Do founder-CEOs have an expiration date? In the wake of Jack Dorsey’s resignation from Twitter, some have begun asking whether the move could herald a new era, in which founders voluntarily step aside rather than sticking around for decades or waiting to be ousted. To explore the value added by a founder-CEO, the authors analyzed stock price and financial performance data from more than 2,000 publicly traded companies. They found that on average, founder-led firms outperform those with non-founder-CEOs — but that the difference dwindles to zero just three years post-IPO, after which founder-CEOs actually start detracting from firm value. Given these findings, they offer three strategies to help investors, boards, and executive teams support founders in transitioning out of the CEO role when the time is right, and ultimately argue that Dorsey’s decision may have been more prescient than many realized.
“There’s a lot of talk about the importance of a company being ‘founder-led.’ Ultimately I believe that’s severely limiting and a single point of failure…I believe it’s critical a company can stand on its own, free of its founder’s influence or direction.”
– Jack Dorsey, Founder and Former CEO of Twitter
Jack Dorsey’s sudden resignation from Twitter last month created a major stir, in Silicon Valley and around the world. Especially after his long-fought victory over an activist investor’s attempt to oust him back in 2020, Dorsey’s decision to hand the reigns over to CTO Parag Agrawal came as a shock to many. The move also bucked the recent trend of “founder-friendly” venture capitalists encouraging founder-CEOs to stick around for as long as possible. Dorsey’s resignation demonstrates how — and why — a founder might voluntarily step aside once their organization has reached a certain level of maturity, and invites the question: Should others follow his lead?
There are more than a few recent examples of founder-CEOs who have massively outstayed their welcome. Both Travis Kalanick at Uber and Adam Neumann at WeWork were ousted in the wake of dramatic, highly publicized missteps (to put it lightly). Similarly, founding CEO of Groupon Andrew Mason was fired only 18 months after the company went public — and Groupon’s stock price immediately jumped 4% in response. And of course, Dorsey isn’t the first founder to recognize the need to move on himself: Skullcandy’s Rick Alden resigned when his company began its IPO in order to focus on more-entrepreneurial ventures, while Girls Who Code CEO Reshma Saujani explained her decision to step down as necessary to ensure her organization remained innovative.
As Ben Horowitz (of leading VC firm Andreessen Horowitz) explains in his book The Hard Thing About Hard Things, effective CEOs must both know what to do and be able to get their companies to do those things. Horowitz argues that founding CEOs are generally much better at the first part than the second and, as a result, they often struggle as their organizations grow more complex. Challenges such as streamlining operations, lowering costs, and managing an increasing number of employees, products, services, functions, geographies, and customers have little in common with the leadership requirements of a startup, and the increased visibility and dispersed ownership that comes along with going public only further complicate the post-IPO CEO role.
On the other hand, there is some evidence to suggest that a founder-friendly strategy can be beneficial for firms. Founders Len Schleifer at Regeneron Pharmaceuticals, Fred Smith at FedEx, and Jeff Bezos at Amazon all retained the CEO position for more than 20 years after their firms’ IPOs, with each firm’s valuation growing to exceed $50 billion under their leadership.
Given these conflicting data points, we were interested in finding ways to better understand and quantify the impact of founder-CEOs on their firms in the long term. We collected data (including both stock performance and financial accounting metrics such as ROA and Tobin’s Q) from nearly 2,000 public companies, about half of which were led by founder-CEOs at the time of collection, and conducted a series of analyses designed to determine the relationship between founder-CEOs and financial performance. And while these analyses are still in progress as we compile more data on newer IPOs, we have already uncovered some surprising insights.
Specifically, our preliminary results indicate that founder-CEO leadership is associated with an almost 10% higher company valuation at IPO, but that the value of having a founder in the top seat rapidly deteriorates after that. We found that the value added by a founder-CEO essentially dwindles to zero approximately three years after firms go public, and they then start detracting from the value of the company in the longer term. Of course, these are only trends, and there will always be exceptions. But our data provides strong evidence to suggest that there is a shelf life to the founder-CEO — and it’s likely shorter than many might hope.
