to have a job?
• -economy    | Are you able to confidently recognize the biginning of a shift back to a more positive business environment?
• -economy/funding  | When will credit markets open and when will VCs start to invest again?
• -funding | How does present economic situation bear on raising additional operating capital? For Series-A companies, what is likelihood of any funding becoming available in 2009?
• -funding  | “Do you receive funding or revenue from US Govt? Have your receipts of US Govt cash increased or decreased compared to prior years? Are you counting on US Govt cash to make plan in 09?”
• -funding  | Congress should increase funding for SBIT and STTR to $250 thousand in Phase 1 which would increase jobs immediately rather than year delay; when people get a SBIR grant they immediately spend the money hiring folks.
• -funding  | which sources of early stage funding feel open still?  My sense:  family offices, corporate venture funds. Where is blocked?  My sense:  most VCs, Angels
• -funding  | “How will marketing and sales budgets change in the coming year?
• -funding | What types of fundraising options are your reviewing?
• -funding | Are you looking at merging, selling or acquiring rather than raising equity financing?”
• -funding  | are you cash flow positive/economically sustainable without a raise, if not when do you need to raise cash again?
• -funding |  How have the criteria for outside venture funding/financing changed in your sector?
• -staff |  How are you linking compensation to performance?
• -staff |  What success have you had with outsourcing
• -staff |  Where are the best software developers in Boston?

A majority of responding CEOs came from the software/internet/telecom sector (61%), while the balance were distributed across cleantech, medical devices, life sciences/Biotech, and interactive media/content/community.

Is executive retention a problem one might ask?  From our own experiences in search, we felt it was.  Educators and consultants alike have taken a more objective and statistically relevant approach to outlining the problem. A 2001 study of executive failure done by Executive Search Information Exchange pegged the average failure rate for recruited executives in their first year at between 40% and 50%.  More recently Michael Watkins,a recognized thought leader in executive leadership and author of The First 90 Days, has revealed from his research that a staggering 58% of new executives hired from the outside fail in their new position within 18 months.

The cost of executive failure? A Mercer study estimated that it's often more than $500,000 or 2.5 times salary. And this doesn't include organizational, opportunity, productivity, and transitional costs for the new executive (Mercer et al, 1999). Including these other components of executive hiring, the calculus for fully loaded cost to the organization per failure at the executive level can top a million dollars (Fortune Magazine).

After spending a decade or more as an executive recruiter working on early & growth-stage CEO searches, it seems worthwhile to take a look-back on some of the reasons CEOs seem to fail.  In fairness, we’re a boutique firm, so the sample set isn’t hundreds of searches.  However, it’s also more than anecdotal, as for every CEO search we’ve done, there was a high probably that there were several CEOs who had already come before our search, and in doing a thorough CEO replacement search, we are students of why predecessors failed in order to ensure we don’t repeat others’ past mistakes.  Another macro observation is that these failures don’t seem to be different from practice area to practice area, or geographic region to geographic region.  We’re a multi-specialty firm, yet we don’t see that software/ Internet/ media CEOs fail for dramatically different reasons than medical device CEOs or cleantech or biotech CEOs.   Nor is there great variability when you look at CEO searches in one innovation center versus another. With presence in Boston and New England, New York and the Tri-State area, Silicon Valley/San Francisco, and London/Cambridge, England, we’ve been able to test this and haven’t witnessed much foundational difference one area versus another.

The following 7 reasons below cover the vast majority of CEO executive failures we’ve seen:

