Page 70 - Harvard Business Review (November-December, 2017)

they had newfound access to information that would The pivotal figure in this shift was, once again,
help them gain those skills. In the 20th century there
were no start-up blogs or useful books on how to launch
and grow a company. Business schools taught entrepre-
neurship, but they focused on how to write business
plans, which sounds useful but has limited utility once
you actually start exposing products to the market.
(Modern start-up founders recognize that no business
plan survives first contact with customers.) The only
way for aspiring founders to get effective training was
to apprentice at other start-ups—a time-consuming
detour that many would just as soon skip.
Founders in the 21st century can learn best prac-
tices far more easily. Anyone can read online all there
is to know about running a start-up. Incubators and
accelerators like Y Combinator have institutionalized
experiential training in crucial tasks such as finding
product-market fit, figuring out when and how to
pivot, utilizing agile development, and dealing with
VCs. In Silicon Valley and elsewhere, mentors abound.
Two financial shifts have also allowed founders to
stay in control. The first is the emergence of secondary
markets, in which founders and employees can liqui-
date some pre-IPO stock and thus stay private longer.
Before secondary markets became popular, founders
had a big incentive to rush toward an IPO (and meet
investment bankers’ requirements for doing so), be-
cause they lacked an alternative way to monetize and
diversify their wealth. By further reducing the power of
the IPO gatekeepers, secondary markets enhanced the
power of founders.
The second shift is the growth in acquisitions.
In 2016 there were 3,260 acquisitions of technology
companies and only 98 tech IPOs, according to CB
Insights. If that ratio holds, a start-up is 30 times as
likely to be acquired as to go public. When a larger
tech company acquires a smaller one, having the
smaller company’s founder retain a leadership role
can make a deal more attractive. VCs recognize this,
so they’re more inclined to leave founders in charge.
THE EMERGENCE OF “FOUNDER FRIENDLY” VCs
t a certain point those changes were supple-
A cycles, which create the need for continuous innova-
mented by an attitudinal shift: VCs began to
see founders not as a problem that needed
to be solved but as a valuable asset that
needed to be retained. That stemmed in
part from a change in their own back-
grounds. Twentieth-century VCs typically had MBAs or
a finance background or both. A handful, including
John Doerr at Kleiner Perkins and Don Valentine at
Sequoia, had operating experience at a large tech com-
pany. Very few were themselves entrepreneurs. But in
the 21st century, VC firms began hiring experienced
founders as partners, and not surprisingly, this cohort
was more optimistic about other founders’ ability to
become successful long-term company leaders.
Marc Andreessen. In July 2009, when Andreessen
cofounded the VC firm Andreessen Horowitz with
Ben Horowitz, also an experienced entrepreneur, it
was with a key philosophical difference from rival
firms: a “founder friendly” focus. “Above all else, we
are looking for the brilliant and motivated entrepre-
neur,” Andreessen wrote when he announced the
firm’s launch. “We are hugely in favor of the techni-
cal founder….We are hugely in favor of the founder
who intends to be CEO. Not all founders can become
great CEOs, but most of the great companies in our
industry were run by a founder for a long period of
IN THE 21ST CENTURY, VCs
CAME TO SEE FOUNDERS
AS A VALUABLE ASSET THAT
NEEDED TO BE RETAINED.
time, often decades, and we believe that pattern will
continue. We cannot guarantee that a founder can be
a great CEO, but we can help that founder develop the
skills necessary to reach his or her full CEO potential.”
Understandably, advertising your firm as “founder
friendly” creates a competitive advantage in a busi-
ness where success has much to do with your ability to
source and negotiate deals with founders. So in short
order, many venture capital firms began emulating
Andreessen’s outlook.
Founder friendliness was driven partly by con-
text. Twentieth-century companies, which competed
in slower-moving hardware and software markets,
could thrive for long periods on a single innovation. If
the VCs threw out the founder, the professional CEO
who stepped in might grow a company to dominance
replacing a founder was the rational decision. But
without creating something new. In that environment,
21st-century companies face compressed technology
tion. Who leads that process best? Often it is founders,
whose creativity and restlessness, comfort with disor-
a time when companies need to retain a start-up cul-
der, and propensity for risk taking are more valuable at
ture even as they grow large. VCs love how professional
managers can bring discipline to the chaotic environ-
ment created by a founder, but today they recognize
that too much discipline may kill off the culture that
made the start-up so innovative.
The retain-the-founder mentality was also driven
by, again, that most fundamental of economic forces:
supply and demand. Whereas once too many start-ups
chased limited amounts of capital from a relatively
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