Ousting the Founder

I was shocked to learn this week that Diane Greene, the co-founder and CEO of VMWare was ousted. I was not alone. Except for senior management (who found out very late, the night before) the employees of VMWare read about it, just like I did on Tuesday morning.

I guess $1.3B in revenues, $14B market cap, 50% growth rate and market dominance was not good enough for the board/EMC. One slight miss in one quarter and BANG! You're out. Perhaps the board believed industry pundits and worried about competition from Microsoft. So they brought in a "heavy hitter"...former Microsoft exec Paul Maritz as CEO.

I'd guess that the more likely reason was that Diane Green was a difficult person to deal with. There is no doubt that she was a controversial CEO. It was her way or the highway and she churned through senior execs (especially in sales and marketing). She never gave much respect to the folks at EMC either (who owned the vast majority of the stock - and controlled the board).

Some other hard-headed, "controversial" founder/CEOs that come to mind are Bill Gates, Larry Ellison, and Steve Jobs. These founders may be difficult to deal with but I'd rather go with them than take my chances with a new hired gun CEO.

Over the years, we've observed that it's difficult, if not impossible, to match the passion and commitment that founders bring to their companies. It's not just a job for them. It's deeply personal. The difference in commitment is akin to the differences you might observe between missionaries and mercenaries (or hedgehogs versus foxes).

Look, I have nothing against Paul. I'm sure he's a very smart, capable and hard working guy. But this whole situation reminded me of the time Steve Jobs was ousted from Apple more than 20 years ago.

As co-founder and CEO, Diane Green built one of the all time great successes in Silicon Valley. Very, very few companies ever reach $1B in revenues. Even fewer in the technology industry. Even fewer in the software industry. And even fewer ever exceed $10B in market cap.

Why the hell would you fire her?? No, don't tell me...I've heard all the reasons. VCs oust founders all the time. I've been in plenty of board level discussions around this topic!

It's almost a rite of passage in Silicon Valley. As a founder, you start a company, get VCs to fund you, recruit a "world class" management team...and eventually, find your replacement (or get ousted).

What people seem to miss, however, is that just about every great company ever created - in technology as well as low-tech, was built by a founder (or a CEO who happened to join the company very early in its growth phase) and a team of dedicated people who grew with their companies.

I don't believe in "world class" management in the generic sense. "World class" in what??

What I believe in is people who learn on the job and become - over time - the best at what they do. Along the way, they make plenty of mistakes. But that's part of the learning (and perhaps the luck of it - because the mistakes happen to be not fatal for the survivors).

Think about it. Some examples of great companies led by founders for decades are GE, UPS, FedEx, Wal-Mart, Southwest Airlines, HP, Intel, SAP, SAS, Apple, Oracle, Microsoft, Adobe, Sun, Dell, Qualcomm, Broadcom, Nvidia, Dolby, Amazon.com, Salesforce.com, etc.

There are some great companies where the original founder(s) did not grow the company but the CEO who grew the business to $1B+ in revenues joined very early on in the life of the company (typically below $10mm in sales): IBM, McDonald's, Starbucks, Veritas, Cisco and Google are examples.

It'll be interesting to see what happens. Even a founder hanging on to the bitter end won't save some companies (i.e. Wang, DEC). But I'd rather take my chances with the founder who built a $1B business from scratch than go with someone new.

The average tenure of the CEOs in our three largest companies is 9 years. They learned on the job. None of them had been CEO before we started working with them. None had much experience in their industry - the market did not exist, and the technology and business models had not yet been invented. But they are guys who took us this far (average sales of nearly $90mm this year) and we will gladly stick with them as long as they still want the job.

I'd rather take my chances with the people who built the business and grew their companies than the "professionals" - the hired guns - the mercenaries - coming in, after the fact, to "fix" things or to "take it to the next level."

We tell all of our companies this - if you want to build the leader in your industry, you have to have the world's leading experts in your field working for you. But do NOT expect to find them outside of your company. Someone senior from the outside won't come in to show you the way. They won't save you.

Think about it. If you can go outside and hire a CEO or other very senior executives to come in to YOUR company and tell you what to do and how to do it - better than you - then you've created nothing special. There is no secret sauce and you have NO CHANCE of building a truly great company.

We like to tell all of our companies this - the world's leading experts in your business will be the people you develop. The young people you hire today will be your future leaders. Five to ten years from now, they will BE the world's leading experts in your business. You will have to figure it out - together - along the way.

