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Top gun recruiting: Jim Harmon’s take on the 10 most common mistakes made by tech startups

James Bagnall
The Ottawa Citizen
February 03, 2005

Changing CEOs is one of the riskiest bets a high-tech firm can make.

Tech companies by their very nature constantly present new leaders with a slew of options — technologies, sales partners, geographies, financing — any one of which can lead down a dangerous path.

The same is true of founders who stay the course, but the risks are heightened with the arrival of a newcomer. An aggressive, ham-fisted CEO can do serious damage in short order.

This applies to large firms as much as it does to startups. Of Nortel’s last five CEOs, three — Paul Stern, John Roth and Frank Dunn — pursued strategies that compelled their successors to spend most of their time on repairs.

But big companies usually have enough cash and institutional history with customers to allow for a recovery. For startups, a wrong choice for CEO can be a death sentence.

But any headhunter who claims a perfect record isn’t taking enough risks of his own.

For example, many Ottawa tech startups include at least one board member representing U.S. financial interests. “Each of these directors usually has a favorite executive search firm from the U.S.,” says Harmon. “This means there are a lot of one-off searches which splits up the market.”

Regardless of who is doing the search for a new CEO, there are common mistakes to be avoided. Harmon has compiled a list of 10 potential pitfalls that face every early stage tech firm. Following is a synopsis:

  1. Bad timing: Harmon notes that boards tend to be too impatient when it comes to the tenure of a startup’s first CEO. Moving too fast can be costly because a charismatic founder often has good relations with lead customers. He or she has often been key in convincing the startup’s engineers to risk careers on a new enterprise. An early exit by the founder could prompt engineers to leave. Late exits can also pose a problem — leaving an inadequate CEO in the job too long will hurt morale.
  2. Failure to link a hire to the startup’s business plan: Harmon says too many early-stage firms hire a new CEO without giving him or her a mandate. It’s an open invitation for later conflict with the board.
  3. Relying too heavily on personal contacts: Many CEO appointments come to grief because a board of directors promoted an outsider it was familiar with, rather than someone appropriate for the position.
  4. Slow hires: Harmon observes that some boards take their time hiring a new chief in the belief they’ll get the right candidate in the end. There are two main trouble spots here. First, the startup “limps along under inadequate leadership” until the search is complete. Second, when top candidates hear nothing back from the company for weeks at a time, they tend to lose interest or move on.
  5. Flawed search: The board should assign responsibilities for conducting the search. A human resources official should make sure resumes and related documents reach the right people. Morever, there needs to be early agreement on the interview process and who takes part. Harmon warns it’s often a mistake to include the outgoing CEO or founder on the selection team. He says “founders generally have little experience evaluating executive talent.”
  6. Failure to establish how the final hiring decision will be made: boards should establish a selection committee and decide early on whether certain directors will have a veto.
  7. Inadequate references: a common mistake involves directors who rely on their own personal networks to ‘vet’ a CEO candidate. Harmon observes that executives can do quite well dealing with board members but fail to connect with average employees or colleagues. He also cites the example of a recent CEO search involving a candidate who had impressed his client’s board of directors. When Harmon checked the candidate’s references, he discovered two were negative, two refused to talk about him and a fifth was astonished that she had been listed as a reference.
  8. Unrealistic compensation: Harmon says he’s seen too many instances of startups trying to attract top level CEOs “on a beer budget”. Experienced CEOs from larger firms tend to very reluctant to accept a pay reduction. If they’re not interested in building a startup, it’s probably a mistake to bribe them into giving it a try.
  9. Failure to consider quality of life: Harmon notes that East Coast startups continue to hire CEOs who live on the West Coast. Nearly every CEO who attempts this commuting arrangement has failed, says Harmon.
  10. Lack of discipline at the board: a poorly executed executive search will usually be a signal for experienced CEO candidates to stay away. He or she will view a disorganized board as a warning sign.

That’s a lot of warning signs for early stage companies with lots of other things to worry about. But paying attention to them will help avoid a world of hurt.