Why Uber can be the revenge of the founders

Today, we take for granted brand-new apps in addition to devices connected to the internet of things appearing seemingly overnight in addition to reaching tens of millions of users – in addition to just as quickly falling out of favor. yet within the 20th century, dominated by hardware in addition to software, technology swings inside an existing market happened slowly — taking years, not months. in addition to while brand-new markets were created (i.e. the desktop PC market), they were relatively infrequent.

This kind of meant of which disposing of the founder, in addition to the startup culture responsible for the initial innovation, didn’t hurt a company’s short-term or even mid-term prospects. A company could go public on its initial wave of innovation, then coast on its current technology for years. In This kind of business environment, hiring a brand-new CEO who had experience growing a company around 1 technical innovation was a rational decision for venture investors.

However, almost like clockwork, the inevitable next cycle of technology innovation would certainly catch these at This kind of point-public startups in addition to their boards by surprise. Because the brand-new CEO had built a team capable of in addition to comfortable with executing an existing business design, the company would certainly fail or get acquired. Since the initial venture investors had cashed out by selling their stock over the first few years, they had no long-term interest in This kind of outcome.

Not every startup ended up This kind of way. Bill Hewlett in addition to David Packard got to learn on the job. So did Bob Noyce in addition to Gordon Moore at Intel. yet the majority of technology companies of which went public circa 1979 to 2009, with professional VCs as their investors, faced This kind of challenge.

Founders within the driver’s seat

So how did we go via VCs discarding founders to founders at This kind of point running large companies? Seven major adjustments occurred:

1. the idea became OK to go public or get acquired without profit (or even revenue)

In 1995 Netscape changed the rules about going public. A little more than a year old, the company in addition to its 24-year-old founder hired an experienced CEO, yet then did something no some other tech company had ever done – the idea went public with no profit. Laugh all you want, yet at the time This kind of was unheard of for a tech company. Netscape’s blow-out IPO launched the dot-com boom. Suddenly tech companies were valued on what they might someday deliver. (Today’s variation can be Tesla – at This kind of point more valuable than Ford.)

This kind of means of which liquidity for today’s investors often doesn’t require the long, patient scaling of a profitable company. While 20th century metrics were revenue in addition to profit, today the idea’s common for companies to get acquired for their user base. (Facebook’s approximately $20 billion acquisition of WhatsApp, a 5-year-old startup of which had $10 million in revenue, made no sense until you realized of which Facebook was paying to acquire 300 million brand-new users.)

2. Information can be everywhere

within the 20th century learning the best practices of a startup CEO was limited by your coffee bandwidth. of which can be, you learned best practices via your board in addition to by having coffee with some other, more experienced CEOs. Today, every founder can read all there can be to know about running a startup online. Incubators in addition to accelerators like Y-Combinator have institutionalized experiential training in best practices (product-market fit, pivots, agile development, etc.); provide experienced in addition to hands-on mentorship; in addition to offer a growing network of founding CEOs. The result can be of which today’s CEOs have exponentially more information than their predecessors. This kind of can be ironically part of the problem. Reading about, hearing about in addition to learning about how to build a successful company can be not the same as having done the idea. As we’ll see, information does not mean experience, maturity or wisdom.

3. Technology cycles have compressed

The pace of technology change within the second decade of the 21st century can be relentless. the idea’s hard to think of a hardware, software or life science technology of which dominates its space for years. of which means brand-new companies are at risk of continuous disruption before their investors can cash out.

To stay in business within the 21st century, startups do four things their 20th century counterparts didn’t:

  • A company can be no longer built on 1 innovation. the idea needs to be continuously innovating – in addition to who best to do of which? The founders.
  • To continually innovate, companies need to operate at startup speed in addition to cycle time much longer their 20th century counterparts did. This kind of requires retaining a startup culture for years – in addition to who best to do of which? The founders.
  • Continuous innovation requires the imagination in addition to courage to challenge the initial hypotheses of your current business design (channel, cost, customers, products, supply chain, etc.) This kind of might mean competing with in addition to if necessary killing your own products. (Think of the relentless cycle of iPod then iPhone innovation.) Professional CEOs who excel at growing existing businesses find This kind of extremely hard. So who best to do the idea? The founders.
  • Finally, 20th century startups fired the innovators/founders when they scaled. Today, they need these visionaries to stay with the company to keep up with the innovation cycle. in addition to given of which acquisition can be a potential for many startups, corporate acquirers often look for startups of which can help them continually innovate by creating brand-new products in addition to markets.

