Page 67 - Harvard Business Review (November-December, 2017)

FEATURE WHEN FOUNDERS GO TOO FAR

if they closed the Uber app. During years of jousting typically wouldn’t take a company public until it had
with local taxi authorities over the legality of its car ser­ had five profitable quarters of increasing revenue. To
vice, Uber had been discovered using a tool called Grey­ achieve that, companies generally had to be able to
ball that disguised the location of its cars and showed sell stuff—not just acquire nonpaying users or build a
a fake version of the app to city officials. Kalanick him­ compelling freemium app. Persuading customers to
self was captured on video condescendingly berating pay for something involved creating a stable product
an Uber driver who complained about falling fares. and organizing a professional sales staff to sell it.
Yet despite the near­weekly scandals, which led to Many founders were wildly creative but lacked the
customer boycotts and increasing calls for Kalanick’s discipline or skills to drive profitable growth. They
dismissal, the 40­year­old founder seemed, for a also lacked the experience and the credibility to man­
time at least, untouchable. Even after the former U.S. age a large company, which is what everyone hopes
attorney general Eric Holder, who’d been hired by a start­up will become someday. To the investment
the board to investigate, issued a scathing report on banks that acted as gatekeepers, such credibility was
Uber’s culture, Kalanick and his directors initially de­ crucial for an IPO. Part of the IPO process was the road
cided that vague promises of coaching, the hiring of a show, for which the bankers would fly the company
chief operating officer, and a slap­on­the­wrist “leave CEO and CFO around the country to present to insti­
of absence” for the CEO were sufficient remedies. That tutional investors; the last thing institutions wanted to
changed when key investors staged a revolt.
Why was Kalanick shown such extraordinary def­
erence by Uber’s board? In a word, power. Kalanick VCs WERE ONCE ALLOWED TO
controls the majority of Uber’s voting shares and until
recently controlled most of its board seats. He is part WALK ALL OVER THE PEOPLE
of a generation of company founders who’ve man­ WHO LAUNCHED SOME OF THE
aged to remain at the helm long past the point when
VCs would traditionally have brought in “profes­ WORLD’S GREATEST COMPANIES.
sional” CEOs. Although the specifics of this scandal
may be unique, the governance issues Uber has faced
are not. Zenefits, Hampton Creek, Tanium, Lending
Club, and Theranos are all start­ups that have en­
dured scandal and founder misbehavior—but some of see was an inexperienced founder at the helm of a com­
their founders are still calling the shots. Rather than pany. To venture capitalists, who generally controlled
being an outlier, Uber illustrates the remarkable and the majority of a start­up’s equity and board seats,
little­understood ways in which founders, no longer green and unskilled founders were a problem that had
systematically pushed aside as their start­ups grow, to be solved if they were to reach their IPO payday.
have come to dominate their boardrooms. I think of IN BRIEF So after a product gained a foothold, VCs routinely
this trend as “the founders’ revenge.” removed founding CEOs and replaced them with
In this article I will outline the forces that have al­ THE PROBLEM “suits”—experienced executives from large com­
lowed founders to accrue such power. I will also argue Founders, who were once panies—to scale up the sales force, build a true or­
that this trend has resulted in a power imbalance that routinely thrown overboard ganization (including an HR department that would
by venture capitalists as
can negatively affect employees, customers, and in­ a start-up scaled, have prevent problems like those at Uber), and lead the
vestors. To remedy that, I’ll offer some initial prescrip­ acquired too much power public offering.
tions for creating a more equitable and sustainable in the boardroom. The best­known example of this, albeit with a
system of start­up governance. somewhat different backstory, is Apple. At its IPO, in
But first, to understand how 21st­century found­ WHY IT HAPPENED 1980, Steve Jobs was still at the four­and­a­half­year­
ers have come to hold such a powerful hand, we must The decline of IPOs and old company, as an executive VP and vice chairman,
less focus on management
recall why venture capitalists were once allowed to credentials have reduced largely because of his charisma and ability to articulate
walk all over the people who launched some of the the need for “adult a vision for the evolution of computing. But because
world’s greatest companies. supervision,” and VCs have Jobs and his cofounder, Steve Wozniak, had taken
come to respect founders’ several rounds of VC funding by then, they together
ability to maintain a fast- owned just 23% of Apple’s equity, and Jobs had few
WHEN VCs SET THE RULES moving, innovative culture. allies on its six­person board. Jobs’s firing in 1985 and
his replacement by PepsiCo president John Sculley
n the 1980s and 1990s tech companies and
I their investors made money through ini­ Pair founders with seasoned may be Silicon Valley’s Shakespearean tragedy, but it
HOW TO FIX IT
was hardly surprising. In fact, what’s surprising is that
COOs, recruit directors with
tial public offerings. In that era an IPO was
public-company experience,
Jobs held on as long as he did.
the eventual goal for nearly every start­up.
This stereotypical fire­the­founder pattern has
Turning illiquid private­company stock
investments in companies
into cash by selling shares to the public and encourage VCs to limit notable exceptions. Hewlett and Packard founded
whose founders have voting
required engaging a top investment bank, which control of the stock. their company in 1939, many years before the advent
96 HARVARD BUSINESS REVIEW NOVEMBER–DECEMBER 2017