by Real Business - Thursday, 30th August 2007

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James Carling has all afternoon to talk. On an unusually sunny day in London, the co-founder of Prime Response shows off the spacious balcony adjacent to his office on Goat Wharf. Behind him, three cranes move like dinosaurs, clearing scrap metal off the neighbouring wharf. They are making way for waterfront flats and a stylish hotel, he explains. Inside his office, Carling leans back in his chair, smiles, and talks about his one-year-old twin sons.

His work schedule used to be more hectic. Since founding the company in May 1990, 39-year-old Carling has regularly logged 80-hour weeks as chief executive. He built from scratch an international company that in 1998 sold $18m-worth of software that manages customer relationships.

Then he replaced himself as CEO.

“It’s a shareholder value issue really,” Carling explains in a matter of fact way. “I felt at the time that this was really getting into the big league of global software and I wanted my investment and the previous ten years to be protected.”

Carling makes ceding control sound about as traumatic as changing stationery suppliers. But entrepreneurs know it’s not so simple. Few believe anyone could manage their businesses as well as they do. Company founders who do replace themselves tend to meddle, alienating their new chief executives. Others exit altogether, sometimes leaving employees feeling cheated by their departure. However, most entrepreneurs cling to the helm at all costs. “It’s not all that common for people to step aside and stay. Although they ought to do it more often,” says Alan Bates, former CEO of Bell Cable Media and chairman of Orchestream, a software start-up whose young founder recently replaced himself. “They almost have to be forced to the edge of the precipice before they do it.” The fear they must conquer, says Rob Johnson, a lecturer in entrepreneurship at the London Business School, is “giving up their baby and allowing their ego to let someone else do things in ways that they wouldn’t do them.”

Clearly, some exiting entrepreneurs are simply bowing to the pressures of investors and board members. Companies planning public floats need the sort of chief executive that institutional investors find credible. More and more founders, however, are returning to their roots. Reading financials and managing people leaves them cold, so they become engineers or sales people again. But entrepreneurs should not feel like failures for stepping aside, says Rick Peel, managing director of London-based strategy consultancy Credo Group. Quite the opposite. “To back out of what you can’t do well isn’t failure. What entrepreneurs provide is very valuable,” he says.

“Their job is to provide the energy and mad vision to get the whole thing moving,” explains Simon Whan, co-founder of London recruitment firm e9c Ventures. “But generally they’re fairly chaotic.” Successful professional managers are a radically different breed. Although they may lack a similar spark, they tend to possess superior organisational skills and an ability to set and focus on long-term strategies. “We see very few founders who are the right people to take their business to market or even to do a trade sale,” says Whan.

Few people make the leap from visionary entrepreneur to professional manager. Notable exceptions include Michael Dell, Richard Branson and Bill Gates (but even he leans on Microsoft president, Steve Ballmer). “It’s very unusual to find a person who is both a creative genius and has the intuitive management skills to take a proposition to its full potential,” says Peel.

In Peel’s experience, 80 per cent of companies that reach maturity these days change leadership. As business cycles speed up, it’s become increasingly difficult for founders to mature at the same rate as their companies. At the same time, attitudes about the role of entrepreneurs are changing. Some British entrepreneurs have adopted the Silicon Valley view that entrepreneurship is about launching ideas rather than managing companies. Indeed, a number are stepping down, but not stepping out. “Increasingly, we’re finding mature attitudes towards replacing themselves as CEO,” says Whan. “What’s most important is the success of the company and not their own position.”

As the owner of a fast-growing company, you may not think you can afford two large salaries. But can you afford not to?

The greater good
No ruthless venture capitalist pushed Carling out. Vacating the chief executive spot was his idea. While negotiating the exchange of 33 per cent of his company for $24m in a first round of venture capital funding, Carling decided that his lack of experience would hurt the company’s global aspirations. He also admits that he didn’t feel comfortable managing top-level talent. “I would have found it very difficult to tell the ex-sales director of Oracle how to sell,” says Carling. At the end of 1998, Prime Response hired Peter Boni as president and CEO. He had run three US public companies. Carling became chief technology officer.

