When Does a Venture-Backed CEO Get Fired?

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Most SaaS CEOs don’t truly get fired. As you can see here, the vast majority of public SaaS companies are in fact run by founder-CEOs. Boom!

But as companies scale, and raise multiple rounds of venture capital, sometimes VCs will suggest, or even in some ways push hard, to bring in a more experienced CEO. Especially if growth slows for an extended period of time. But it’s not the default choice or goal.

Most seed and early-stage investors, the very last thing they want to do is fire a CEO. Even in a struggling start-up, almost anything else is worse. Who are they going to find that is “better”? Even if they are “better”, they won’t know the product, how to fix its issues, the customers, etc. And if your start-up is early, struggling, with a tiny balance sheet, what great CEO #2 is going to join anyway?

Now, with later-stage investors, sometimes there’s more of a split in thinking. Multi-billion funds sometimes have a bench of potential “operators” that can come is a CEO. But even there, if it makes sense (which I believe it rarely does), it’s only going to work at $10m-$20m in ARR, once a real engine is running. So these later-stage folks are often more nuanced on whether a founder CEO is by default the long-term CEO. A little more on that here: 5 Things To Be Wary of In VC Financings | SaaStr

And importantly — note that these days, it can be pretty hard for VCs to truly fire a founder CEO. There are generally enough control provisions, and with less dilution (and thus control) common, oftentimes, the VCs have no legal or contractual rights here, anyway. See, e.g., the drama with Travis Kalanick and Uber.

In any event, almost all investors want the founder CEO to go the distance.

So why do they get fired, if no one really wants to do this?

Too misleading / lying / lack of transparency. VCs are wired to take bad news. Don’t hide it. One hidden bit of bad news is probably OK. But a long sequence of hidden issues undermines the investors’ confidence that they will ever make money.
Burning through all the cash way, way too quickly. VCs are also wired to take risk. But CEOs that burn all the cash very quickly, without corresponding growth, can create panic.
Asking for a third check from existing investors. This is related to the prior point, but most VCs expect to write a smaller second check later into a start-up if things take longer. But a third check they are forced to write to keep the company afloat? That can create panic. At that point, most VCs are already considering if another CEO could better manage the investment to success.
Creeps. There is a lot less tolerance for creeps today, thankfully. Hopefully zero.
Overwhelmed, way over their head — for too long. VCs expect first-time founders especially to be learning, and for the management side of things to be a stretch set of skills. But if the job becomes so overwhelming, that they are constant “deers in the headlights” — it’s not going to work. These days, most VCs try to bring in a COO, mentors, and/or someone else to help. But sometimes, the job is just too much. This stuff is hard. Not everyone in the end can take the pressure.

Anyhow, you’ll still hear horror stories, even today. And sometimes, VCs do want to push founders out. But in general, in 2018, that’s a lot less common. And even when one VC wants to push a CEO out, oftentimes, the others won’t agree. I never have.

So if you are worried:

Don’t sell too many shares. The more you sell, the more control you give up. Each round sounds great on TechCrunch, and it may be great. But it’s also, one way or another, giving up more control.
Pick VCs you can trust and believe in. This is far more important than brand, fancy retreats, domain expertise, or anything else.
And be more transparent, and
Don’t burn all the cash quicker than plan. And if you do, make sure everyone knows why, and is bought into why. Maybe even, pretend you raised 33% less than you did.

Then you probably don’t need to worry.

…

Look at UiPath. They did it the hard way. It took them 10 years to get to the first $1m in ARR (!!). And they raised just one tiny seed round along the way in those early years. But then … boom! They went from $1m to $600m in 5 years! Matching capital to growth. So the founder-CEO owned 30% at IPO. And 90% of the voting stock …