The Top 3 Reasons Investors Would Remove You from Heading Your Own Start-up …and How to Avoid It!

"The Boffin Fallacy is the misconception that technologists do not understand business – that it’s something they can’t do, won’t enjoy and/or is beneath them. Commercial skills like: sales, marketing or accounting are actually fairly simple. If you want to, you can learn them – but the reverse is not true, for those wanting to learn how to develop the technology.” Suranga Chandratillake

At the Cambridge Start-up Billion Pound Scale-up Challenge event in October 2018, Suranga Chandratillake, the former CTO at HP and General Partner at Balderton Capital, mentioned the Boffin Fallacy and how research shows that the most successful tech companies in the world are run by the tech founder.

Photo by Vikki Barcroft from Cambridge Wireless of the panel at the Cambridge Start-up Billion Pound Scale-up Challenge event Oct 2018, bottom left to right: Elly Hardwick, Monika Biddulph, Helen Adams, Suranga Chandratillake, Adelina Chalmers, Poppy Gustaffson, showing Cambridge Independent photographer Keith Heppell.

Suranga looked at the largest US tech companies by market CAP top 100, most of them were public and most had a founding tech CEO who was an engineer. 80% had a genuine tech founder as CEO and in the 20% who did not have a bona fide engineer CEO, had a tech founder running the company day to day.

Suranga argues that “given the increasingly quantitative reality of areas like marketing and finance, the analytical, rigorous nature of science and engineering degrees makes technologists better equipped to run a business than ever before.”

During the event he also said that engineer CEOs are often replaced by commercial CEOs but if you want to develop a unicorn, the research is clear: some of the world’s most successful tech companies which reached unicorn status were run by their original tech founders.

Look at: Bill Gates (Microsoft), Larry Page (Google), Stan Shih (Acer), Jeff Bezos (Amazon) and Mark Zuckerberg (Facebook) and the list goes on.

I love engineers and I work with them to help them gain the soft skills Suranga was talking about in his theory about the Boffin Fallacy.

If engineers are in fact the most successful of tech company entrepreneurs, why would their boards or investors replace them with a commercial CEO who will never be able to understand the tech as well as the original founder… and is there a way to prevent this from happening?

To find the answer to this question I interviewed 20 investors: 9 angel investors and 11 VCs from Oct 2018-Jan 2019.

From all the interviews one thing stands out:

It’s much cheaper and less disruptive for both the company and investors to help the CEO get training and self-awareness to improve their soft skills (presentation, negotiation, selling, people management, marketing, commercial awareness, etc), than it is to replace them altogether. Some angel investors were convinced that replacing the tech founder means the demise of the company. David Cleevely seems to agree with Suranga:

“Only remove a founder in an extreme situation: it is easier to teach a founder soft skills and help them improve, than to teach a new comer the business - and in any case, founders are much more motivated to make the business a success.” David Cleevely , Cambridge Angel Investor

Here are the top 3 reasons investors said they would remove a start-up founder (being them an engineer or not) as CEO, see if you do any of these things without realising:

(Hint: They are all about the people skills and none are about the technology.)

1.   You act like you know everything all the time.

You have a chronic inability to listen to and make changes in response to relevant feedback. Lack of self-awareness of your own limitations and arrogance are core to your behaviour, in extreme cases even leading to dishonesty and misrepresentation of facts to the board.

Signs you do this: You believe you would appear incompetent if you admit you don’t know something or if you take someone’s feedback on board or admit you had it wrong.

You never say to others: “I don’t know the answer to that question but I will look into it”, “I was wrong”, “I am not sure if I am right”, “You are right, I was mistaken”, “You are the expert in this field, so we’ll go with your suggestion”. You think you have to have all the answers all of the time (or at least you should pretend you do) and not admit you don’t know or haven’t thought of something.

What you can do about it instead: Practise active listening. This means that whenever someone gives you feedback instead of justifying, defending or explaining why you did it like this, or simply thinking they are an idiot as they don’t understand, become curious about their thought process behind the feedback. Say things like: “What I understand you are saying is X, is this correct?” or say: “could you please tell me more about what was it about X that made you think it is Y”. Check your understanding of others’ input, don’t just listen to respond, listen to genuinely understand. Admit when you don’t know something or when you haven’t thought of something. Taking ownership of your mistakes makes you look confident and authoritative, not weak. If you are a software engineer, you will enjoy this “communication protocol” based on http protocols, which is the technique of actively listening broken down into very small steps.

