When my partner Marc wrote his post describing our firm, the most controversial component of our investment strategy was our preference for founding CEOs. The conventional wisdom says a startup CEO should make way for a professional CEO once the company has achieved product-market fit. In this post, I describe why we prefer to fund companies whose founder will run the company as its CEO.
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, including:
Amazon – Jeff Bezos
AMD—Jerry Sanders III
Apple – Steve Jobs
EDS —Ross Perot
IBM—Thomas Watson, Sr. (*)
Intel—Andy Grove (*)
Microsoft —Bill Gates
(*) While not technically cofounders, Andy Grove and Thomas Watson, Sr. were the driving force behind Intel and IBM, respectively. Andy Grove was Intel’s third employee (after the two cofounders Robert Noyce and Gordon E. Moore). Thomas Watson, Sr. joined as a General Manager of the Computing Tabulating Recording Company, but renamed the company International Business Machines and turned it into the IBM we recognize today.
In addition, founders run today’s most promising new companies such as Zynga (Mark Pincus), Facebook (Mark Zuckerberg), Twitter (Ev Williams), Workday (Dave Duffield and Aneel Bhusri) and Fusion-io (David Flynn).
There are certainly exceptions to this rule, most notably Google and Cisco (I will address both exceptions later in this post), but the evidence is one-sided and overwhelming.
The underlying reasons
The reason is that 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.
Steve Jobs’ return to Apple provides an excellent example. At the time Jobs regained control of Apple, the conventional wisdom said that Apple was getting killed by “PC Economics” and had to separate the operating system from the hardware. Specifically, Apple couldn’t compete with Microsoft unless it became more horizontal and let commodity hardware manufactures compete while Apple focused exclusively on the OS. The professional CEO who preceded Jobs (Gil Amelio) took the conventional wisdom to heart. He set out to create an ecosystem of Mac cloners who would provide the commodity hardware complement to Apple’s famous OS.
When Jobs came in and reversed those decisions, most industry analysts thought Jobs was insane. Jobs not only killed all the commodity hardware and the horizontal strategy; he went radically vertical. In addition to the basic hardware and operating system, he added applications (iLife, iWork) and peripherals (like the iPod). He even added retail stores.
Today, people would let Steve Jobs make such a radical turn at nearly any company because of the outcome he’s achieved at Apple. But remember that when Jobs returned to Apple in 1996, he was doing so as the co-founder and CEO of NeXT computer, a marginal computer workstation company which Apple purchased for less than $500M. Let’s just say he didn’t have the benefit of the doubt. What he did have: the founder’s courage to innovate despite the doubters.
Innovator’s requirements – what does it take to find the product cycle?
So where did Jobs get this “founders courage” and what is it? In addition to general brilliance, we see three key ingredients to being a great innovator:
1. Comprehensive knowledge
2. Moral authority
3. Total commitment to the long-term
Great founding CEOs tend to have all three and professional CEOs often lack them.
Understanding the exceptions – why do professional CEOs succeed?
Two spectacular exceptions to the founding CEO rule are John Morgridge at Cisco and Eric Schmidt at Google. Let’s look at how these two overcame the issues illustrated above and massively triumphed.
Eric Schmidt–Getting the goodness of the founders and combining it with the know-how of the professional
Eric Schmidt has been a spectacular success at Google. He hasn’t just maximized the original product cycle (which was built around search—although he’s done a brilliant job of accomplishing that feat), but he has also overseen the creation of important new product cycles such as Android and Google Apps. Interestingly, he did so by teaming with the founders and gaining the benefits of their knowledge, moral authority, and long-term vision. This may seem like an obvious strategy, but shared leadership and control are incredibly difficult to achieve. Doing so involves intense communication, deep humility, and some hard compromises. Almost nobody ever pulls it off. And that’s why Eric Schmidt is such an important exception.
John Morgridge—All by himself
John Morgidge is another spectacular counter-example of the non-founding CEO building a tech powerhouse. 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.
How did he do it? In speaking to many Cisco employees over many years and observing the dynamic, innovative product and M&A strategy that enabled them to defeat fierce competitors such as Wellfleet and Synoptics, I believe John Morgridge may have been the greatest professional CEO in the history of the high tech industry. He worked tirelessly to develop the characteristics outlined above as well or better than any founder. He was smart, knowledgeable, tough, innovative, courageous, and, unlike most professionals, legendarily cheap. He once said that if you can’t see your car from your hotel room, then you are paying too much. As a result of this magical combination of qualities, he achieved complete moral authority. He is proof positive that a professional CEO can build a great technology company. At the same time, he is the ultimate exception.
Full article is available here.
Ben Horowitz is a cofounder and general partner at the venture capital firm Andreessen Horowitz and The New York Times bestselling author of The Hard Thing About Hard Things, which is now available in 19 languages.
Founded in 2009 by Marc Andreessen and Ben Horowitz, Andreessen Horowitz (known as "a16z") is a venture capital firm in Silicon Valley, California that backs bold entrepreneurs building the future through technology. They are stage agnostic, investing in seed to late-stage companies, and both consumer and enterprise technology companies. To date, a16z has raised $7.1B, across seven funds, including the $650M Bio funds.