1.      Failure point #1: Founder “Peter principle.” This has been well-documented by others, most notably by John Hamm, venture capitalist at VSP Capital and leadership development coach who authored a Harvard Business Review article a few years back, titled “Why Entrepreneurs Don’t Scale.”  To set up John’s observations, most of our time as executive recruiters, we focus on helping early-stage companies jump the leadership chasm from entrepreneurial to professional leadership.  More often than not, there is absolute certainty that a casualty will occur– the only question is whether that casualty will be the founder(s), or the company.   Where venture capital or private equity is involved, all is done to avoid the latter in favor of the former.  Regardless, it is too rare an occurrence when this collision between founder CEO, growth mandate, and outside investors ends positively, and if the company survives, it has to deal with the emotional baggage of shedding this first founder layer and all the pain this brings with it.   John outlines four management tendencies that work for smaller-company environments but become Achilles’ heels as these CEOs try to scale their companies. The first tendency is loyalty to founding team mates. In entrepreneurial mode, you need to lead as though you’re in charge of a combat unit on the wrong side of enemy lines where anyone on your team is a keeper. However, in larger company growth mode, blind loyalty can become a liability.  At some point, it may be required that the rest of the team that started the company with the CEO may need to be changed out for an executive team with experience at the “growth-stage” versus just the “start-up” stage.   The second tendency, task orientation, is critical in driving toward a big initial product launch, but excessive attention to detail can cause a growing organization to either suffocate under such leadership–one that can’t generate creative ideas or momentum without being instructed by the CEO–or lose sight of its long-term goals. The third tendency, single-mindedness, is important in a visionary CEO who is unleashing a revolutionary product or service on the world.  However,  this can limit the company’s potential as it grows, as all good ideas aren’t always born from one person.  In addition, often a lack of self-awareness or “emotional intelligence” can create a large blind spot around what isn’t working with the original idea, and instead of an ability to iterate to a better but related idea for the marketplace, the founder CEO can become caught up in the initial “vision” and stick to it regardless of external market input that would indicate changes to the initial value proposition are needed to capture broader market adoption. The fourth tendency, working in isolation, is fine for the brilliant scientist focused on an ingenious idea, technology or science. But it’s a non-starter for a leader whose expanding organization increasingly relies on people other than the CEO. There is also a significant difference in skill set required when the company grows beyond a single layer of management, requiring, VPs who manage directors, who may manage managers.  Managing through a multi-layer management system requires a very different managerial toolbox.  As the summary for the article outlines, “Leaders who scale deal honestly with problems and quickly weed out nonperformers. They see past distractions and establish strategic priorities. They learn how to deal effectively with diverse employees, customers, and external constituencies. And, most important, they make the company’s continuing health and welfare their top concern.”

2.      Failure point #2: Unable to “imbed” with the existing team. This is all about forging meaningful bonds, trust, and a following with the existing executive team/staff/employees as the “newcomer.”  This is most often the cause for CEO failure when an outside CEO is brought in as the first successor to the founder CEO.  We refer to it as “organ rejection.”  The host organism (the company) has a high degree of the founder CEO’s DNA in it.  That founder CEO has proven that they are a miracle worker, coming up with the idea, building it out through proof-of-concept on a shoestring budget, getting venture or other funding for the idea, that the rest of the employees who imprinted on the founder CEO “reject” the new CEO as an “imposter” or “foreign matter.”

3.      Failure point #3: Getting sideways with the board. As executive recruiters, we hear this often.  A CEO, whether founder or non-founder, doesn’t gel with the Board of Directors.  In the case of a growth-stage company, there is often outside capital involved, and investors who serve as part or all of the board of directors.  A CEO’s inability to quickly understand the drivers of each board member, and inability to build a communication bridge that may be unique to each board member, is very likely to fail, regardless of whether growth milestones are being hit or not.  One a board member loses faith in a CEO, it’s very hard to win that faith back.  Activities that often alienate a board include hiring issues (holding on to existing employees too long, or holding off on hiring into a key role, board communication issues (not sharing the bad with the good), lack of realism around budgets and burn rate and unwillingness to make the tough decisions, etc.)

4. Failure point #4: Inability to balance revenue/burn rate There is always a constant struggle between CEO and investors if the company has a net burn rate (spending more cash than revenue coming in the door).  Just last week, I heard from a venture capitalist who said that a CEO, during a board meeting, said that he was unwilling to cut the burn rate for fear of being unable to scale fast enough to meet demand once the product “got traction.”  The VC then said, “After the board meeting, I got a call from one of the other investors, expressing concern that the current CEO just didn’t understand the realities of the situation, and he felt it was time to start a search for a new CEO who did.”  Often, this is a circumstance where the CEO has come from a larger company environment, and has rarely if ever faced a situation where “out of cash,” is a literal term, versus just a euphemism for asking the parent corporation for some more capital.

