There’s this company started eight years ago to exploit its founders’ lust for new business ventures. In all 254 have seen the light of day, and 77% are still operating.
All started from scratch, but they now collectively have $1.8 billion of capital, $550 million of sales and 6,569 employees. Would you consider the conglomerate a success or a failure?
That depends on a figure that isn’t revealed: profit. You can assume that most of the operations are in the black - otherwise they would mostly, no doubt, have joined the 23% closures. Assuming that the profit evidence backs a vote for success, the fictitious conglomerate makes a real-life point of much significance - that you can really teach and learn entrepreneurship. For all 254 ventures were created by MBA students at Harvard Business School, with half of the projects based ‘on ideas worked out or developed there’.
There are some staggering stories of young men who quit university to launch new businesses which went on to multi-billionaire status, as did their founders.
One such hero is Bill Gates, the world’s richest man, thanks to Microsoft. The challenger now emerging as Microsoft’s greatest threat, Google, was founded by two young men of similar ilk. But the billionaires are only the peaks of a wide range of businesses whose common denominator lies in academies like HBS.
CORPORATE SPONSORS
The latter is especially proud of Tom Stemberg, the founder of Staples, the office supplies retailer, more than half of whose first management team consisted of HBS alumni trained through the Corporate Sponsorship Programme. This was built around the idea of HBS entrepreneurs coming back to Harvard in order to communicate what they had learnt and to refresh themselves from the wisdom of the professors – but above all, to inspire the up-and-coming generation of new entrepreneurs.
At this point, the sceptical manager may well be ready to pour scorn on the entire idea of the trained entrepreneur. Sure, Harvard can point to those 254 firms and their reasonably high success ratios. But there must be thousands more businessmen and women whose entrepreneurial lessons were not gained from Harvard’s beloved ‘case history’ method, or anything like it. Jeff Cruikshank, author of Shaping the Waves, claims that:
‘The curriculum is constantly refreshed with stories about problems that demand action from the students - they learn to think like entrepreneurs. Here’s the problem, you define the problem, but that’s not enough. What are you going to do about it, and how?’ This passage strongly implies that the entrepreneur is distinguished from others by the propensity for action. The logical fallacy is plain. Even if it’s true that all entrepreneurs are men and women of action, it doesn’t follow that all activists are entrepreneurs: any more than the truth that all bald people are men proves that all men are bald. Can research provide nothing more useful in the way of definition, something specific that can be taught?
Harvard publishes a small quarterly magazine entitled New Business in which management academics investigate entrepreneurial facts to derive useful lessons. For instance, does the typical founder-entrepreneur stay with his or her creation all the way? That’s certainly what the myth suggests. But Noel Wasserman, an assistant professor at the HBS, has taken the trouble to look at the facts - and they are very different. His data ‘show that the percentage of founder-CEOs who “go the distance” is extremely low, especially in high-potential ventures’.
Wasserman cites Gates and Larry Ellison (of Oracle) as exceptions who ‘are able to lead their companies for quite a while’, and get all the attention because of their rarity. In fact, Gates has given up the chief executive role to act as chairman and lead the technological effort - a combination which Wasserman’s research finds potentially deadly for the successor CEO:
‘Taking over a company is quite a challenge for any new CEO, but doing it in that kind of situation brings the challenge to a very different level’.
For confirmation, look no further than Bill Perez, who took over the top spot at Nike from the founder, Phil Knight. As I reported in an earlier column, this was the third time that Knight had replaced himself: it’s now the third time that this genius has found his replacement lacking. Evidently his genius doesn’t extend to picking CEOs - or perhaps the failing lies in an inability to stand clear and let the successor succeed (in both meanings of the word). Perez lasted just a year.
DROPPING THE CEO
As for why founder-CEOs don’t last, that maybe because they start to do badly. ‘But the interesting paradox is that when founder-CEOs do really well, that also increases the chances that they’re going to be replaced’. The ideal leadership candidate for the development stage may be a major impediment to the company’s mastery of the market place. The leader has to ask questions such as this half-dozen:
• Can I create a sales organisation?
• Can I manage multiple functions?
• Can I deal with customers?
• Can I handle more complex financial issues?
• Do I have the skills required to cope with the new challenges created by success?
Founder-CEOs, however, are notoriously unwilling to accept or acknowledge that they have become yesterday’s men. They love ‘their’ company, they love their job, and they are used to getting their own way. However, if there are outside investors, such as venture capitalists, they may well make the decision for a boss who fails the ‘Rich versus King’ test.
The King has to control the company at all costs - which includes the cost of seeing it grow less fast than the optimum, or even start to fail. The Rich entrepreneur is only interested in staying and waxing wealthy through the development of the business. If that means abdication, so be it. The Rich versus King pattern is familiar enough, and can have brutal results. There are compromises available, such as moving the founder-CEO to a non-executive role, but that, as noted, has its own obvious dangers.
WAVING FAREWELL
But is Wasserman right in his readiness to wave farewell to the founder? When Trinity Ventures analysed its successful companies across several dimensions, it found this: ‘The one trait of all our successful companies was that the CEO we backed at funding was still the CEO at the sale of the company or IPO (Initial Public Offer)’. Trinity has learnt ‘the need to believe that the existing CEO could bring the company to a successful outcome’.