Angel Investor Paul Anson said: "If they can’t be mentored or coached, then you can’t keep them around. We all understand people make mistakes, there’s no crime in getting it wrong. It’s much worse if you don’t seek help or if help is offered and you don’t take it on board."

2.   You act like getting investment equals “I have achieved commercial success”.

You have a lack of interest or ability to continuously and consistently communicate and get buy-in from investors, teams and clients. You go down rabbit holes that are irrelevant to the market, you polish the tech more than it needs before checking with customers. You spend money like getting investment was for you the end goal, instead of it being the beginning of the next growth phase.

Signs you are doing this: You think about your technology as: “build it and they will come” or “our tech is the best so it will sell itself”. In client meetings you feel that you have to talk a lot to show them how amazing your technology is. You think if the client doesn’t buy from you is because they are “stupid” or “an idiot who doesn’t see how amazing this tech is” without asking yourself what else could you have done to help them see the value. You don’t like talking about money and discussing money with the customer. Your response to the customer often is: “no, no, no, this is the way we should do it!” You think just because your tech is faster/cheaper/bigger the customer should buy it. You never ask yourself questions like: “what problem does my tech solve for this customer?” When someone asks you: “what does your company do” you answer by giving them a list of the amazing technical capabilities your product has without talking first about the problem your client faces and how your product solves it.

You only contact investors when you need more money but not throughout the ups and downs of your journey. You think the technology (not people!) is the most valuable thing in your company and you spend your time making this more “innovative” without checking if customers actually need all this “innovation”. You don’t like meeting customers and prefer being in the office working on the tech. 80% of your time is spent looking at ironing out glitches in the technology yet you have not spoken to the customer if these would even come up when they use the product. You only have 3 big customers and somehow you feel this is more than enough.

What you can do about it: Whenever you are in a client meeting and they “don’t get it”, become curious about what problem they are trying to solve and how/why your current solution doesn’t solve this problem in the way they want it solved. Here are tips on what clients want to know when the project is not going well and you will have to make major changes.

General Partner at Amadeus Capital Partners, Alex van Someren said: "A lot of engineer founders don’t have the sales skills to be able to do the sales part. If you don’t sell more stuff you don’t have a business at all. So as a tech CEO you have to decide if you are willing to expand your soft skills or if you prefer to have a commercial CEO take over."

3.   You fail to create a culture where people work well with each other and achieve the milestones you agreed with the board and investors.

You think “people development” and “company culture” are some frivolous words consultants or HR executives throw around to feel important. Your idea of “building a team” is recruiting five PhDs and thinking they will work well together just because you asked them to work on the same project. You have an inability to work with others and think that people are not important, but technology is.

Signs you do this: People you manage do not contradict or challenge you or even anyone else in the C Suite. You find out late when things go wrong (like just before the release) or that they won’t be done on time (because your staff are scared to speak up as they worry about your reaction so they leave it as late as possible until it is too late). You only broadcast decisions to staff but don’t ask their input and you don’t seek their buy-in before making a decision. You are the bottleneck; people must wait for your response on the smallest decisions as without you saying “yes” they will be reprimanded. You avoid having difficult conversations altogether or if you have difficult conversations you don’t know how to carry them out tactfully and people leave steamrollered or humiliated. You are frustrated your teams don’t seem to take ownership of their work or you feel they are passive and don’t actively contribute to moving the technology forward. You even make fun of your own teams saying things like “nice to see some people do some work around here” without realising that you are the leader who created this culture and it is up to you to change it.

What you can do about it: Encourage and actively praise those who report errors. Reinforce that poor performance happens when people don't report errors. Don't just have an open door policy, but actively talk to people at all levels in your organisation. Leaders should be the first to open up about times when they didn't know something, were wrong or failed. Show from the top there is no shame in admitting you made a mistake. Encourage people to ask and receive feedback or help and praise actively those who do. Information on how to have difficult conversations here. More information on culture in this article.

What (more) can you do as a start-up founder?

