Four Lessons for New CEOs

Written

Four Lessons for New CEOs

Stanford GSB faculty and industry leaders help young executives of search fund companies navigate their new roles.
creative business people in meeting
New CEOs must build relationships with their board members, a panel of experts told the audience at Stanford GSB's Search Fund CEO Conference. | iStock/julief514

Years ago, Kevin Taweel, chief executive and co-founder of cellphone insurance provider Asurion, was grappling with high employee turnover and other issues in the company’s round-the-clock call center. To check if the center was functioning in the wee hours, Taweel and cofounder Jim Ellis took turns dragging themselves out of bed to dial in and see if anyone answered. “I would set [the alarm clock] at 1 in the morning, Jim would set it at 2, I’d set it at 3 a.m.,” says Taweel, a lecturer at Stanford Graduate School of Business and 1992 MBA alum.

Taweel spoke at Stanford GSB’s first Search Fund CEO Conference, a daylong event examining the challenges of leading small high-growth companies that entrepreneurs locate and acquire using the search fund model (see sidebar). As searchers, Taweel and Ellis, also a GSB lecturer and 1993 MBA alum, acquired Asurion’s predecessor company in 1995. Through acquisitions and international expansion, they transformed it into Asurion, which currently has 16,000 employees on five continents.

Understand a Search Fund
illustration of a person looking through a telescope
Illustration by iStock/ilyast

What is a search fund?

A search fund allows relatively inexperienced entrepreneurs to find and lead an existing small, high-growth company. The entrepreneur, or “searcher,” raises funding from investors, who may include friends and family, angels, business associates, and institutional search-fund investors. Those investors are betting first on a searcher’s ability to find a high-potential company and, secondly, to lead it.

Who are search fund candidates?

Searchers are typically recent graduates of MBA programs and in their late 20s or early 30s.

How does the funding work?

The initial funds pay for the entrepreneur’s “search” for a small company, a process that often takes more than a year. Once the entrepreneur finds a company, he or she raises more money, some of which may come from the original investors, to acquire it. The entrepreneur, who also has an equity stake in the company, assembles a board of directors and operates the firm with an eye toward an exit event after six or so years.

Who invented the concept?

The idea was conceived in 1984 by H. Irving Grousbeck, the MBA Class of 1980 Adjunct Professor of Management at the GSB.

At the conference, held Sept. 13, speakers and panelists discussed the many demands of serving as CEO of a small firm and explored ways to meet those challenges. The event, hosted by Stanford GSB’s Center for Entrepreneurial Studies, comes a year after the release of the center’s most recent biennial Search Fund Study, which found that search fund activity is on the rise. In 2015, 43 new search funds were raised, up from 38 the prior year and 10 in 2007. Part of the rise may be attributable to an increase in overall familiarity with the model, explored in such CES classes as Entrepreneurial Acquisition.

Following are some of the ideas discussed at the event, attended by more than 250 chief executives, academics, directors, entrepreneurs, and investors.

Becoming a Chief Executive

Most searchers have previously worked as consultants, managers, or individual contributors, but once they identify and acquire a company, they make a major leap to CEO, speakers said. As a new CEO, you suddenly have top managers work for you, says John Stanton, chief executive of telecommunications firm Trilogy International Partners. CEOs must learn to report to board members and manage others, often in remote locations. Young CEOs also need to fight the common tendency to do work that should be done by others. Not trusting others is a common trap, says Stanton, adding that earlier in his career, “what I missed was developing people by letting them make more mistakes and turning them into partners in the business earlier.”

Speakers agreed that if you’re a CEO, you should build board member relationships outside of scheduled meetings. Call them when you want advice and not always when you have bad news.

New CEOs should also realize that effective management doesn’t mean they must “act like a CEO” and pretend to have all the answers, says H. Irving Grousbeck, the MBA Class of 1980 Adjunct Professor of Management at Stanford GSB. “Sometimes the best answer is, ‘I don’t know; let’s figure this out together,’” Grousbeck says, adding that that acknowledgement shows authenticity and humility.

Hiring, Retaining, and Firing

For search fund CEOs, recruiting people for the management team is one of the biggest tasks, especially during the first year. Speakers suggested digging through business and personal networks, and considering people from other industries because capable and talented hires can learn the intricacies of a new field quickly enough on the job.

The burden is on executives to present the company and its opportunities effectively to candidates. For instance, Asurion’s predecessor, Road Rescue, was in the unglamorous area of vehicle towing. But Taweel and Ellis recruited Gerald Risk, who earned his MBA from Stanford GSB in 1996, as chief financial officer in part by “painting a compelling vision for the company,” says Risk, who ultimately joined and now serves as its vice chairman.

Speakers described their interviewing processes, which in some cases include at least one meeting in a restaurant to allow the interviewer to see the candidate’s interaction with staff. Some executives include other senior-level managers in the interviewing process. David Shaw, the event’s lunchtime speaker and director of Stanford’s football program, adds that he has recruits spend time with team members.

Executives also emphasized the importance of background checks. One idea is to call references after hours and leave voicemail, says Andrew Saltoun, a 2008 graduate of Stanford GSB and CEO of health-benefits manager Integra Partners. Saltoun tells references that if the candidate is good, call back, and if he doesn’t hear from them, he won’t hire the person.

Compensation isn’t the only way to retain employees, speakers said. Employees also appreciate a company’s investment in them. Saltoun noted that to boost retention, he spends significant time learning about the goals and motivations of individual employees. “Retention is part of my everyday dialogue,” he says.

While it’s tempting to postpone or procrastinate firing an employee who’s not working out, don’t give in. Dragging your feet on letting someone go isn’t in anyone’s interest and sends the wrong message to others, speakers said. CEOs can certainly give an employee on the way out a generous amount of notice and can help him or her find another more appropriate role.

Maintaining Culture

Speakers noted that as the top dog, the CEO promotes a company’s culture, or its values, attitudes, and motivations. But the culture must be supported by everyone else, from key managers to staffers throughout the ranks. Even during the recruiting and interviewing process, a company can identify candidates by building into interviews questions that speak to the culture.

“Culture is the conglomerate of everyone” in a particular setting, and leaders establish a culture by the people they bring in, says Shaw.

Retention is part of my everyday dialogue.
Andrew Saltoun

A compelling story can help leaders uphold and communicate a company’s culture. Jennifer Aaker, the General Atlantic Professor of Marketing at Stanford GSB, says that people embrace and remember narratives, which can be rich with characters, emotions, or actions, far more than they recall facts and data. A story about an entrepreneur’s experience that led him or her to found a company, or one about the history of a particular product, for instance, can enhance a company’s culture by conveying its heritage or sense of purpose and direction. Ideally, leaders can combine a story with facts and data to speak to both the “rational” and “emotional” sides of the audience.

Transforming a Company

Once a company achieves success, the CEO should already be considering how it will transform to its next stage, says Mark Leslie, lecturer in management at Stanford GSB and former CEO of Veritas Software. Too many companies, especially large corporations, miss big opportunities to transform themselves, Leslie says, citing Kodak, Borders, and BlackBerry as examples. The time for top executives to think about a company’s next big opportunity is during the good times, or “right when you’re least likely to think about it,” he says.

Leslie cites other firms, such as Oracle, that entered new lines of business or made strategic acquisitions to continually evolve over decades and find paths to growth.

Indeed, even small companies in their early stages must be willing to test and explore. Taweel recalls that even as Asurion runs its core business, it also experiments with several new potential opportunities. “You never know what exactly is going to hit,” he says.

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