An outside CEO's misunderstanding of a core business model can be catastrophic. The new CEO pivoted from a high-margin, recurring-revenue model to chasing large, complex projects. This mismatch resulted in a $12 million loss on $20 million in revenue, halving the company's EBITDA in just nine months.
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Many late-stage investors focus heavily on data and metrics, forgetting that the quality of the leadership team remains as critical as in the seed stage. A new CEO, for example, can completely pivot a large company and reignite growth, a factor that quantitative analysis often misses.
A founder's real boss is their customer base. While keeping a board happy is important, some CEOs become so consumed with managing up that they lose sight of the product and customer needs, ultimately driving the company off a cliff despite running perfect board meetings.
It is significantly more difficult to step in as a non-founder CEO than to build a business from scratch. The new leader must contend with inherited business inertia, a pre-existing culture shaped by the founder, and constant comparisons, making transformative change much harder.
Founders often chase executives from successful scaled companies. However, these execs can fail because their experience makes them overly critical and resistant to the painful, hands-on work required at an early stage. The right hire is often someone a few layers down from the star executive.
Corporate leaders are incentivized and wired to pursue growth through acquisition, constantly getting bigger. However, they consistently fail at the strategically crucial, but less glamorous, task of divesting assets at the right time, often holding on until value has significantly eroded.
Dynamic Signal generated millions in ARR, but analysis revealed customers treated the product like a one-off media buy, not a recurring software subscription. The high revenue hid an unsustainable, services-based model with low lifetime value.
The industry glorifies aggressive revenue growth, but scaling an unprofitable model is a trap. If a business isn't profitable at $1 million, it will only amplify its losses at $5 million. Sustainable growth requires a strong financial foundation and a focus on the bottom line, not just the top.
Many founders believe growing top-line revenue will solve their bottom-line profit issues. However, if the underlying business model is unprofitable, scaling revenue simply scales the losses. The focus should be on fixing profitability at the current size before pursuing growth.
When a private equity investment thesis is primarily built around a single person (e.g., a star CEO), it's a sign of weak conviction in the underlying business. If that person fails or leaves, the entire rationale for the investment collapses, revealing a lack of fundamental belief in the company's industry or competitive position.