Look at the list above. If you notice any of the signs I have listed, you are probably a challenging CEO who needs to improve their soft skills and become more self-aware if you are going to continue running this start-up. Self-awareness is not simply about knowing what your strengths and weaknesses are (e.g. “I am good with numbers when they talk about data but I don’t like talking about money”) or what your preferences are (“I prefer email than to talk to people”). It is also about realising that the moment someone challenges you, instead of becoming defensive, it is best to become curious about the reasons why this person is challenging you and understanding their perspective before responding. Self-awareness is about internalising that others have a different perspective and their perspective may be more valid than yours in this moment. Self-awareness is the core aspect which separates us from animals as it is an ability only humans have due to our neocortex, the part of the brain that developed last (neo) and which realises that other people have different priorities/world views than us. Whenever you find yourself dismissing others as idiots or not understanding why they are giving you this response – this means you are processing the information with your limbic system (the emotional part of the brain) not with the neocortex, the logical part of the brain. If you want to read more information about the limbic system and the neocortex and how these relate to your day to day interactions with others, there is a long list of articles I have written on LinkedIn.

What you can do as an Investor:

Research suggests it is much less disruptive and you are much more likely to grow a successful company if you help the CEO develop their soft (people and commercial) skills and grow their abilities with the startup, instead of replacing the engineer CEO with a more commercial CEO.

Most angel investors I spoke to actively support and mentor the startup CEOs they invest in. Most VC investors I spoke to also offered their support to help develop the tech CEOs through mentoring. However, from what I could find, on the most part, there were no formalised or systematic initiatives set for developing the CEOs before agreeing to giving them money.

Perhaps this is not needed?

One Cambridge VC who asked not to be named said: “We don’t have a package for what skills you have to develop to reach the milestones we agree in the business plan. We encourage the CEO to go to courses on how to manage people but we don’t think about this initially and certainly don’t make it a condition of investment. We should focus on this more and make it more formal than just suggesting to them that they do it.”

One suggested way as an investor you can help the startup CEOs is to agree, before handing over the investment, a Development Plan which is created by analysing the milestones the startup has to achieve in the next 2 years and the soft skills gap they have at the moment which could prevent them from achieving these milestones.

(E.g.: if they have sales milestones to reach by 2021, how much sales experience do they have and would it be good for them to have some sales coaching? If they will be doubling in size in the next 6 months, do they have experience of recruiting people, do they need some support to ensure they have the right job descriptions in place and hire the right people?)

Then you can agree a development budget with the startup before you give them the cash.

A couple of VCs I spoke to formed a team of “sparring partners” around them, which consists of experienced executives or coaches who are available to assist founders in different ways, from short coaching sessions to full project implementation for a duration of 3 to 6 months.

Examples of topics that CEOs have needed help with are: building a strong company culture and great work environment, recruitment and interviewing skills, presentation and negotiation skills, improving product-market fit and marketing or handling strategic pivots.

One of these VC firms is Aster. Jerome Joaug, who is leading Aster’s investment activities in the UK, said: "At Aster, we believe that it is counterproductive to systematically replace CEOs. We believe that it is much more efficient to help founders develop over time very early on after we invest. Just before Aster’s investment, we work with the Founders to include a personal development budget in the financing plan, which the founders can decide to use or not in the future. We have this currently implemented in France and what we have seen is that most founders are entirely open to the idea and are keen on using the sparring partners as soon as they feel the need or see the impact generated on other investees. Our role is more to help them prevent the issues before they happen rather than fighting the fire once the house is already burning! The experience is definitely more than positive, and I am now looking at forming a similar team for the founders we support in the UK."

In Silicon Valley Felicis Ventures (backers of companies such as Fitbit, Shopify) commit 1% in capital, on top of every first cheque they give to a startup, to be used towards “personalised founder development”, including “executive coaching, therapy, leadership development and more”.

Looking at all the evidence, especially for deep tech projects, it is easier to help the tech founding CEO to develop their soft skills, than to replace them altogether. I hope we will soon see a lot more formalised personal development support for our tech founders. Then we can break the Boffin Fallacy and the UK can see more and more unicorns growing out of Cambridge, giving Silicon Valley a run for their money.

If you are an angel investor or a VC firm looking to implement personalised development plans, I am happy to introduce you to the other investors who have more formalised schemes in place and who are willing to share good practice. Just contact me at [email protected] or on 07932088821.

Coming up... article on: Top 3 Challenges CEOs face post investment they wish their investors knew...

Resources:

https://www.theengineer.co.uk/issues/march-2013-online/the-boffin-fallacy/

https://www.ingenia.org.uk/Ingenia/Articles/f2a54055-cf52-4b67-8f70-98404203c0f2

https://www.theguardian.com/society/2018/oct/20/tech-startups-stress-pressure-macho-approach-to-coping