Sea change

How company founder Liz Cobb found the courage to hand over the CEO reins

One night Liz Cobb was kissing her two daughters good-night when the younger one stopped her with one of those out-of-the-blue questions kids are famous for. Somehow her daughter, then 9, had learned things weren't the same at Mom's software company. And now she wanted an explanation. "Mom," she asked, "why aren't you president?" In Cobb's home, the company was like a third child. So Cobb did her best to answer. Yes, it was true Mom was no longer president and CEO of the company she had started. But, she assured her daughter, she wasn't abandoning Incentive Systems Inc. In fact, she was still its chairman. But the change bothered the young girl. "She understood president," says Cobb.

What Cobb could not have explained to her daughter is how the Internet world has changed the very pace of life for so many company founders.

Once upon a time, a start-up CEO who raised $9 million in venture financing, as Cobb had, would have been called a hero. Once upon a time, Cobb's sales and marketing savvy would have made her indispensable as CEO. But at this moment in Internet time, it wasn't enough. Cobb had come to believe that if Incentive Systems had any hope of making it in this dot-com-driven world, she had to step aside. At the time her company was not quite three years old.

It was a Friday afternoon about a year ago. Cobb had the champagne ready. Waiting to be carved was the carrot cake -- a carrot being the logo and central metaphor for Incentive Systems' product, software for managing sales-incentive plans involving multiple sales channels, including the Web. Cobb nervously clutched a white baseball cap embroidered with a carrot and the letters C-E-O. Standing beside her was Mike Byers, then 37, the company's first chief financial officer and chief operating officer. He was about to acquire another hat. Cobb was going to make the announcement during the usual Friday-afternoon staff meeting so that nothing would seem out of the ordinary.

It was business as usual -- or so Cobb reassured herself as employees began filing into a cramped meeting room. Looking out at the people she'd hired and come to know well, Cobb suddenly felt a pang of terror. Maybe this wasn't a good way to send employees home for the weekend. She paused for several moments before beginning her speech. Finally, the time came to hand over the hat. Turning to Byers, she said, "I want to introduce our new CEO."

"Liz, does this mean you're leaving the company?" blurted out one longtime staffer. The simple question caught Cobb off guard. "Oh, no, no, no," she answered quickly. To her amazement, she realized she'd failed to explain her new dual role as executive vice-president of strategy and board chairman.

Looking back on that awkward moment, Cobb says she understands the mixed emotions that her announcement generated. It's just sentimental," she says. "Changes like that always rattle people, even if they're the right thing. I did put on my maternal hat and say, 'I've got to do the right thing for this baby to grow.' "

Cobb's ability to "forget" herself for the greater good of the company is viewed as a virtue by those who live and die by the take-no-prisoners world of high-tech deals. "I think today successful entrepreneurs like Liz have an out-of-body experience when they look down at the company to see what's there," says Jon Flint, a general partner at Polaris Venture Partners Inc., in Waltham, Mass. In fact, Flint looks for that prescient quality in the founders he backs. Will they be able to "go outside themselves," as he puts it, and ask, "Am I the right person to lead the company?" Because the stakes are enormous. Polaris has contributed $12 million of the $36 million in venture capital that Incentive Systems has received to date.

Having VCs with high expectations exerts massive pressure on dot-com wunderkinder. Just ask Eric Kuhn, who, at 29, feels fortunate to still be CEO of publicly traded Varsity Group, based in Washington, D.C. "I know what typically happens in VC-backed companies with twentysomething CEOs. About 70% of the time the CEO takes a different title by the time the company goes public," he says. "There's always that undercurrent."

But even fortysomething company starters feel the white-hot heat. While Cobb, 47, possessed extensive knowledge of her software niche, she had never launched a product before -- never mind one that was on the cutting edge of e-commerce. "In the Internet space, things are definitely happening much faster, no question about it," says Flint. Thus, founders are stepping aside as CEO sooner, sometimes within a year.

No one's saying who initiated the process at Incentive Systems, but according to Flint, "over a period of time Liz was saying, 'There are too many questions I don't know the answer to.' "

"It's hard to let go of a piece of it. You wonder, Will the people you brought on board accept the change OK?" says Incentive Systems founder Liz Cobb.

