The importance of a technical CEO for a tech company

I think it’s virtually impossible to start a technology company with a non-technical CEO. The person making the fundamental decisions about the business needs to understand what the product does at a very deep level. Otherwise, she can’t know why and how customers should use it, and can’t recognize the use cases and opportunities it best serves. She can’t explain the fundamental value in the business to employees, partners, customers or investors.

Of course the CEO must also think broadly about the business. She must understand market forces, investment strategies, sales and marketing and more. Fortunately, while each of those domains is challenging, they can all be learned. It’s much easier for someone with a technical background to pick up general business skills than for someone with a classic business education to master a technical discipline.

Naturally, as businesses grow, the demands on the CEO change. At some point, it’s reasonable for the board and founders to replace members of the leadership team, including the CEO. The CEO herself may decide that the transition is necessary.

Moving the founding technical CEO out of that role is always risky, though. She created the company, motivated early employees, closed early sales and positioned the business and the product in the market. Employees, customers, partners and others are likely to worry about the transition. The new CEO must master all areas of the business at the same time, and quickly.

As a result, it makes sense to invest in the founding technical CEO, to preserve her in the original role for as long as possible. She should get the coaching, advice and other help in learning her job as it changes.

The CEO’s job

The CEO has five essential responsibilities. Once a quarter, she should sit down alone and with her board to assess her performance on each of the five.

1. Strategy

The CEO must define the company’s strategy:

The answers to these questions will inform plans and tactics, and feed directly into a detailed operating plan.

The strategy may change over time, but that should be exceedingly rare. If the fundamental motivation for the company changes, it’s really a different company. As a result, it’s worth revisiting the strategy and vision regularly, to test their freshness and to make sure they still make sense.

One key consideration in creating the company’s strategy is deciding on its long-term trajectory. Can it -- should it -- remain independent and privately owned? Businesses that seek venture capital or private equity funding must generally find some way to liquidate those investments in their first ten years. That’s a promise to go public or to sell to an acquirer in that time. That has long been the default choice in the tech ecosystem, but it’s not a commitment that a founder -- especially a founding CEO -- should make lightly.

2. Team

Early in the life of any start-up, the team is tiny. The CEO personally does a lot of detailed work in different functional areas, like product planning, marketing, sales, finance and others. That’s natural and healthy. Having her finger on the pulse of the nascent business lets her recognize problems and opportunities as they develop. The business can move more quickly.

But as the business grows, delegation becomes essential. Specialists do better work than generalists, and the CEO must spend her time on her five essential responsibilities.

Hiring and managing teams is hard. The CEO has to know enough about each job function to recruit well, to manage team members and to recognize good and bad performance. She must motivate each member of the team to perform well, coaching and mentoring where necessary. The team as a whole must work well together -- a great marketer who can’t collaborate with a sales leader in building a pipeline and optimizing conversion hurts the business. It’s the CEO’s job to be sure that the symphony sounds good, not just that the performers are competent.

Most critically, the CEO must recognize when it’s time to replace individual members of the leadership team. Perhaps she made a bad hire. Perhaps the business has simply grown, and demands a full-scale CFO instead of a bookkeeper or accounting manager.

Building and running a full-function team is often hard for a technical founder. Many engineers choose that profession because they’re more comfortable working with machines or mathematics than with people. Some are prone to argue reflexively, always challenging; others tend to avoid conflict, preferring not to challenge.

Neither trait is particularly helpful in high-caliber management of teams. The CEO must actively seek out conflict -- it is both an important indicator of possible trouble, and a signal that the team needs a CEO-level decision. Finding, exploring and resolving conflict among the management team is crucial. That requires emotional and coaching skills that engineering schools don’t generally teach.

A key consideration both in hiring and in firing is whether there is an appropriate person already in the company who can be promoted into an open job. That’s a fantastic way to build loyalty among employees generally. Clear avenues for professional development keep people around for the long term. It saves time and money, since no outsider needs to learn how things work. This applies as well to employees who leave for other opportunities or for personal reasons.

A good CEO should put in place mentoring and training programs to create career ladders of this kind for staff generally. She should always consider succession plans for members of the executive staff, and for key employees throughout the business.

Finally, a CEO should think broadly about “team.” The company exists in a market with partners, competitors and potential acquirers. Building personal relationships with key executives at those companies is a core part of the CEO’s role. Considering their roles in the company’s success, and creating incentives for them to do what the company needs, is an enormously valuable skill. This demands careful thought in advance -- who matters, and why? It requires careful execution as well, especially when spending time with those whose interests are at odds with the company’s.

3. Operating plan

The operating plan describes, in detail, how the team will achieve the strategy.

Of course that requires a budget. How much money will be spent on product development, demand creation, sales execution, customer service? What revenue will that work generate? How much will cloud services, real estate, IT, business services and so on cost? What net profit or loss will result? This is an important accounting exercise. It requires diligence and precision.

But an operating plan is not just a spreadsheet. It’s a narrative document that talks about why customers will buy, how partners and competitors will participate and how the company will establish a long-term, profitable business. It describes what the company plans to measure to assess performance and success.