5.      Failure point #5: Inability to hire well. There is an expression, “the first time, shame on you, the second time, shame on me.” This is what the board of directors often employs when a CEO can’t find the right VP level executive to successfully fill a key seat on the management team.  Often, it’s the VP Sales.  When the product is still in development, it’s often the VP Engineering.  However, if the CEO churns either of these positions with several candidates that don’t end up meeting board expectations, ultimately the board feels it’s perhaps not these VPs, but rather the CEO who needs to be changed out.  When a VP Sales commits to a revenue target, and then misses it repeatedly, often the CEO and board decide to make a change in the VP Sales.  multiple replacement in a single role, VP Sales, or VP Engineering) (blaming someone else

6.      Failure point #6: Change of business model. Part of emerging & growth stage company building is the iterative approach to finding the magic business model that takes root and thrives.  At times, founders, investors, and early team members develop a thesis on what model they’re going to chase first, and hire a CEO into that thesis.  However, as often as not, the early iterations miss their mark, and the ultimate business model that evolves as the winner is one that doesn’t play to the strengths of the earlier CEO hired.   In this eventuality, it’s much like “no fault insurance.” Neither driver is at fault, but in the best interests of the company, the earlier CEO hired needs to be changed out to make room for one better tailored for the market approach the company finally settles on as bedrock on which to scale the company.

7.      Failure point #7: Leadership fatigue.  At times, running a company turns into a grind.  The company doesn’t grow as fast as anticipated, or the magic formula for business model doesn’t materialize.  Or the executive team doesn’t come together as all wished at the beginning.  At this point, the company doesn’t fail or flame out, but nor does it continue to show healthy growth and positive direction.  Sometimes, a company grows for a bit, then plateaus and efforts to move the proverbial needle continue to fall short.  One of my favorite expressions comes to mind, “The definition of insanity is doing the same thing over and over yet expecting a different result.”  If most all other variants and permutations have been tried, no doubt it’s possible that leadership fatigue has set in and the company is in need of a fresh horse.

There certainly are other subsidiary reasons that less often cause failure-a CEO not being technical enough to shepherd a pre-revenue start-up through early product development stages into successful commercialization, or not enough industry domain expertise in an area where a Rolodex of relationships are critical to obtaining early customer wins or market credibility.  However, for the most part, these and many other one-off failures function as exceptions to the larger CEO failure points outlined above.

One of the questions that naturally follows in exploring the most typical reasons for failure is what steps, actions, or changes can be made to optimize the probability for CEO success?  Is there “another way of doing it?”   One of the best ways we’ve found is to split the Chairman and CEO roles.  However, this is a topic for another discussion.  It’s something that’s actually done in the UK as SOP, and even out in Silicon Valley more than in Boston or New York.  We’ve executed our fair share of executive searches in each, and comparing the perspectives around leadership-sharing held by venture or private equity investors is interesting grist for further analysis.

Although only preliminary, below are the early returns on the February 2009 growth-stage CEO survey for technology & science-driven companies.  The majority of the CEOs surveyed are from venture capital-backed or institutionally funded companies.   The theme remained the economy for the February survey.  The first question was around what the prevailing sentiments were for a recovery.  Unfortunately, although perhaps not unexpectedly, less than 25% of CEOs surveyed expect the economy to improve before Q4 2009, and more than half the CEOs don’t expect the economy to shows significant signs of recovery until 2010.

As CEO, when do you predict the market conditions to take a turn for the better?

When CEOs were asked whether they were still seriously considering cuts in Q2, 2009, more than 25% of the early respondents answered affirmatively.

As CEO, are you seriously considering further downsizing in Q2 2009

We will post the rest of the survey responses in the next 10 days or so, and will include updates in the interim.

Here is the balance of the survey responses from the VC-backed CEO survey we administered at the end of December 2008 into the first week of January 2009, both responses and a bit of interpretation.

Given survey responses, it appears the bell curve peak is in the 20-40% reduction in headcount.  The group of CEOs who indicated these reductions were approximately half of the 60 CEO respondents.

• •    40% or more staff reductions? ~ 10% of total CEOs surveyed
• •    Less than 20% staff reductions? ~ About 17% of all CEO respondents

Winner on this question was “more than 9 months,” with more than 40% of the CEOs.  Runners-up were the “0-to-6 months of cash” CEOs, evenly split with 25% saying 3 to 6 months, and another 25% saying “less than 3 months.”  What this may indicate is that there is a bimodal distribution of funding in the market –those who are well-funded, with 9 months or more, and those companies who are running out of cash (popular definition = less than 6 months of cash remaining).  This is reinforced by the fact that very few companies responded that they had 7-9 months of cash (less than 10% of companies).  Therefore, one might imagine that those companies who are shortest on cash are also those who are making the deepest cuts in staffing.  In addition, that there may be another round of cuts in store for those low-cash companies if they can’t get another round closed soon.