Not so long ago Incentive Systems was just another obscure software company. Cobb spent nine months at home writing the business plan before finding a partner and officially starting up in January 1997. Three months passed before the pair hired a single employee. Cobb made the rounds of venture forums and found supporters at the MIT Enterprise Forum and at events put on by the Massachusetts Software Council. Her business concept? To provide an intelligent solution for managing complex sales-commission schemes using software that would be marketed to companies that had outgrown their old spreadsheets. It was a solid concept but hardly sexy.

But then the Internet changed everything. By the summer of 1998, as Cobb signed up beta sites at companies like Baxter Healthcare Corp. and Jamba Juice Co., the potential of e-commerce was no longer in question. With companies of all types making a sales push over the Net, the issue of channel conflict reared its lucrative head. More than ever there seemed to be a pressing need for a sales-automation tool.

Suddenly, Incentive Systems was sitting on a gold mine. As Cobb closed on her second round of financing, in December 1998, she and her investors revised their market projection to upwards of $5 billion. But Cobb soon realized she couldn't be product guru, Web visionary, and chief executive. One of her investors and mentors, Bill Warner of Avid Technology Inc., had warned her she'd spend 30% of her time managing vice-presidents. He'd been right. "It started to get overwhelming," Cobb says. Was it time to hire an outside CEO?

For advice, she turned to friend J.J. Allaire, the 31-year-old chairman of Allaire Corp., in Cambridge, Mass. The young founder had quickly imported an experienced CEO once his company had received backing from Polaris. He assured Cobb it was one of the best moves he'd ever made. Allaire Corp., which sells Web-development tools, went public at $20 a share in January 1999 and at press time enjoyed a market cap of roughly $1 billion. Allaire's advice to Cobb? "Don't hire someone just like yourself."

Cobb didn't. In May 1999 she promoted CFO Byers to chief operating officer as a trial run. She wanted to give an insider a shot at the job. But he still had to prove himself to the board. As Cobb saw it, Byers had many things she herself lacked: years of experience with hiring managers, managing fast growth, raising money, preparing for an initial public offering, and handling mergers and acquisitions. And his skills had been honed at companies like Object Design, the #1 company on the 1994 Inc. 500. But making the jump from CFO to CEO? "I never thought it was in the cards," Byers says.

But that's exactly what happened. "The march started with Mike as CEO," Cobb says, referring to the trek everyone hopes will culminate in a successful IPO. And yet Byers's promotion was buried in a November 3, 1999, press release heralding Incentive Systems' launch into the bustling e-business marketplace.

These days, however, Byers is making headlines at the Bedford, Mass., company. For one thing, he has converted the company's beta sites into paying customers, to the tune of $5 million in sales, with an expected threefold increase this fiscal year. This past March he completed a $27-million round of financing.

Sitting down with her CEO one afternoon, Cobb glances appreciatively at Byers with a look that says, "If not me, then you -- and it's better that it's you." "Finance is what I know the least about," she admits, adding that "the demands of scaling are bigger than before."

Some changes have taken longer to adjust to. For example, it bothers Cobb that she's not always on the inside track anymore. "I have a high need to know what's going on," she says. "Usually, Mike and I talk daily, but sometimes a few days go by. But his office is right next door."

And she's struggled to relinquish her role as staff mediator. "It's hard to let go of a piece of it. You wonder, Will the people you brought on board accept the change OK?" However, many of the 75 employees have taken the changing of the guard in stride, she says. "Some people complimented me on my strength for having done this," she notes.

In simpler times, Cobb might have stayed on as CEO. "I knew the business model would keep changing," she says, "but the Web wasn't in the forefront of my mind as a channel that would cause more channel conflict. The Web accelerates the pace of everything." Including the need to raise lots of money.

These days it's Byers who greets potential investors and prestigious investment-banking firms. At board meetings he makes all the presentations, a role he loves. Cobb takes the chairman's seat and sits back to watch the show.

All along, she says, she couldn't see herself heading a public company. "When you're CEO of a public company, you're on all the time. This company is my third child but not my only child," she says. So she's done what good parents do -- let go -- though when she started the company she never dreamed her baby would be independent so fast.

Susan Greco is a senior writer at Inc.

Related resource: Guide to Executive Recruiting

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