Right Co-Founder … Wrong CEO. Could That Be You? Be Honest. | SaaStr

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On the investing side of life, the toughest meeting of all for me at least is probably the Right Co-Founder, Wrong CEO start-up.  Great product, driven team, good early product-market fit, great vision.  Check, check, check and check.  But clearly — the Other Co-Founder should be CEO.  It’s happened to me again twice in the past few weeks.

My learning?  I always have to pass.  Because the founders don’t tend to fix this themselves.

And I think this is also one of the toughest companies to think about joining — or not — as a VP as well.

It’s all looking strong, and yet … it’s really the other co-founder that should be CEO.

Screen-Shot-2016-03-12-at-3.26.29-PM
This happens with some regularity in SaaS, I’ve learned
(and to be clear:  I’m not talking about any company I’ve invested in, am an advisor to, board member of, etc – 🙂

Because when it’s still a very small team, with no true management team … co-founders can kind of hack it to $1m-$2m in ARR together.  And both really can be co-CEOs, no matter what the titles are, up to that point.  But after that, it starts to break down when you have to recruit a true management team, and in many cases, additional capital.

So … first off, Who Should Be CEO?  The most important factors probably are:

  • Who can best raise capital (if you need any)?  Investors care most about the CEO.  Who can best raise the money?  If one of you has raised capital successfully before and the other hasn’t, that may tell you who should be the CEO.  If you don’t know … ask your angel investors and advisors.  They’ll know …
  • Who can best recruit a management team?  This won’t matter in the super-early days.  But one of you will be much better, or at least, much more interested in recruiting a VP of Sales, Marketing, Product, Customer Success, Engineering, etc. etc.  Sometimes you’ll know this based on who on the team is the more seasoned manager.  But even more often, it’s probably not that clear from prior experience.  But who can find, recruit, and somehow convince an A+ team to join you?
  • Who can best inspire and “recruit” customers?  It turns out, this is often almost the exact same skill set as the prior two points.  Raising capital, and recruiting great team members … is a sales job.  Customers really care about who the CEO is.  The best Customer Officer, ideally, is also the CEO.
  • Who best can speak to the vision, the issues, and the challenges?  The “wrong CEO” as co-founder so often isn’t the best at truly explaining not just the vision, but how to get there.

If one of you is clearly the best at all 4, they should be CEO.

OK … now let’s assume you didn’t know at the time when you started.  Or more often, one of the co-founders sort of made themselves CEO from Day 1.  Most often, because the startup was their idea.  Or because they recruited the other co-founders.  Or they were more senior at the last company.  Anyhow, “Ellen” or “Billy” sort of became CEO by default on Day 1.

Here is where you can get yourself into a pickle.  Because often, if all you care about as a co-founder is Success … you may let your colleague start off as CEO.  Even if it turns out that was the wrong choice later (or even, really, not even the best choice even in the beginning).  But if you are a great team and committed and appreciative co-founders, again, the cracks won’t show up for a while.  You’ll still get to Initial Traction.

-> So here’s my simple suggestion.  As you cross $1m in ARR, and perhaps a second time at $2m ARR … have an honest, quiet conversation with your co-founder.  Maybe — bring in your #1 most trusted advisor to help guide the discussion  And ask … Are we 100% sure the right co-founder is CEO?  If not, make a change now.  Make a change before you recruit a sub-optimal management team.  This will really, really drag you down just as you start to scale.  Make a change before fundraising gets harder, when it shouldn’t.  Make a change before your attitude toward customers is too affected by who the customers most want to work with.

And then do it again once you cross $2m or $2.5m or so.  Because you’ll have learned so much more, again.

In 8/10 companies, this will be a 5-minute exercise.  It would be silly to consider a change.  But I’m going to suggest in > 10% of the cases, great co-founders, totally committed ones, that haven’t done real SaaS before, that haven’t recruiting a cross-functional team before … get this wrong.

Fix it.  It’s fast, “cheap” and is one of the Top 5 things you can do to make your founders’ stock more valuable.

Finally, I wrote a version of this post way back in 2016 when I first encountered this situation.  I loved a SaaS company where the co-founder CMO was not just the marketing guru, but the real visionary.  And the CEO was the “generic sales guy”.  At first, they still did OK.  In fact, they even got to $30m ARR.  But in the end, it petered out.  You need the right co-founder as CEO.

So today, I pass reflexively on these deals.  Even when I might do them, if only the cofounder that should be CEO, was CEO.

Published on August 30, 2022

Go to Publisher: SaaStr
Author: Jason Lemkin