Friday, June 11, 2010

Firing Founders: Mostly A Bad Idea

steve jobs co founder of apple computerImage by Annie Bannanie 09 via Flickr
Because-I-can is not a wise use of power.

My first disagreement with Fred Wilson, expressed at some third party blog, about a year ago, was with his assertion that there was too much money in the venture capital business. I find tremendous overlap between his and my thought processes most of the time, and I respect him as a person through our disagreements, and I sure admire his work, but I think I just came across my second major disagreement with Fred.

Fred Wilson: Parting Ways With A Founding Team Member

Fat Can Work, But Lean More Often Does

I am going to paraphrase my summary statement from an earlier debate where I was on Fred's side: firing a founder can sometimes become necessary, but that has to be the exception rather than the norm. Fred seems to think that has to be the norm.
If I look back at our most successful investments over the almost 25 years that I have been in the venture capital business, almost every single one of them has seen a founder or critical founding team member shown the door as the company scaled. It's almost inevitable.
And here Chris Dixon and I seem to stand shoulder to shoulder. I have disagreed with Chris before, fundamentally: Chris Dixon On Twitter: Not Impressive.
(W)ow, Fred, I've never disagreed with one of your posts as much as I do (with) this one. (U)nless a cofounder is deliberately underperforming or engaging in terrible behavior etc you should never fire him/her. (P)ut them in a different role or something if they can't manage/scale.
There are a few things Fred is right about. One, that letting go of an early team member is not easy. And he has put in a lot of sense into how to do it. If you do have to let go a cofounder, do it right. Do it fast, and be generous in the process.
I am in favor of vesting more stock than is contractually obligated to be vested. And severance so the person can take some time and decompress is another way to be generous. Most of all, be generous with the way you talk about the person's contributions. Call them a founder if they are a founder. Recognize their contributions both internally and externally and continue to do so. And help them find another situation where they can work their magic again.
What he has not talked about enough although he has touched upon it is the circumstances in which the cofounder has to let go. He makes it sound like this has to be routine practice, and I find that alarming.
Fred, I guess I see your point to an extent, I can see some instances where a cofounder might need to go. But I'd see your side better if you were to also talk of instances where a founder's departure was a really bad idea. Famous example: Steve Jobs and Apple. A recent example and close to your home: Etsy. Sometimes a charismatic cofounder might be "did in" just because he/she was not adept at the smoke room politics of a big team.
And he has not talked about the alternate which Chris Dixon touches upon. There are alternatives to let go. You could create a new, smaller role for that early team member.

My argument is not that this firing should never happen. I am suggesting this has to be rare, and there has to be a healthy debate as to what the circumstances would be that would warrant such a let go.

Severely diluting angel investors and mercilessly kicking out early team members is not venture capitalism, it is vulture capitalism. All the top tech companies of today have had their founders intact. Sometimes venture capitalists kill or stunt the growth and promise of companies they invest in with their unwise use of power: because-I-can.

Mozart died an early death because he was a creative genius who could not have been adept at the brute force ways of the dumb people around him.

Steve Jobs getting fired by Apple was a terribly bad idea. I have been angry at that Pepsi guy this entire time, and I am someone who has never bought an Apple product. A recent example close at home: why was the Etsy founder brought back? It is a DNA thing. There are people who are good at managing, and good at managing at big scales, and are good at scaling, but they lack the DNA, and that is why they did not start the company they now work for. It is tempting to give all the power to those technocrats, but that can be defeating. You trade muscle for essential DNA.
The Daily Beast: John Sculley On Why He Fired Steve Jobs: “I haven’t spoken to Steve in 20-odd years,” Sculley tells The Daily Beast. “Even though he still doesn’t speak to me, and I expect he never will..."
On that note, I am for a much simpler, transparent formula for the investment climate. That probably is another blog post.

Paul Allen left early for health reasons. Bob Miner was not fired by Larry Ellison, he left on his own. Steve Wozniak, it can be argued, did not scale either. These incidents do not prove Fred Wilson's point, they only disprove another of his pet points, that a company must have a Co-Founder. That is my third major disagreement with Fred. Every historic company has had this one key, indispensable member. That second person was a junior member, an early member, but not a Co-Founder. Companies are not founded by Siamese twins. But, again, that would be another blog post altogether.
Ben Horowitz: Why We Prefer Founding CEOs: The conventional wisdom says a startup CEO should make way for a professional CEO once the company has achieved product-market fit. .... The macro reason: that’s the way most of the great technology companies have been built ..... 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. ..... why are great technology companies so often run by their founders? And why do professional CEOs sometimes succeed? ...... Professional CEOs are effective at maximizing, but not finding, product cycles. Conversely, founding CEOs are excellent at finding, but not maximizing, product cycles. Our experience shows—and the data supports—that teaching a founding CEO how to maximize the product cycle is easier than teaching the professional CEO how to find the new product cycle....... innovation is the most difficult core competency to build in any business. Innovation is almost insane by definition: most people view any truly innovative idea as stupid, because if it was a good idea, somebody would have already done it. So, the innovator is guaranteed to have more natural initial detractors than followers. ........ the founder’s courage to innovate despite the doubters. ....... Comprehensive knowledge .. Moral authority .. Total commitment to the long-term ..... Great founding CEOs tend to have all three and professional CEOs often lack them. ...... This knowledge is nearly impossible to replicate. Without it, thoughtful people lack the courage to bet the company on entirely new directions......eems totally natural that Larry Ellison transformed Software Development Labs from a consulting business into a software company called Oracle ....... An excellent example of existing, invalid assumptions paralyzing a whole set of companies recently played out in the music industry. ...... Despite this dynamic history, 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........They were proficient at running the current business, but lacked both the courage and the moral authority to jeopardize the old business model by embracing the new technology. ...... Hastings wasn’t married to the old distribution model precisely because he invented it. ...... Any serious innovation requires a heavy investment. Beyond the up-front cash, costs may include lower growth, bad publicity, and internal grumbling as existing features atrophy. Recently, we’ve seen Facebook’s founding CEO Mark Zuckerberg make a series long-term bets........
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