Don't count on those mythical "world class" managers to come in to save the day. Not only are there no guarantees, I believe they will end up hurting your chances of building a special, lasting company. If you do try to hire them anyway...good luck. What I will guarantee is this - they will negotiate HARD for a nice severance package.

Comments

[Steve Iverson]

Great post and I agree 100%!

[James Stenston]

Great post. Reminds me of how venture capitalists ruin companies by ousting the founders.

Love this line:
Think about it. If you can go outside and hire a CEO or other very senior executives to come in to YOUR company and tell you what to do and how to do it - better than you - then you've created nothing special. There is no secret sauce and you have NO CHANCE of building a truly great company.

[Atul Salgaonkar]

First things first and I appreciate this post for being so open and forward thiking.

In my personal circle, I have seen, examples of both: a founder CEO getting fired and a founder CEO getting a side position while the investors brought in an outside CEO.

With the fired CEO, it was not as black-and-white as many people think; The seeds of acrimony were planted perhaps much earlier in the dating (pitching, seed funding and early valuation)stage. A couple of years later, when the CEO and the investors were clearly misaligned, there were many battles - how the results should be set, measured/interpreted as well as a big ego fight.

Just before getting fired, the CEO was offered an alternate position but said to me that it was an "insulting" offer. I was not surprised to read the blurb in the SJ Mercury 2 weeks later.

The other story is much different; Here also the company had stumbled soon after the A round. The CEO, though, reached out to the investors and they jointly crafted a plan, which included bringing on an outside CEO.

I recall discussing with my contact why their family hadn't moved ahead with the planned purchase of the Infiniti car. While chatting, this CEO hinted at being disappointed, but als said how bringing a new CEO was similar to a surgeon bringing on another specialist to help save the patient.

The new CEO was hired and the founding CEO has a token post which while a bit frustrating was/is enormously beneficial in recruiting and PR; Interviewing managers and directors get to "meet the founder", and get the company vision as well as the history.

Both stories are on-going and incomplete and, for these individuals, (as far as I can tell) neither happy nor sad.

My important lesson, as we start fundraising for our seed, is to look for good (mindset-matching) partner-investors, focus on company building and remain objective, open and flexible.

[Jonathan]

Thanks Ho, a great post, and as a founder in the process of raising another round, it really is reassuring to remember that there are folks like yourself in the community.

Your portfolio companies are lucky to have found Altos.

[Sal]

As a founder CEO who has now moved back to the CTO position (at my own request) I find this topic extremely important.

We have now after 15 months recruited a fantastic new CEO, and I'd like to add my thoughts.

Wow, what a relief it was standing down.

Just because I could do it did not mean I should have been doing it.

I now have the pleasure of watching someone complete all those things I knew needed to be done, but who knows how to do it without having to 'work it all out' from scratch. I on the other hand can concentrate on what I am more naturally good at.

After seven months of working together, I'm not the token 'meet the founder' but am recognised as someone who understands the history of the company and market.

We had our run ins, sorting out what was what in the beginning. Its hard to have all your work examined minutely and inevitably there were differences of opinions.

What eventually emerged after the review however was agreement. Although neither of us necessarily liked the conclusions :-)

The incoming CEO was diligent and attempted honestly to get to the bottom of things. As ex CEO I had attempted most things with mixed results that needed to be evaluated.

I am back where I started with my feet in technology, but with one important difference. I now know the importance of the commercialisation of the technology. Whatever that technology might be and however smart.

So a useful journey all round.

I write this as at a moment where a series C investment due diligence just kicked off with a bang and the CEO is due on annual leave with his family tomorrow.

I still can see him grinning as he dumped the requirements list on my desk. Legal, financial and technical. And I think that was 'Viva Espana' he was whistling....

The point? I suppose managed successfully you can get two for the price of one (and a bit).

[Ho Nam]

Sal,

Thanks for sharing your experiences. You represent an important viewpoint. I know many founders who - like yourself - feel that the best thing that ever happened to their companies was hiring of a CEO or other professional managers who helped turn their vision into reality.

Still, I have my biases. But I will have to admit this - whether or not a person is a founder, some people act like founders and some people act like mercenaries. THAT is perhaps the important point.

There are all types of founders and professional managers. I've seen some founders act more like mercenaries than the "hired guns." It doesn't matter what your equity stake is or when you got started at the company - some people act like owners and some don't. Some people really care about their companies and some don't. Some people treat the company's money as their own and some don't.