With prior experience programming huge marketing databases for companies such as American Express, Carling believed his technical skills would benefit the company more than his administrative skills. With Boni managing the business from 1,000 miles away in Prime Response’s Massachusett’s office, Carling has been free to update the company’s product, making it more electronic commerce-friendly. For example, the software now generates e-mails and adapts to customers’ Web sites.

My company, my self
Even for entrepreneurs who decide to replace themselves for all the right reasons, completely letting go is never easy. Tim Jackson, founder of QXL.com, realised it was time to go when he walked into his Notting Hill offices one day last autumn and saw a new staff member he knew nothing about. Jackson never wanted to run a big company. Nor did he think he had the organisational skills to carry QXL.com to the next level. Still, wanting the company to grow, he hired 38-year-old Chicagoan Jim Rose, who used to run United News & Media’s United Information Group.

Handing over the reins to Rose was less painful because Jackson has always viewed himself more as a journalist than an entrepreneur anyway. He has continued to write a weekly column for the Financial Times, while turning QXL.com into a pan-European Internet auction site that employs 70 people and sells to 16 countries. For Jackson, it’s not all about work either. He has three young children and a fourth on the way. Sitting outside on his verandah (just around the corner from QXL.com), Jackson says he prefers the solitude of writing to the frenetic pace of business.

The day Rose arrived last May, Jackson left. Still, parental pangs persist. Jackson may have only visited the offices a handful of times since his departure, but he hasn’t cut himself off entirely. Still the largest shareholder and a member of the board, he attends conferences, follows competitors and sends frequent e-mails (about 30 a week) to his replacement, including business proposals that he receives or ideas about how to improve the auction site. Messages to Rose, he claims, are sent as suggestions rather than directives. “If you want it to succeed you have to get out of the way,” he says. “If you are in the office with your successor you pick apart the small problems. If you stay away you can focus on the big picture.”

Losing a charismatic leader
Handing over company control can be hard on employees, too. Employees tend to be fiercely loyal to charismatic founders who they’ve sacrificed weekends alongside. Moreover, some staff members inevitably believe they should have been appointed CEO. Tim Jackson brought Jim Rose into QXL.com for his big corporate background and for his ease with people, but the situation could easily have turned nasty.

Rose himself worried that the company’s chief financial officer and sales and marketing vice-president would both feel slighted. “Those guys thought they would be the ones,” says Rose. But chief financial officer Robert Dighero, who had previously been CFO at AOL UK, says the transition went smoothly. He and Stan Laurent, the other VP, both interviewed for the job and screened potential candidates. “I think we felt we had a fair crack,” says Dighero. “Jim has more experience basically. Stan and I would have had problems if someone had come in with similar experience to ours.”

A dynamic leader’s exit from the head office can also dampen a company’s spirit. “Any change of this nature is non-trivial,” says Graham O’Keeffe of Atlas Venture, a London-based venture capital firm that invested in software-maker Orchestream. Although Orchestream’s new CEO, 45-year-old Ashley Ward, is charming and youthful – he zips around town on a scooter – it would be hard to match the appeal of its 24-year-old founder. Even O’Keeffe acknowledges this. “You have a young visionary CEO, very articulate… there’s a lot of personal commitment from the founder and the founding employees are loyal to the founder. There’s a combustible mix in there.”

Charles Muirhead knew the transition would be tough. Soon after replacing himself with seasoned entrepreneur Ward, he gathered the engineering department together to assure them that he had not been pushed out and that he planned to stay. Still, employees suspected that because Ward was older and came from a more structured environment, he might impose dress codes or stifle their creativity with too many rules. Muirhead spent time separately with two employees he heard had concerns.

