Page 68 - Harvard Business Review (November-December, 2017)

of modern venture capital, so they retained control of what’s happening inside a company than the board
HP for decades. Microsoft, founded in 1975, became does. Because investors bear most of the financial
profitable so quickly that it didn’t need much venture risk if a start-up fails, preferred shareholders (primar-
funding; when it went public, in 1986, Bill Gates, Paul ily VCs) were given protective provisions (such as the
Allen, and Steve Ballmer owned 85% of the company, right to block a sale of the company) and the major-
and its sole VC owned just 4.4%. Likewise, Jeff Bezos ity of board seats. As start-ups required successive
controlled 48.3% of Amazon’s equity when it went rounds of VC funding, founders saw their ownership
public, in 1997, and even today he holds three times in the company (and with it, their control) dwindle.
as much stock as Amazon’s largest institutional share- Over time, Silicon Valley filled up with people who
holder. But until fairly recently, ousting the founder had founded iconic firms but spent the remainder of
was standard on a start-up’s journey to an IPO. their careers telling woeful stories of how “the VCs
The convention had solid theoretical underpin- stole my company.” The luckiest of them retained
nings. Venture capitalists sought to mitigate the nominal titles, such as chief technical officer.
agency costs and moral hazards created when a For three decades, from the mid-1970s to the early
start-up founder has much more information about 2000s, the rules of the game were that a company

NOVEMBER–DECEMBER 2017 HARVARD BUSINESS REVIEW 97