It doesn't matter if you're the receptionist or janitor. The pride and ownership mentality is there or it's not. I've seen people at the lower ranks cringe at corporate waste, take pride in their work - and their company. I've also seen very senior people (even founders) act as if they don't care about their customers or co-workers or the company as long as THEY make money. They would chop up the company into pieces and sell it off like pieces of meat if it suited them. Such people, in my opinion, will never create a great business or a great company.

Ho

[Randy Korba]

Ho -- as usual, apropos and sage-like. I've done more than a few "founderectomies" over the years (as CEO and as board member) and usually, founder or not, it comes down to this:

There are fantastic founding CEOs, but also fantastic founders who should not ever be a CEO. The CEO has to WANT to be the CEO (although Diane Green, from all stories and VM folks I know certainly did). Founders, and I've been this guy in the past, often don't want to be the CEO longer term. And it is a much, much different beast creating, running, and building a great enterprise.

Hence, you have co-founders (Apple, MS, Google, Yahoo, etc.) and you have visionary companies led by founders but vision driven (Apple), and you have companies where the founder was a genius who ran screaming from running the company as soon as someone better came along (I'd love to be that founder!).

You nailed it, as some of the commenters above do.

[Sal]

Ho,

I completely agree. What I didn't say in my post was that we had tried to hire a CEO five years ago at the funders request. Founders can't run a company it appears :-)

Two years later I received instructions as the founder to terminate the 'mercenary' we had hired, secure our key accounts, neutralise some very dodgy alliances, obtain a compromise agreement, move into the CEO position and they would put in the required cash for a recovery period.

Believe you me that was a lot of fun! Mercenaries fight dirty....Luckily 'engineers' pay attention to the detail (which mercenaries tend not to do IMHO) and I got him on 'cause'. When you think the companies money is your own you get kinda sloppy.

We have good staff now, if you are highly motivated as a founder you have high expectations of your staff and don't carry passengers. (Sometimes too high)

Mercenaries tend to want to reinforce their own position and weaken the real strength around them.

And anyone can be a mercenary you are right. Actually from my observations geeks make very bad mercenaries generally.....

I speak at local conferences on raising capital and my experiences. My first slide has the acronym OPM on it. The first 10 minutes is devoted to the concept of taking Other Peoples Money, and the rights and obligations that brings. What surprises me is how many people dont get the basic contract!

[Jeff]

THE MAIN PROBLEM WITH OUSTING A FOUNDER WHO HAS BEEN SUCCESSFUL... part of the recipe for success of a startup is growing and dynamic culture. This is the lifeblood of any startup. A startup that does not live and breath a culture of learning, growth, innovation, passion, and fun will never survive. The founder is generally responsible for planting the seed and growing this culture. When they leave, the company becomes just another company, not a way of life. That's not to say that a CEO coming in can't create a new type of culture. But this comes as the result of many layoffs, management restructuring, etc. The company loses its voice, its identify. I'd argue VC underestimate the power of a unique culture created by a founder. Check this for more commentary in the downloadable chapters... www.readtheanswer.com/index.php?RTA=web2

[Arrielle Mali]

Ho, great post!!

We can only hope to have such great mentorship and guidance from a VC such as Altos. As I'm in a startup working long hours along the side of the Founder, it reminds me that he is the breadth of our company and it'd be more than a shame to oust him over any reason. He's the product, he has the vision, and when it's down, he's the only one that can fix it!

It continues to baffle me why successful companies sometimes unknowingly let their egos get in the way and break their own lifeline. Why don't people/companies ever learn from history or better yet from other people's mistakes? For so much intelligence in the Valley, I've realized when it comes to common sense, they need to get back in line and ask God to "fill it to the rim please."

[Paul DiMaggio]

Being a founder of my company,wallscape,& looking for venture capital this article or blog is very helpful to me. I really never never thought about the long term aspects that could be toxic to my personal future. Yes the passion of a founder is usually unmatched, however it always pays to be nice i guess, with a keen eye for the people whom we surround ourselves. Good,Bad or in different?

[Kate Dougherty]

You can add to the list of visionary founders/ industry leaders ousted from their company by a VC, Alan Klapmeier of Cirrus Design Corp. Cirrus makes the airplane with a parachute and until the economic meltdown, made the best selling airplane in the world.

Cirrus' VC firm has a Ceo/Pres that IS the entire C Suite, along with head of sales as well.

Company culture? Gone, and disposed of aggressively. Everything that made Cirrus unique and interesting as a company is now gone.

With VC decisons like that, what do you think the chances are of Cirrus even surviving at all?