No business ever hits its operating plan exactly. Young companies especially can miss them by wide margins. One of the best reasons to specify the plan carefully in advance is to recognize those misses as they happen, and to react to them. A good operating plan includes some amount of contingency: If revenues lag, we can cut expenses here; if demand surges, we can invest in more sales and support capacity; if the product is late, we can move marketing programs out; and so on.

Boards and investors often like to see three-year operating plans, for example during fundraising. I’m skeptical about those for early-stage companies. They are generally works of speculative fiction. They are enormously time-consuming and expensive to produce. As statements of principle, reflecting the strategy and vision, they make some sense, and a CEO should have a picture of the three-year trajectory of the company. She should revise that annually or as required, but neither boards nor CEOs should be hypnotized by year-two or year-three details; they are directional documents only.

A longer-term operating plan should always consider additional products or new revenue streams that can build on the core business of the company. It may be necessary to invest now so those products are ready in time. The CEO should have a clear picture of the company’s product and services portfolio over time.

In any case, a full-year financial plan is essential to have before the fiscal year starts. Otherwise, management can’t understand the business well enough to run it. The team won’t know what to measure and won’t recognize problems and opportunities. Best practice is to continually revise a full-year plan, adding a quarter every time a quarter ends. That way, there’s always a detailed picture of the business for the coming twelve months, and lessons learned in each quarter are incorporated into the revised plan for the next and future quarters.

Creating, continually revising, and measuring performance against the operating plan is the day-to-day responsibility of the management team, but especially of the CEO. This can and should be a collaborative, wide-ranging discussion. It must be informed by strategy and subject to “what-if” questions and a variety of underlying assumptions. That helps to identify key metrics for the business. It adds confidence to the plan by fleshing out more fully the different contingencies that might arise. The management team, board members and knowledgeable outsiders will provide good insight and ideas.

4. Funding

The team applies the operating plan in order to achieve the strategy, but it can only do that work if there is enough money available to keep the lights on and the employees paid. It is an absolutely essential part of the CEO’s job to make sure that the business has the funding it needs to accomplish its goals. Every failed start-up is, in the end, a result of the CEO’s failure to do this part of her job.

That means that at the very earliest stages, when the strategy is still getting hammered out, the founding team needs to consider how and where it might raise money, and build that into its operating plan. Revenue from customers is always best; it is non-dilutive, and is conclusive proof that the company is delivering value. Revenue in excess of expenses means the business is profitable and can in principle run forever without outside capital. Profitability is a huge boon to a CEO; her fate is in her own hands. She can resort to outside capital if and when the strategic opportunity justifies doing so, but can survive without it through a market downturn or if investment terms are not satisfactory.

Whether from revenue or investment, a CEO should know how available money will be used, what the measurable impact on the future operating plan will be, and whether and when it will be necessary to raise more capital. Long-term business plans are not very useful for running the company day to day, but long-term funding plans are essential to building it over time.

The founders and early employees of any company clearly have a stake in its outcome. Likewise customers and to a lesser extent partners, who come to rely on its products. Whenever outside funders enter the picture, they too become important stakeholders. They affect the possible future trajectories of the business: They presume an exit via IPO or sale, generally on a relatively short timeline. That funding is almost always irrevocably dilutive to the interest of employees and founders. A CEO must be very thoughtful about how and when to tap that well.

As a matter of principle, I consider equity retained in the company, for the benefit of the founders and employees, as superior to equity sold to investors. Founders and employees have a huge percentage of their future net worth tied up in the company. Outside capital is generally much more diverse, and willing to tolerate risks and failures that can hurt insiders.

Of course this doesn’t mean that traditional venture capital or private equity is bad. Those are often savvy and supportive investors with deep and liquid reserves, able to provide consistent access to capital over the life of a company. They frequently have good networks and can offer infrastructure, advice and operating support to young and growing companies. Those advantages can be significant, and are worth exploring in detail whenever raising this kind of capital.

There are more options available to founders today than there were ten or twenty years ago. Debt, asset-based financing and other options are also worth considering, both at founding and for working capital over the life of the business.

5. Culture and ethics

This last topic is not a focus of every CEO -- many whom I know consider culture as inessential to the success of the business. It’s important to me, and I think it should be important to you. At the two companies where I served as CEO, I spent a lot of time on it. The result was, I believe, outstanding in both cases. We created companies that people were passionate about. Our employees believed in our missions and identified with the companies. They were loyal and worked harder.

Honesty, respect for the law, support for human rights and a commitment to our customers and employees and their families were important at Sleepycat and Cloudera.

Clear and open communication is essential in transmitting culture. The CEO, and to a lesser extent the founding team, are essential in modeling that. But if culture and ethics are to be reliably shared throughout the entire organization, and to survive arrivals and departures over time, that communication must be ubiquitous. Finding ways to promote communication, and to continually assess cultural and ethical health, is a key part of the CEO’s job.

Communicating culture always means communicating the company’s strategy clearly, inside and outside the company. Everyone must know where the business is going, and why. I strongly prefer open, rather than secretive, cultures, and encourage CEOs to share details of the operating and funding plans, as well. That openness is itself a cultural value. It’s not universal -- great companies like Apple are notoriously secretive -- but especially in start-ups, it can be a valuable way of building loyalty and morale.