Case Study: A Founder Steps Back from Her Start-Up

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Bzzt. Bzzt. Bzzt. Sitting on a bench in the dog park, Elena Pelc glanced at her phone. She’d hoped to escape from work for the morning, but as the founder and CEO of 2 Proud Pups, a maker of all-natural dog care products, she didn’t have much free time. She decided to ignore e-mail for a few more minutes. This was a rare outing with her pets, so she wanted to enjoy it.

Maggie, a yellow lab, was rolling on the ground. Broccoli, a black shepherd-husky mix, was sniffing a few other dogs. Elena smiled. These were her first and second babies, adopted just after she and her husband, Matthias, had gotten married. The business was her third baby: She’d launched it when the pups were a year old simply because she couldn’t find any high-quality shampoos for them on the market.

Existing products had touted their cleaning power, but their ingredient lists were long and full of nasty-sounding chemicals that irritated the dogs’ skin. So Elena had invested her savings to hire a chemist and create something better. They had mixed early batches in her kitchen, and she’d tested the solutions on herself first.

When the shampoo was ready, she’d started selling it to local retailers and developing a loyal customer base. Over the next six years she’d hired a few staffers and added several more all-natural products, such as conditioner and toothpaste. The line was now carried by more than 1,000 independent pet stores nationwide plus a few regional chains.

Elena had managed this growth without taking on any outside investors; she’d relied on bank loans and continued to invest her own money in the business. But she felt at a crossroads. Although her products were selling well, revenues had plateaued at about $1 million annually. She didn’t think she could take 2 Proud Pups any further, and now she had a real baby on the way. Seven months pregnant and feeling a little burned out from years of 24/7 work, she needed—and wanted—a change. She was ready to step down as CEO and possibly to sell the company. But after months of research and meetings, she still hadn’t found the right successor or buyer.

Bzzt. Elena looked at her phone again: three more e-mails and texts. It was time to get back to the office. She eased onto her feet and whistled to the dogs. “Broccoli! Maggie! Time to go!”

New CEO, New Company?

Walking into the 2 Proud Pups office, Elena unleashed her dogs and greeted Kelly, an employee of three years. “How’s today’s delivery coming?” Elena asked.

“Almost done,” Kelly said. “I told them I’d be there this afternoon.”

“Great. Thanks.” Elena glanced at the time. “Shoot—I have a call now.”

Kelly’s smile dimmed. “Another interview for a new you?”

“Yes.” Elena sighed. “But this is a really strong candidate.”

She walked into her office. On her desk was a pile of résumés from CEO candidates who’d responded to a listing she’d posted on a small business sale website. Clipped to each one, at Elena’s request, was a photo of the applicant’s dog.

She’d spoken to all of them by phone, but only one seemed close to a good fit: Christine Reed, a 35-year-old MBA whose previous experience included stints at a cosmetics start-up and a global consumer products company. They’d already met for coffee, and Elena liked her—and her bulldog, Rembrandt, who’d joined them at the café. She and Christine had discussed the history of 2 Proud Pups, its financials, and the terms under which a new CEO might join the firm.

Backed by an investor with whom she’d worked before, Christine was ready to take a 40% equity stake. She would accept the same modest salary Elena had been earning and would accrue more shares each year. Elena had hoped to divest a larger chunk of her holdings—she and Matthias were keen to buy a bigger house and set up a college fund for the baby—but she also liked the idea of remaining the majority shareholder in the company even as she ceded day-to-day control.

It made sense on paper. Christine was smart and dynamic and seemed passionate about 2 Proud Pups. Her references had raved about her. But Elena couldn’t help feeling that something was missing—hence the follow-up call.

“Thanks for taking the time to chat with me again,” Elena said.

“Happy to!” Christine replied. “I’m excited about this opportunity.”

“That’s good to hear,” Elena said. “As you can probably tell, I feel really protective of the 2 Proud Pups brand. One challenge with a new CEO would be maintaining all the relationships we have with suppliers, customers, and stores. How would you handle that?”

“Honestly, I love making new connections. Ideally, I’d shadow you for a month to meet all the key contacts, and then I’d keep up with calls and visits. I’d assure them that 2 Proud Pups will be business as usual.”

“But I can’t help wondering—will it be business as usual? Last time, when we discussed where you want to take the company in the future, you mentioned targeting Amazon and Whole Foods, Chewy.com, and Petco.”

