Why you should care
Because what if an annoyed investor canned the next Zuckerberg?
A major startup adage: Founders and CEOs have vision but may lack management skills. They start companies out of passion and then begin to flail when the nitty-gritty of handling people and the day-to-day begins. Which is why, as a startup expands into a full-fledged company, “professional” managers enter the picture, shouldering the actual business of getting shit done while the founder remains up in the visionary clouds.
That’s not exactly the thinking these days among those controlling the purse strings of venture money, however. Take Ben Horowitz of prestigious venture firm Andreessen Horowitz, who’d rather invest in a founder-led company — and he has a billion-dollar list of reasons why: Facebook, Salesforce, Microsoft, Motorola. Studies trying to put numbers to this pop up every once in a while, like this 2010 Wharton analysis of exits. The latest: data collected specifically on IPOs and M&A exits by TriplePoint Ventures president Ben Narasin and Kleiner Perkins Caufield & Byers general partner Michael Abbott.
Their findings revealed that companies led by their founders created more than
as much value as those with mercenary managers when it came to raising money.
And in IPOs, founders resulted in between 1.5 and two times the mean valuations. The reasoning here is clear enough: It’s not just that founders have the passion, but also that managers can face “huge, huge resistance as they try to exert moral authority” over a team that might have been there five or 10 years longer, says Narasin. “Replacing the founder should be the absolute nuclear option,” he adds.
That thinking is less intuitive than you’d think — see influential startup thought leader Noam Wasserman of Harvard Business School’s 2008 study showing that by the third year of a company’s existence, only half of founders were still acting as CEO; that number shrunk to 40 percent by the fourth year. Indeed, while companies stay private for longer, VCs are more likely to mess around with leadership than boards of public companies; shareholders and therefore the market aren’t in danger of responding with volatility in response, and at an early stage, more possibilities seem open, Narasin says.
But if Narasin’s (and Horowitz’s) thinking is catching on — the replace-the-founder practice is “becoming less aggressive,” Narasin says — will those numbers keep going up? Maybe, but we may be transitioning instead to more of a world of managers and founders in delicate partnerships. That’s often the ideal and a necessity, says Seattle-based Madrona Venture Group partner Matt McIlwain. McIlwain adds that in the crucial partnership between investor and founder, sometimes a joint decision out of a “trust-based relationship” (read: occasionally muscle-induced) for the founder to self-replace is necessary. That’s exactly what Reid Hoffman, LinkedIn cofounder, has suggested, as he wrote on his blog. He did it himself. And McIlwain has some examples: Eric Schmidt joining the Google team, Sheryl Sandberg helping to get Facebook on track.
Narasin, for his part, has his own experience whispering in his ear — from when he ran a public company. “I know for certain I would have been fired” by venture investors, he says. “And, I know for certain that if that had happened, we would have lost all our money.”