4. Founder-friendly VCs

A 20th century VC was likely to have an MBA or finance background. A few, like John Doerr at Kleiner Perkins in addition to Don Valentine at Sequoia, had operating experience in a large tech company, yet none had actually started off a company. Out of the dot-com rubble at the turn of the 21st century, brand-new VCs entered the game – This kind of time with startup experience. The watershed moment was in 2009 when the co-founder of Netscape, Marc Andreessen, formed a venture firm in addition to started off to invest in founders with the goal of teaching them how to be CEOs for the long term. Andreessen realized of which the game had changed. Continuous innovation was here to stay in addition to only founders – not hired execs – could play in addition to win. Founder-friendly became a competitive advantage for his firm Andreessen Horowitz. In a seller’s market, some other VCs adopted This kind of “invest within the founder” strategy.

5. Unicorns created a seller’s market

Private companies with market capitalization over a billion dollars – called unicorns – were unheard of within the first decade of the 21st century. Today there are close to 0. VCs with large funds (more than approximately $0 million) need investments in unicorns to make their own business design work.

While the number of traditional VC firms have shrunk since the peak of the dot-com bubble, the number of funds chasing deals have grown. Angel in addition to seed funds have usurped the role of what used to be Series A investments. in addition to in later stage rounds an explosion of corporate VCs in addition to hedge funds at This kind of point want in to the next unicorns.

A rough calculation says of which a VC firm needs to return four times its fund size to be thought of as a great firm. Therefore, a VC that has a $250 million fund — 5 times the size of an average VC fund 40 years ago — would certainly need to return $1 billion. yet VCs own only approximately 15 percent of a startup when the idea gets sold or goes public (the numbers vary widely). Just doing the math, $1 billion divided by 15 percent means of which the VC fund needs $6.6 billion of exits to make of which 4x return. The cold hard math of “large funds need large exits” can be why VCs have been trapped into literally begging to get into unicorn deals.

6. Founders take money off the table

within the 20th century the only way the founder made any money, some other than their salary, was when the company went public or got sold. The founders along with all the some other employees would certainly vest their stock over four years, earning one-forty-eighth a month. They had to hang around at least a year to get the first quarter of their stock (This kind of was called the “cliff”). Today, these are no longer hard in addition to fast rules. Some founders have three-year vesting. Some have no cliff. in addition to some have specific deals about what happens if they’re fired, demoted or the company can be sold.

within the last decade, as the time startups have spent staying private has grown longer, secondary markets – where people can buy in addition to sell pre-IPO stock — have emerged. This kind of often can be a way for founders in addition to early employees to turn some of their stock into cash before an IPO or sale of company.

One last yet very important change of which guarantees founders can cash out early can be “founder-friendly stock.” This kind of allows founder(s) to sell part of their stock (approximately 10 to 33 percent) in a future round of financing. This kind of means the company doesn’t get money via brand-new investors, yet instead the idea goes to the founder. The rationale can be of which since companies are taking longer to achieve liquidity, giving the founders some returns early makes them more willing to stick around in addition to better able to make bets for the long-term health of the company.

7. Founders take control of the board

With more VCs chasing a tiny pool of great deals, in addition to all VCs professing to be the founder’s best friend, there’s an arms race to be the friendliest. Almost overnight the position of venture capitalist dictating the terms of the deal has disappeared — at least for “hot” deals.

