Why Startup CEOs Are Fired

Noubar Afeyan, founder and CEO of Flagship Ventures, started his first company at age 24. As he was raising money, many investors told him that they wanted to bring on a more experienced CEO to run the company. But Afeyan wanted investors who would trust him, so he kept looking until he raised $1 million from three VC firms that would let him stay as CEO. Then on his second day after receiving funding, he did something unexpected: he hired an outside CEO to replace himself.

Now a prominent venture capitalist, Afeyan says a startup CEO stands for “Current Executive Officer.” It’s simply a matter of fact, he says, that 80% of startup CEOs are replaced at some point. And the cause is in large part due to the structure of venture capital firms.

Proposition #1: startups miss their numbers. It’s inevitable with any startup, good or bad, successful or failing.

Now, VC firms are run by individuals but have collective responsibility. Each partner has a portfolio of startups that they work with, but the other partners at the VC firm have an interest in the performance of all portfolio companies, if only a passing knowledge of what’s going on inside the companies.

The first time a startup misses its numbers, the lead partner usually goes to bat for the company. He or she tells the other VC partners, “yes they missed their numbers but they have a plan…”

The second time a startup misses its numbers and the VC partners are unhappy with the performance. They ask the lead investor what he’s doing about the situation, the most obvious answer is “there’s a leadership problem and we’re replacing the CEO.”

CEOs are critical to the success of a startup, but also the most interchangeable. Pull one out, drop a new one in, and the startup continues without missing a beat. So long as the CEO is not the founder. That’s why venture capitalists don’t like the founder to be CEO – because then if the founder/CEO is fired there is no more company.

Moral of the story? If you’re a founder of a startup looking for Venture Capital money, you probably don’t want to stay on as CEO. And if you’re a CEO of a VC-backed startup, keep your resume up to date (and try not to miss your numbers!)

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