“Well, if the idea is to put it on a growth trajectory, I think we’d have to go after those big players. It would be a multiyear strategy, and we might need outside investment. But I think we could accomplish it while maintaining existing distribution.”

She paused. “But Elena, this obviously only works if we’re on the same page. The deal we discussed would make us partners, even if you’re stepping down from management. You’d have to trust me to take the company where it needs to go.”

Elena felt a little queasy. Christine’s vision for the company did sound promising from a financial standpoint, but it just wasn’t the 2 Proud Pups that Elena knew. Still, she tried to hide her discomfort. “This search is all about finding someone who will bring a different perspective to the business, and it’s clear you can do that. But this is a big step for me, so I hope you can understand if I take some time with it.”

“Of course,” Christine replied. “Just know that I’m ready when you are.”

To Sell or Not to Sell?

Elena left her office deep in thought.

“How was the call?” Kelly asked.

“It’s hard to pick your own replacement,” Elena said.

“That’s because no one can replace you!” Kelly replied, grinning.

“That’s nice of you. But maybe a pregnant me—or a new-mom me—isn’t what the company needs right now. Selling to a competitor actually seems easier. It feels less personal.”

“Which one?” Kelly asked warily.

“There are a few options,” Elena answered noncommittally. The truth was she’d been in talks with Doghouse Luxe, a luxury dog food specialist, for the past two weeks. But its CEO, Rajeev Gupta, an impressive guy who’d been installed by the company’s private equity owners, had asked her to keep the negotiations confidential.

The Doghouse philosophy was similar to 2 Proud Pups’, but its business model was different. While Pups sold its products mainly through stores, Doghouse had an award-winning website and sold mostly direct to consumers. Rajeev had offered Elena a cash buyout and 10% of the merged entity. The deal would give her a cleaner break from her company and a much larger payout. Rajeev’s firm seemed to have a terrific track record of rolling up small businesses into larger, more successful ones. Still, the idea of having little or no influence over her brand going forward was tough to stomach.

Elena sat on a box, and Maggie padded over to lick her hand. “Where’s the delivery going, again?”

“Pete’s. I was about to head over.”

“Actually, why don’t I do it?” Elena said. “I’d like to talk to Pete.”

Kelly hauled the boxes into the 2 Proud Pups van, since Elena couldn’t do much heavy lifting these days. Pete’s Pet Shop, across town, was a city institution, named for its founder—a beloved curmudgeon who adored animals and tolerated humans. When Elena parked at the rear and lightly tapped her horn, Pete appeared.

“Well, hello, Elena,” he said gruffly. “What’s this I hear about you selling to Doghouse Luxe?”

Elena grimaced. “It’s just an idea, Pete. How did you know?”

“Word gets around. Especially when us independents are worried. You can’t sell to them, Elena. Their whole business is designed to eliminate us.”

“Actually, the idea is to sell all the products through all channels—in stores and online. A merger would mean 2 Proud Pups reaching more pets. You know I want what’s best for you guys and for the animals.”

“But your products are better than theirs. That’s why I took a chance on you way back when and stuck by you when others jumped on the all-natural bandwagon. Your shampoo is the only one my dogs will sit for. Can you promise me that Doghouse won’t change the ingredients to cut costs?”

“How are those dogs?” Elena asked, trying to change the subject.

Pete smiled briefly. “The same—always getting into trouble.” Then he frowned. “I guess Doghouse is better than you defecting to Petco or Chewy. We certainly don’t want to carry the same stuff as those soulless giants. But it still doesn’t sit right with me. We trust you, Elena, and there’s nothing wrong with staying small. Do let me know what your plans are once you make them. I’m uneasy about this.”

“Believe me, Pete,” she replied, “I know the feeling.”

The Better of Two Bad Options

On her way home that night, Elena got takeout, which she and Matthias ate on the back porch with the dogs. She quickly recapped the day’s conversations.

“And you’re sure you want to step down?” Matthias asked. “If both options for the company are bumming you out, we can make it work—even after the baby arrives.”

Elena squeezed his hand with one of hers while holding the other to her belly. “You’re sweet. But I think I’ve given 2 Proud Pups as much as I can for now, and I’d like to rest and be a mom for a little bit. The timing feels right; it’s just that neither option does. I guess you’re never excited to leave your life’s work behind.”

She looked down at Maggie and Broccoli. “What do you think, pups? Who’s the best person to take our little company into the future?”