To be clear, this doesn’t mean that founder-CEOs are never a good idea. Our data shows that the presence of a founder-CEO increases firm value before and during IPO, suggesting that a founder-friendly approach actually makes a lot of sense for VCs, who typically invest while companies are still in their earlier stages and cash out shortly after they IPO. However, given our finding that on average, post-IPO performance is lower for firms with founder-CEOs, investors looking to get in after a company has already gone public would be wise to take a less founder-friendly approach — and investors, board members, and executive teams alike will benefit from proactively encouraging founder-CEOs to move on before they reach their expiration dates.
We’ve identified three strategies that can be effective in ensuring a smooth transition:
1. Funnel founders towards non-CEO positions.
On average, we found that while founders add the most value as CEOs in the early years of a firm’s development, by the six-year mark, they become more valuable in non-CEO positions, such as CTO or a board seat. Of course, six years is just an average — the optimal timing will vary substantially based on the specific situation. But in general, encouraging a founder-CEO to transition to another role within the organization enables the firm to benefit from new top management while still leveraging the founder’s deep knowledge about the organization in an advisory capacity.
For instance, when Google hit $100 million in revenue, Sequoia Capital (one of Google’s largest investors at the time) was concerned that founders Larry Page and Sergey Brin lacked the managerial capabilities necessary to lead such a rapidly growing firm. Sequoia recognized the value the founding team brought, but strongly encouraged the pair to hire an external CEO. Page and Brin ultimately brought in Eric Schmidt as CEO, who led the company through a successful IPO and on to unprecedented growth. Importantly, while Schmidt guided the founders on managerial questions, he continued to rely on their creativity and knowledge when it came to developing new products and other core business activities, yielding a collaborative, mutually beneficial dynamic. This approach works best with founders who are able to acknowledge that they are no longer the best fit for the CEO role, but who are still committed enough to their companies that they are willing to stick around and help.
2. Funnel founders towards personal passions.
Every founder is drawn to entrepreneurship for different reasons. Gaining a better understanding of what drives a particular organization’s founder is the best way to help them determine the next step that they’ll find most rewarding. Some founders, for instance, are passionate about the specific ideas or causes underlying their businesses. Many successful founding CEOs have resigned to focus on related humanitarian efforts: Jon Huntsman, Sr. left Huntsman Chemical to found the Huntsman Cancer Institute; Microsoft’s Bill Gates shifted his focus to establishing and running the Gates Foundation. Others particularly enjoy the early-stage startup life: Rick Alden’s successor at Skullcandy has stated that Alden was always more interested in the entrepreneurial process than in managing a large, public company, and so it was natural for him to step down as CEO and pursue other early-stage opportunities that were more closely aligned with his interests.
Both founders and their organizations will benefit from clarity around what will work best for the individual leader. Board members and executives in roles supporting founder-CEOs should strive to discover their founders’ passions and direct them towards paths that will help them to fulfill those goals. At the same time, founders themselves should focus on developing their capacities for introspection and self-awareness. If you’re a founding CEO, remember to ask yourself how you really want to be spending your time and effort — and if the answer isn’t running a large company, consider what options might be a better fit. Exploring these questions proactively will prevent headaches both for founders and their firms, and will ultimately empower everyone to identify win-win opportunities.
3. Involve founders in succession planning.
Especially in organizations where the founder still holds significant power and influence, board members and executives may be reluctant to even think about succession planning, let alone open up a candid conversation on the topic. But one way or another, succession will have to happen eventually, and it’s likely to go a lot better if the CEO is involved from the outset in crafting and implementing the plan.
Ideally, the founder themselves should be the one spearheading the effort. Steve Jobs, for example, personally hired his future replacement Tim Cook and helped groom him to eventually take over the CEO position. Apple’s share price increased by 1,022% under Cook’s tenure. More recently, when Kendra Scott resigned her position as CEO of her namesake firm earlier this year, she appointed long-time executive Tom Nolan as her replacement.
However, if the founder isn’t as excited about spearheading the effort, it’s up to the board to take the lead — and when that’s the case, it’s vital for them to proactively involve the founder as much as possible. For example, after 25 years as CEO, the founder of successful nonprofit Communities in Schools, Bill Milliken, was reluctant to step down. But rather than simply forcing him out, the board worked with an external counselor to persuade him to transition to a board role, ultimately leading to a win-win-win for the founder, his successor, and the entire organization.
In short, Jack Dorsey may be on to something here. Though founder-CEOs play an essential role in creating and growing new organizations, our research suggests that their value-add tends to deteriorate as firms mature past IPO. A great founder can set up a company for success — but to win the race, they’re often better off passing the baton.