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Another Year, Another Chief Executive

By Ellen McCarthy

Thursday, January 8, 2004; Page E01

Last September, Cliff Chapman stood in front of the 50 employees at his Fairfax technology company and warned that changes were coming. The board of directors and the venture capitalists were in agreement, and a new guy, Paul W. Chisholm, was taking over as chief executive of MindShift Technologies Inc.

There was no anger that day, no emotional outpourings of loyalty, Chapman said. He was passing the baton willingly and would stay with the firm as a vice president. Besides, the people of MindShift had been through executive upheavals several times before.

In fact, the company’s top spot has been held by four people during its four years of existence. And so it goes at venture-backed start-ups, where leadership changes are quiet but common and often involuntary.

Venture capital is still the business catalyst of choice among entrepreneurs who line up for seminars on how to get it. But most executives admit the funding is a blessing and a burden; when you’re no longer the owner, you’re no longer indispensable.

Chapman, MindShift’s third chief executive, was brought in to relieve Douglas S. Holladay Jr., an interim leader who replaced the company’s founder, Michael Wheeler. MindShift’s venture investors were trying to figure out how to accelerate the company’s growth, Chapman said, and it was his job to get the firm on track. The previous administration, he said, “had stumbled a bit with execution.”

The transition to Chisholm was made easier by the fact that he had served as a board member and consultant to the company for several months. The announcement was met with more skepticism than resistance from employees who had seen it all before, Chisholm said.

Matt Newton, a partner at Columbia Capital, said executive changes frequently occur when a company is not meeting the goals set by its venture investors, board of directors and its own management team.

“What we find often is that the managerial skills required in a larger company are different than the managerial skills needed in a small company or start-up,” Newton said.

A company that has not gone through a major executive change is the exception rather than the rule, according to Frank A. Adams, managing partner at Grotech Capital Group, a venture firm based in Timonium. Adams said it really happens for only one reason: The company is not prospering.

That may mean a start-up is not hitting its numbers and is burning cash quickly, he said. In that case, both the entrepreneurs and the board of directors know things aren’t going well. Adams said the more difficult situations arise when a company is growing but not growing as quickly as investors think it ought to be.

In talking with his entrepreneurs two or three times a week, Adams will sometimes broach the subject by saying things like, “It’s possible that this company needs a different kind of leadership,” if he sees a potential need for change. The executives are often receptive when it is presented as a theoretical question, Adams said, but when the time comes to talk details, they want “another month, another quarter, or another million.”

Venture capitalists are of mixed opinion on whether to move current executives into another role at the company. Newton said old executives could add expertise. Adams said it’s better to make a clean-cut.

“Typically, what happens is they just get in the way,” Adams said. He explains to entrepreneurs that “lingering here is like being in a bad marriage. You need to get out of the house.”

When Patrick Sweeney was replaced as chief executive of ServerVault Corp., a Dulles Web hosting firm, in 2001, it did not come as a surprise. He had told the firm’s five investors that it needed an additional $5 million before it would have a positive cash flow, generating enough cash to meet its cash expenses. That was not, Sweeney said, what the venture capitalists wanted to hear. Sweeney was named president and chief visionary officer, and a new chief executive was brought in.

“He came in as someone who knew the company for two months. I have been running the company for 21/2 years. The challenge for me was not to sabotage his ability to do the best due diligence he could,” said Sweeney, who admits that he may have been too close to see the company objectively.

Sweeney said his employees at ServerVault reacted to the news with a mix of surprise and confusion, questioning the impetus for the change. ServerVault has since been acquired by Fort Washington Capital Partners, which named John F. Kraft as ServerVault’s chief executive in July. Sweeney moved on to his next start-up, Odin Technologies, a radio frequency identification company based in Reston.

Sweeney said it was challenging trying to run a company owned by venture capitalists. But he still sees venture capital funds as crucial for building a new company.

Stepping in as an outsider can be a daunting task, said Glen Hellman, who joined Ikimbo Inc., a Herndon communications software firm, in July. Ikimbo had also been through several regime changes by the time Hellman arrived, having been run by its founder, Jamey Harvey, and two other chief executives since it was established in 1999.

Some of the employees will be confrontational; others will try to get in good with the new boss, and the rest will stand back and wait, Hellman said. The important thing, he said, is to listen to the staff and figure out what changes are needed at the company. Hellman says that process can be tough for entrepreneurs who, like new parents, sometimes lack objectivity.

“Have you ever met a parent who told you they have an ugly baby? We need to keep asking ourselves, ‘Is this an ugly baby?’ and founders don’t do that. Founders get too close,” Hellman said.

A member of the local tech community is finally making his debut on reality television. Sam Solovey, co-founder of Potomac Tech Wire, will be vying to become the protégé of business tycoon Donald Trump on NBC’s new show, “The Apprentice.” Solovey was prohibited from doing telephone interviews but said via e-mail that he continues to run the daily newswire with co-founder Paul Sherman. But, he said, “If an opportunity with Donald Trump presents itself, the business will carry on successfully with or without my full-time leadership.” The first episode airs tonight.

Ellen McCarthy writes about the local technology scene every other Thursday. 

© 2004 The Washington Post Company