The Founder’s Dilemma: Can Founders Make Good Long-Term CEOs?
December 3, 2021
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by Stephen Kanyi

Earlier this week Twitter and Square founder Jack Dorsey announced plans to step down as Twitter CEO for the second (and I hope final) time. He will be succeeded by Parag Agrawal who joined as an engineer in 2011 and then rose to CTO.

Jack, as characteristic of him, did not go ‘quietly into the night.’ He wrote an email that was some sort of an explanation (or justification) of his decision to step down. This was not a surprise; Jack is after all the innovator of what is essentially the global centre for gossip.  What is however more interesting are the contents of the email, in it he touched on a problem that has plagued the tech start-up scene since startups were a thing.

His email read:

There’s a lot of talk about the importance of a company being ‘founder-led,’” he wrote. “Ultimately I believe that’s severely limiting and a single point of failure. I’ve worked hard to ensure this company can break away from its founding and founders.”

I’m sure you have already digested the bone of contention in this statement, specifically this part: ‘the importance of a company being ‘founder-led.

He even adds: “it’s critical that a company can stand on its own, free of its founder’s influence or direction.”

This brings us to the crux of the matter that is the subject of this piece; the founder’s dilemma.

The Founder’s Dilemma

In the 90s, during the dot com bubble and the early 2000s, the common practice was for founders to start a revolutionary company, grow it and then bring what Reid Hoffman terms as “grey hair”, in the form of experienced executives, once it was time to scale the business.

He cites key examples such as Yahoo, Cisco, eBay, Google and I might also add Apple and now Twitter.  All these companies switched leadership from the founder to a seasoned executive once the company reached a period of hypergrowth. This was then, for most companies, followed by another period where these companies grew almost exponentially.

Recently, however, this practice has shifted, especially for consumer internet companies or more broadly, technology companies.

Rise of the Founders

Over the last decade and especially with the rise of Web 2.0 tech giants, a lot more companies are increasingly being led by their founders throughout their product lifecycle. Think of companies such as Amazon, Facebook (now Meta), Netflix and Airbnb. All of these companies have been led by their founders since they started to now, billion-dollar companies.

In fact, for Ben Horowitz co-founder of popular venture capital firm Andreessen Horowitz, most of the successful technology companies have been founder-led for much of their lifetime. They include:

  • Adobe—John Warnock
  • Amazon – Jeff Bezos
  • AMD—Jerry Sanders III
  • Apple – Steve Jobs
  • Dell—Michael Dell
  • EA – Trip Hawkins
  • Hewlett Packard – Dave Packard
  • Facebook (Meta) – Mark Zuckerberg
  • Microsoft – Bill Gates
  • Netflix – Reed Hastings
  • Oracle – Larry Ellison
  • Sony – Akio Morita
  • Tesla/ SpaceX – Elon Musk
  • Twitter – Jack Dorsey

And the list goes on.

The key point here is that founders seem to be doing pretty well in leading their companies to success.

The question however is whether this the norm or just an exception?

Well, according to a study that took into consideration 212 start-ups launched during the dot.com era, only 50% of founders were still in control of their companies three years after launching them. Only 40% of them were CEOs after four years of the launch while a paltry 25% were CEOs by the time of the company’s IPO.

Making a case for the Rockstar Founder

Despite these damning statistics many people vouch for and even aspire to be one of these rockstar founders.

This is after all the dream of every aspiring entrepreneur. To start and grow a world-class company.

For Ben Horowitz, the case for the founder is clear: “As we looked at the history of great technology companies, we discovered that founders ran an overwhelming majority of them for a very long time.”

He backs this statement with some data:

“First, the University of Pennsylvania’s Wharton School of Business just published an analysis of recent exits for high technology companies such as BlackBoard, BladeLogic, Concur, Danger, Liveperson, LogMeIn, and Netsuite. Looking across these nearly 50 companies, the study finds that founding CEOs consistently beat the professional CEOs on a broad range of metrics ranging from capital efficiency (amount of funding raised), time to exit, exit valuations, and return on investment.”

Basically, founder CEOs are better at running companies than executives. He cites three reasons for this.

  1. Comprehensive Knowledge
  2. Moral Authority
  3. Total Commitment to the Long Term

Comprehensive Knowledge

To create an innovative product that starts a company founders must fully comprehend the technology required, the market it operates in and the employees.

This knowledge, he explains is unique to innovators and cannot be replicated.

Moral Authority

True innovation requires one to throw out their foundational assumptions that are key in the present running of the company. This is difficult for most professional CEOs whose priority is to keep the company engine oil running.

Ben Horowitz gives a brilliant example of the record (music) industry. The whole industry was created by the invention of the vinyl record then transitioned to the CDs. However, most of the industry was unable to adapt to the internet.

Why?

“…. modern record company executives badly missed the most sweeping technical innovation—the Internet.  How was that possible? By the time the Internet arrived, all of the original founders of the record companies had been bought out, retired, or died. The new, professional CEOs were unwilling to let go of the most basic assumptions driving the cost structure of their businesses. Specifically, they wouldn’t give up their stranglehold on distribution and the value they placed on owning the recording.”

Compare this with Netflix whose founder Reed Hastings successfully and courageously I might add, transitioned from mailing DVDs to becoming the biggest online video streaming service in the world.

Total Commitment to the Long Term

Last but not least founding CEOs unlike executives take the long view of their companies. Most are willing to make sacrifices in the form of zero revenues or in Amazon’s case, losses in the order of millions of dollars pursuing long, rather than shorter-term goals.

Unlike professional CEOs who tend to be driven by relatively short-term goals, founder CEOs are willing to make bets that may take even decades to yield fruit.

Successful Professional CEOs: The Exception or the Norm?

Despite Eric’s strong argument though, the data still supports professional CEOs. Executives such as Eric Schmidt at Google and Tim Cook at Apple are evidence that the traditional model is still working.

Professional CEOs while not particularly good at creating new products, do outperform founders in maximizing existing product cycles. And this is what is needed once a company’s core products are already created.

Cisco’s John Morgridge is a good example.

“John took over as the company’s second CEO in 1988, a role he held until he became chairman in 1995. With John as CEO, Cisco grew from $5m to $1b in revenue and from 34 to 2,250 employees. He also took the company public in 1990.”

This is a trend that is seen in a majority of tech start-ups. Innovating a new product takes time and this is why seasoned CEOs who know how to get the most out of existing product cycles are crucial for success.

Conclusion

While the data supports professional CEOs, the role of founder CEOs cannot be denigrated. They are the true explorers who take the most risk sometimes with their own lives to benefit us all.

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