The trick is to clear the air quickly. Otherwise, employees fill in the blanks, usually with versions that are more colourful and ominous than the truth. When Julian Bull became managing director of Dimension M, a full-service marketing agency in Iver, Buckinghamshire, in September 1998, he says employees viewed him as the hatchet man because shortly after he arrived, he let two people go. “Behind my back there were whispers that I had been put in there by the bank,” recalls Bull. “Initially it was scary,” agrees co-founder Jamie Malcolm. “You bring someone in and everyone starts to talk.”

Taking orders
Bull’s situation was further complicated by the fact that the co-founders had been buddies since childhood. Although the charismatic pair hired Bull for his no-nonsense attitude, his ability to manage personnel, procedures, finances and set strategy, the two had a hard time taking orders from someone new to their business. In the pub after work, Malcolm recalls complaining, “We created this thing. How dare he walk in and tell us how to run our business.” Describing himself as a control-freak, he says he had a hard time taking criticism. In one instance, he recalls having to answer to Bull about why he didn’t land a lucrative contract. “He just came up to me,” recalls Malcolm, “and said, ‘someone else is doing the work, why aren’t we? We’re obviously doing it all wrong.’ And I’m saying, ‘don’t tell me how to do my job.’ There was an enormous amount of bravado in the beginning.”

Presenting in writing how Bull’s suggestions would affect Dimension M’s bottom line helped convince the pair to adopt some of his strategies. For example, says co-founder Piers Mummery, before Bull, they had never had an expense budget. Although Bull had suggested they tone down their spending, it wasn’t until after Christmas when he showed them their bills and how much they would be taxed for wining and dining clients that they agreed to cut back. Bull says they even traded in their smart cars. “What is the point in hiring a senior member of the company and not allowing them to do their job,” says Malcolm.

Airing their differences helped them move past their initial difficulties. Then, just as they did, Bull resigned.

The three say he left in June because the business hadn’t grown as expected and that his job to prepare the business for sale is, for the meantime, less relevant. “At the end of the day Jamie and Piers could do without having me as an additional cost to the business,” explains Bull.

The cost of liberation
Still, the two 32-year-old founders say that Bull’s short tenure was liberating. “His agreement was really simple. He will come and free up our time to do what we do best,” says Mummery. Before Bull arrived, Mummery says he was spending 40 per cent of his time on administrative chores, leaving little time for sales. Malcolm, too, was able to devote himself full time to developing client relationships. “We wanted to stay on the front line because that’s where we’re best. What we didn’t want to do was just administrate the business,” he says.

Having removed himself from the day-to-day, Charles Muirhead of Orchestream is also now free to play to his strengths. He is a natural networker. “People want to know Orchestream because we have a young charismatic, erudite founder,” says the new CEO Ward. Shuttling between the company’s London and San Mateo offices, Muirhead spends most of his time meeting potential customers, partners, the press, etc. Still, he agonized over the decision to replace himself. Some people, he says, told him not to let go of the title. Although he’s glad he did, doubts linger. “Will you ever find an opportunity in the rest of your life when you call the shots?” reflects Muirhead. “It may be a once in a lifetime opportunity.” James Carling agrees. “It would have been great to ride over the sunset as chairman and chief executive officer of an important software company, but it’s just too high risk,” he says. “I would rather ride over the horizon as chief technology officer of a very large successful software company – with a large number of shares.”

Should you be the boss?
Ten signs it’s time to replace yourself

Employees still join you in the pub after work, but corridor conversation goes quiet when you approach.

Shareholders ask more questions about your golf handicap than about your bottom line.

You spend all your time chasing new funds, yet terms such as IRR and clawbacks mean nothing to you.

People who used to ring you now ask for your finance director or operations manager.

You’re bored by the big picture.

The only knowledge you have to pass on to colleagues are war stories about the company’s early days.

You’re more comfortable in the staff canteen than in an airport VIP lounge. You think the Nouveau Marché is a new French supermarket.

You read the sports section of the Daily Mail before the Lex column of the Financial Times.

Your idea of hell is orchestrating an organisational change programme.

Contacts
Stephanie Gruner is now Internet correspondent at the Wall Street Journal.

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