If there is a trend in the corporate boardroom in recent months it is the unusually prominent recall of founders (or dominant CEOs) to companies they left suffering at the hands of replacement or “professional” CEOs brought in by the same board members.
Michael Dell and Jerry Yang are only the most recent names in a surprisingly long list of glorious founders who returned from exile. It seems like only yesterday that the most glorious of all founder exiles returned to Cupertino riding a white personal computer straight into a corporate renaissance, along the way giving great hope to technology founders whose mischievous boards had also ejected them as too “entrepreneurial” to manage a transition into a large successful company.
Has it really been 10 years since he-who-must-not-be-named-in-a-stock-option-scandal rode in from NeXT to save Apple? Indeed it has, and the Valley is celebrating this year by buying more than just iPods.
By golly, do something
It is a foregone conclusion among venture capital boards that CEO replacement is the single most effective application of the oft-vaunted “value-add” that an investor can bring to the corporate governance of a growing company. The premise is simple: Few entrepreneurial founders—those creative and impetuous souls who dream big and achieve the impossible—are able to successfully transition from the early days of company-building to the role of Big Company CEO.
Leading a highly complex and profitable organization with institutional investors and Wall Street analysts as constituents is fundamentally different from leading a startup with dreamy-eyed venture capitalists and early employees. This audience (disappointingly for most founders) cares more about profits and less about vision. Faced with this rapid transition, few entrepreneurs, as the argument goes, are able to adapt to the changing environment and it is the duty of the board to ensure the growth of the company by decisively replacing founders with a “suit” better able to navigate the next stage of company growth.
The number of technology company founders successfully able to make such a transition (Bill Gates, Andy Grove and Larry Ellison come to mind) is limited in fact to few more than these legendary names. One needs only to look at the dead bodies of the Oracle-heir-apparent graveyard to know that sometimes not even board members can force a CEO change
What can VCs learn from Dell and Yahoo? For one, just because you have a loaded gun doesn’t mean you should pull the trigger.”
Bart Schachter and George Hoyem, Managing Directors, Blueprint Ventures
So the board acts (although never with enough alacrity).The rationale is once-again simple: Allow the company to escape its entrepreneurial straightjacket and move rapidly toward its next development phase. But could this strategy be misguided or occasionally just plain wrong?
Certainly, it would explain why the two prominent returns of 2007, Dell and Yang, were summoned back only a few short years after their boards fêted the recruitment of next-generation managers. Dell celebrated his partnership with Kevin Rollins in more than mainstream media. A 2005 Harvard Business Review article featured an extensive analysis of his relationship with the man he helped hire as a replacement for himself in his namesake company.
Just months after Dell took back the reins at Dell, Yang volunteered to do the same at Yahoo. Like Jobs before them, both returned to lead the companies they created 10 or 20 years before. But unlike Jobs, Dell and Yang didn’t complete their exile all the way to the rivers of Babylon. Both stayed on, continuing to contribute to the companies whose DNA they not only shared but created.
A look at Yahoo’s management succession could be instructional if not prophetic for venture capital boards tempted to effect change. Yang turned over the CEO reins early on to Tim Koogle in 1995, but he retained the C-level role of Chief Yahoo. Koogle was ousted in 2001 as the board sought to diversify a business model that was overly dependent on advertising (sound familiar?).
Of Late, Yahoo’s performance was linked to that of Hollywood mogul Terry Semel, whose face continued to be celebrated on the covers of national business magazines even as his company effectively began to follow the march of AOL into Internet irrelevance. The PR mythology extolled the virtues of an entertainment leader (who else to deliver a live Tom Cruise appearance at the Consumer Electronics Show in Las Vegas last year?) descended from Mount Hollywood to the Valley of Silicon to transform a classic Web 1.0 business into something grander (drum roll please): an entertainment company.
Meanwhile, Yang, last seen sleeping under his desk when the company was still small, had mostly disappeared from external visibility. Somewhat suddenly, Yahoo celebrated the dropping of the CEO guillotine upon its renowned CEO and Yang’s return to the helm. What happened at Yahoo might give pause to those advocating large-impact CEO changes.
A look at Yahoo’s management succession could be instructional if not prophetic for venture capital boards tempted to effect change.”
Bart Schachter and George Hoyem, Managing Directors, Blueprint Ventures
Some think the beginning of the end was Semel’s $230 million compensation package in 2005, which led to a shareholder uprising and ultimately his resignation. Yes, Semel subsequently “trued down” to a $1-per-year package, the same compensation that Jobs and Google’s Eric Schmidt famously took as their own.
But the salary savings barely offset “Yahoo South,” the Burbank campus purpose-built to either bring the company closer to Hollywood or, more cynically, its CEO closer to his office. Semel pocketed $500 million for his four to five years of work and a mere 5% annual stock appreciation, a hair more than a sub-prime mortgage over the same period. More importantly, while Semel was schmoozing Hollywood, along came Google to school him on a business model built on Yahoo’s roots: search and advertising.
How will the Yahoo story end? It’s too early to tell. Will Jerry be the next Steve? Unlikely. Perhaps he has passion and alignment, but not Jobs’ force of will. How will the Dell story end? Most likely with a victorious Michael. It is his company, and just like Phil Knight booted Bill Perez when he didn’t like where the new guy was taking Nike, Dell still has the grit to get his company back on course.
While we speculate about the fate and fortune of two PC and Internet pioneers, what of Gates and Microsoft? How long until a call from Redmond summons back that other famous founder? At what point does the virtue of saving the third world from killer diseases fall prey to the virtue of saving Microsoft from killer competitors. After all, many Microsofties would kill to have Semel’s stock performance at Yahoo. Their own shares stand flat over a 10-year period!
What can VCs learn from Dell and Yahoo? For one, just because you have a loaded gun doesn’t mean you should pull the trigger. Changes at both Yahoo and Dell were necessary, but the talent brought to replace or augment the founders did more harm than good. Some might point to eBay’s Meg Whitman and others as counterpoints. She was one “suit” well able to take the helm from founders and lead the company to the next level. Ditto for Microsoft. At least for a while.
Most often, founder-replacements are necessary and venture investors should plan on them along with the first term sheet. A cynic might say the lesson here is that, if you’re going to use that gun, you better shoot to kill. Otherwise, those founders will come back to haunt you.
Bart Schachter and George Hoyem are managing directors with Blueprint Ventures, an investment firm that focuses on capital efficient technology startups and Corporate IP Spinouts. They may be reached at email@example.com and firstname.lastname@example.org.
What do these men have in common?
(Hint: It’s not just stock option scandals.)
Paul Allaire, Xerox
Jeffrey Citron, Vonage
Michael Dell, Dell
Steve Jobs, Apple
Phil Knight, Nike
Henry Schacht, Lucent
Charles Schwab, Schwab
Ted Waitt, Gateway
Jerry Yang, Yahoo