Another venture capitalist, Alta Partners, gets ‘a little concerned’ when the entrepreneur comes in and says ‘I’m in this to flip it in a year’. If Alta gets the impression ‘they’re not in it for the tough times, then it’s definitely a problem’. If you regard the CEO as disposable, you are taking a lot on trust - above all, your ability to find a successor who will combine the virtues of a good King with the drive for Riches.
Russell Siegelman of Kleiner Perkins says flatly that ‘I tend to invest behind an entrepreneur, not behind a professional manager as the CEO’. That’s in the early stages, but Siegelman is right in saying that ‘Entrepreneurs have to have a clear sense of the opportunity and how to build the business. But the best ones are willing to re-examine their assumptions and...to veer left or right or pivot all the way round when the data suggests they’re headed in the wrong direction’.
The choice of direction is vital. All the venture capitalists reporting on their own strategies to New Business emphasise the supreme importance of looking outside the company and its beloved business plan. Kleiner Perkins wants a market sector large enough to generate a $100-$300 million business within five years - with at least a quarter share of a $500 million sector.
Menlo Ventures always looks at the market first: by that, Sonja Hoel means ‘a strategic view that includes market growth, market size, competition and customer adoption rates. If a company has a great market, it doesn’t need to have a complete management or positioning story, or sizzle. The details can be filled in later’. Twice a year Menlo tracks investments by size of market, team, unique technology and development: ‘market size and a developed product matter most’.
A SECTOR BET
At Trinity, while they spend ‘a lot of time’ evaluating the CEO and his team, their analysis suggests - again – that the sector is ‘another big determinant of success ...it’s a sector bet. If we’re investing in the right sector - even if the team is more mediocre or the execution isn’t as good - the rising market lifts all the companies in the sector’.
Like Kleiner Perkins, general partner Fred Wang likes the company to have the potential to reach $100 million of revenue, though it may get by with half that in a hot IT market that promises the five to 10 times return on which the venture capitalists dote. The importance of dispassionate sector analysis, and of forming large but realistic ambitions, is self-evident, and certainly something that can be taught at any business school. Yet in my own experience advising on venture capital proposals, none of the would-be entrepreneurs had done these sums. Their rosy forecasts were all based on internal projections of the growth rates that their wonder-product would certainly generate, filling ‘a gap in the market’ because of its wonders - and their wonderful management.
Wang paints a vivid picture of such a proposition: ‘it looks like a great technology, really groundbreaking, could be a huge market, but it’s a technologist - sometimes a wild-eyed technologist - who’s driving it. The businessperson is either weak or not there at all’. That’s a project that ‘typically we won’t do’. The potential employee or partner should be just as wary of the wild eyes: there are better ways of spending your life than ‘arm-wrestling’ with a founder-CEO, especially one who happens to control the equity.
But the founder isn’t necessarily the guilty party. Just as Wasserman would recommend, Steve Jobs of Apple decided that his baby had grown too big for his management talents and interest. So he handed over the reins to a Procter & Gamble marketing whiz, John Sculley. Conflict between the two was inevitable, and the newcomer before long engineered departure, not just of Jobs the man, but of Apple’s heart and soul.
Sculley’s own later departure was the inevitable result of poor performance which opened the door for the founder’s return. Jobs is a phenomenon, an entrepreneur who can visualise a technological promise in marketing terms. Despite the time he has devoted with such success to Pixar’s animated films (which have just won a $4 billion bid from Disney), Jobs has masterminded innovation after innovation at Apple, mostly successful - and one, the iPod, a smash hit.
MARKETS BEFORE PEOPLE
Look at the iPod through venture capital eyes, and you’ll see how perfectly it fits the bill. First, the market sector - portable recorded music - is enormous and populated with customers eager for the latest in technology. As venture capitalist Robert Simon says, there are two schools of thought about backing entrepreneurs. You can ‘invest in people first and foremost’, or you can say ‘I don’t care about people. I care about markets. I look for big opportunities’.
The best course lies somewhere in-between, but I would position myself much nearer to the market.
As Simon says, the second school of thought argues that ‘If management doesn’t work out, I can always fix management’. The would-be entrepreneur should pay the closest possible attention to venturers like him, even if you don’t need their help. That’s because you are investing your time, effort and no doubt all you can afford (if not more) in your brainchild. It’s imperative to get the market right - and the founders.
To seek entrepreneurial success is more than a good idea: it’s the prime career opportunity of the 21stcentury. In its January issue, Management Today lists 10 people under 40 who run businesses ranging from recruiting nurses (worth an estimated £50 million), via copies of celebrity clothes to telecoms (founder’s fortune £17.4 million). In a large company, they would have been nowhere near such fortunes: nor, probably, would their work have been so creative, so free from interference, or so rewarding in non-financial ways.
Mastering the entrepreneurial lessons, whether from Harvard or your own observations, is worth it even if you stay salaried. Getting ahead in business today depends on your ability to see and seize opportunities and to develop new skills as you advance. Be your own venture capitalist - invest systematically in yourself.
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