Traditionally, in exchange for giving the company money, investors would certainly receive preferred stock, in addition to founders in addition to employees owned common stock. Preferred stock had specific provisions of which gave investors control over when to sell the company or take the idea public, hiring in addition to firing the founder etc. VCs are giving up these rights to get to invest in unicorns.

Founders are taking control of the board by generating the common stock the founders own more powerful. Some startups create two classes of common stock with each share of the founders’ class of common stock having 10 to 20 votes. Founders can at This kind of point outvote the preferred stock holders — the investors. Another method for founder control has the board seats held by the common shareholders — the founders — count two to 5 times more than the investors’ preferred shares. Finally, investors are giving up protective voting control provisions such as when in addition to if to raise more money, the right to invest in subsequent rounds, who to raise the idea via in addition to how in addition to when to sell the company or take the idea public. This kind of means liquidity for the investors can be at This kind of point beholden to the whims of the founders. in addition to because they control votes on the board, the founders can’t be removed. This kind of can be a remarkable turnabout.

In some cases, 21st century VCs have been relegated to passive investors or board observers.

in addition to This kind of advent of founders’ control of their company’s board can be a key reason why many of these large technology companies look like they’re out of control. They are.

The gift in addition to curse of visionary CEOs

Startups run by visionaries break rules, flout the law in addition to upend the status quo (Apple, Uber, Airbnb, Tesla, Theranos, etc.). Doing something of which some other people consider insanity/impossible requires equal parts narcissism in addition to a messianic view of technological transformation.

Bad CEO behavior in addition to successful startups have always overlapped. Steve Jobs, Larry Ellison in addition to Tom Seibel all had the gift in addition to curse of a visionary CEO – they could see the future as clearly as others could see the present. Because they saw the idea with such clarity, the reality of having to depend on some other people to build something revolutionary was frustrating. in addition to woe to the employee who got in their way of delivering the future.

Visionary CEOs have always been the face of their company, yet today with social media, the idea happens faster that has a much larger audience; boards at This kind of point must consider what would certainly happen to the valuation of the company without the founder.

With founders at This kind of point in control of unicorn boards, with money in their pockets in addition to the press heralding them as geniuses transforming the earth, founder hubris in addition to bad behavior should be no surprise. Before social media connected billions of people, bad behavior stayed behind closed doors. In today’s connected social world, instant messages in addition to shared videos have broken down the doors.

The revenge of the founders – founding CEOs acting badly

So why do boards of unicorns like Uber, Zenefits, Tanium, or Lending Club let their CEOs stay?

Before the rapid rise of Unicorns, when boards were still in control, they “encouraged” the hiring of “adult supervision” of the founders. Three years after Google started off they hired Eric Schmidt as CEO. Schmidt had been the CEO of Novell in addition to previously CTO of Sun Microsystems. Four years after Facebook started off they hired Sheryl Sandberg as the COO. Sandberg had been the vice president of global online sales in addition to operations. Today unicorn boards have a lot less leverage.

  1. VCs sit on 5 to 10 or more boards. of which means most VCs have very little insight into the day-to-day operation of a startup. Bad behavior often goes unnoticed until the idea does damage.
  2. The traditional checks in addition to balances provided by a startup board have been abrogated in exchange for access to a hot deal.
  3. As VC incentives are aligned to own as much of a successful company as possible, getting into a conflict that has a founder who can at This kind of point prevent VC’s via investing within the next round can be not within the VCs interest.
  4. Financial in addition to legal control of startups has given way to polite moral suasion as founders at This kind of point control unicorns.
  5. As long as the CEO’s behavior affects their employees not their customers or valuation, VCs often turn a blind eye.
  6. Not only can be there no financial incentive for the board to control unicorn CEO behavior, often there can be a downside in trying to do so

The surprise should not be how many unicorn CEOs act badly, yet how many still behave well.

This kind of post was originally published on Blank’s blog on Oct. 24.

Steve Blank can be an entrepreneur, author in addition to professor. Blank has delivered talks on “The Secret History of Silicon Valley” in addition to has been named among Forbes’ 30 most influential people in tech.

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