Question: Should a subsidiary, in startup mode, be led by an external CEO

Our group owns small to mid sized businesses in many verticals, with our core business in property management and storage spaces. A lot of our growth has come from M&A, and we have a fair understanding of what works for us.

We are trying to start a new business ground-up, based on our understanding of an underserved need, of our existing clients. We do not have any presence in this industry currently.

It feels like the competencies needed to lead this business will be very different in the first 2-3 years, Vs. what they will be once the business becomes profitable.

Should we hire an external candidate (from this industry) as CEO, or is it better to tap into one of our execs (with client familiarity)?

5 Expert Insights

My prior experience shows that both approaches work, depending on the circumstances.

If you need to build a business in a different vertical market, and that experience doesn't exist internally, you MUST find someone, even an interim CEO, who can step in and get things up and running quickly. They can take the new subsidiary to a stable level, and if you like what they have done, you can certainly keep them in charge (or promote from within, now that everything is in place). Minimizing risk and giving yourself a jump start is what you are doing with this approach.

If, on the other hand, the market isn't that different, and you can easily sell to your existing client base, then an experienced internal resource can be given the role, as long as they have what it takes to build a business from scratch. That's the real key here: Do you have someone with that kind of skill set? If you do, great! If not, don't set yourself up for failure. Get someone who has done this before and let them take on the role of business-builder.

Setting aside the fact that you may not have the right person available to do this in-house, or for that matter the required depth within existing teams to adequately support this new venture, my initial reaction would be to stick with internal resources for now. Three main reasons why:

- You mention that the new business answers a need of existing customers. Those customers know you and you know them. Leveraging existing talent should allow you to more easily maintain the relationship and culture that makes you successful with them today;

- You rightfully point out that the competencies needed to start and grow this business are likely different from those needed to manage it later in its growth. Consequently, this could mean hiring one person now, and potentially look for someone else down the line to take over post launch. I would favor having to do this only once, and look for the right profile once the business has legs, with a clearer perspective on true need at that time;

- Hiring a person from the outside will most likely lead to increased costs. You will need to attract someone to this new opportunity, and the new hire will likely want to build his/her team. Starting internally should enable you to minimize internal silos, leverage existing resources more fully, and build some synergies where possible as you develop the core knowledge needed for the new business.

Hope this helps.

Though I understand your desire to hire an outsider as a CEO so you can hit the ground running, it is important for you to get the support for that from other members of your management team. Without that who ever you hire could end up having problems and once the person is hired you will have no recourse.

To add to the comments from Michael Harden and Patrick Boulard:

You might think about the team of people you need to get this new business up and running. You will need more management than just a CEO. There is nothing ruling out bringing in an outside CEO with start up experience and an up and coming sales person from your organization who knows the customer base. Both of these people will be driven by the challenge. And the sales person from your organization will see this as a great opportunity to work in a start up, to be a key player in a high growth opportunity.

One caveat, since most successful start up leaders are good at sales and marketing, be careful to select people who will be supportive of each other. You don't want to hire a CEO whose skill set and leadership style will inevitably set up internal competition over who is the king of the sales hill. A strategy that might work well is to hire the CEO with the explicit understanding that the CEO will bring in one or more managers from your existing staff. This would require the new CEO to learn how your  group works, dig into the operations and culture, and make a good selection of managers to bring into the new company.

Well it sounds like your asking a couple of questions here. You have existing experience owning & successfully running multiple businesses. Congratulations.

You are now starting up a new business that you have no experience in but you feel has great potential. You state that it "feels" like you need 1 kind of CEO to start & grow the business & another to take it to the next level. Absolutely. Many businesses, both start up & mature, find it takes a different kind of CEO to "maintain" a business compared to "growing" a business. Likewise, an entrepreneurial mentality is required to lead the start up of a business while "professional" (aka experienced) management is better for taking it to the next level beyond the entrepreneurial one.

Part of the answer is in your question. You say you don't have the experience, even if you have the time with all of the other verticals you are serving. Search for a CEO with industry experience who is hungry for a chance at a fresh opportunity to blend with your broader experience. Set the  compensation in line with targets & goals and get out of the way!