Top implied answer here?   Don’t raise a venture round in 2009.  And this is what the largest slug of CEOs responded with (33%).  Of those who are going to try to raise in 2009,

• •    one-third of CEOs see a flat round
• •    16% feel they’ll get an up round
• •    and almost half (45%) are predicting a down round

Winner for this question shows some great optimism however, with about 1/3 each of the CEOs responding answering with either “revenues up 1 to 25%”  or “Up more than 50%.”

There was an intentional effort to get a fairly even distribution of venture-backed CEO respondents for this survey, to try to avoid sector bias.  We were fortunate to have at least 10% (6 or more companies) from each of life sciences / biotech, medical devices, and the cleantech sectors.  Software/Internet/telecom was the largest category represented, with 42% of CEOs hailing from this sector.

BONUS SLIDE

Q: If YOU could survey your peer CEOs, what question(s) are both urgent AND important to running your business you’d like us to consider asking in future polls?

This was one of the most rewarding questions for which to see the responses.  Fully half of the CEOs polled had a question they’d like to pose to their peers, and some CEOs had several.  Below is a partial list of questions we’ll choose from in follow-on surveys.  If any of those CEOs would like to respond individually to any of the questions below, feel free to post a comment on this blog entry and we’ll post it for public consumption (clustered by general question subcategory as well as by industry sector).  Of course, the winning question asked by one of you CEOs, just to validate that venture capital-backed CEOs are-if anything-self-aware, pragmatic, and not fatally over-optimistic:

“What will CEOs do if their company fails?!”
1.   Cost-related questions

• •    Approaches or success stories in restructuring debt to the company’s advantage.
• •    Is it better to reduce headcount 20%, go to a 4-day work week, or reduce salaries by 20%?
• •    In addition to headcount reductions (if any), what type of expenses are you reducing?  Are you delaying new projects/initiatives?  How have investors reacted to this?
• •    Will you consider outsourcing some of your product development to make cost variable, at the expense of some know-how then being outside the company?

2.    Sales/Marketing/Revenue-related questions

• •    How are you using the economic downturn to improve your business position/model?
• •    What are you going to spend more money on in 2009 than in 2008?
• •    What changes in the sales cycle are you seeing in the last 6months, 2 months, currently?  What does the resultant trend point to for 2009 and what actions are you taking in response?
• •    How has your visibility into the level of future business changed in the last 3-6 months?Asked another way – what level of confidence do you have in your current forecast of business?
• •    (1) What emphasis do you place on marketing in your organization? (2) What do you consider the top 3 most important elements of marketing to be?
• •    How will you as CEO deal with longer term rate issues if you are a service business as it seems all labor rates are being pushed down?
• •    The number one reason why clients buy your product is? (cost, quality, service, other?)

3.    Funding/exit/valuation questions

• •    Are you finding lending lines out there?
• •    If an acquirer made an offer to buy your company today, but at a multiple less than what it would be in a strong economy, would you consider it, or wait until the economy improves so you could get a higher valuation?
• •    Are you considering merging your company with another? Are you looking at merger partners as a legitimate exit option in 2009?
• •    Are you looking to current investors or new investors for additional rounds of financing?

4.    Board of Directors/investor-related questions

• •    How will venture capital investing change in 2009?
• •    What is your satisfaction with your Board’s ability to fundraise in the future? (I think the current environment highlights a board’s function as protector of value through fundraising and too few board members are good at it)?
• •    Compensation for outside board members?

5.    Staffing/talent questions

• •    How are you balancing full time versus contract employees?
• •    How are you retaining employees during these tough times?
• •    What kind of retention ideas have you considered to make sure your key folks don’t bail for a more stable environment?
• •    What skills are you as CEO still looking to hire?
• •    What do you do to conserve cash? attract customers?
• •    How many of you CEOs have proposed reducing people to part time levels and adding equity compensation instead of releasing them all together?

6.    Economy-related questions

• •    When do you predict the market conditions to take a turn for the better?

There a few industry-specific questions CEOs wanted to ask their peer as well:

Life sciences/biotech-related questions

• •    What kind of deal structures are you seeing in liquidity-directed partnerships? What kind of partnerships, if any, are you envisioning for discovery stage assets?

Medical devices-related questions

• •    How do you expect reimbursement to be influenced during the next administration?