Monday, December 19, 2016

We need more great founders

Cross posted from the Engineering Entrepreneurship blog.

Successors to successful founders rarely do as well, according to two Bain consultants who’ve studied the topic.

The headline in Monday’s WSJ made it clear:

The Company Founder’s Special Sauce
No one leads a firm as effectively as the person who started it.
By CHRIS ZOOK and JAMES ALLEN
Dec. 18, 2016 5:03 p.m. ET

‘The Founder,” a new film starring Michael Keaton, tells the story of McDonald’s Corporation founder Ray Kroc as he turns a few small restaurants into a ubiquitous international chain. It’s a tale of founder-driven corporate growth—something that has become too rare today. This breed of entrepreneurial spirit makes for a good story, but it’s also crucial for the economy.

Research we published in July finds that of all newly registered businesses in the U.S., only about one in 500 will reach a size of at least $100 million in revenue. A mere one in 17,000 will attain $500 million in revenue and sustain a decade of profitable growth. Despite their rarity, these successful firms are a bedrock of the U.S. economy.

A study out earlier this year from Bain & Company, where we work, shows that over the past 15 years founder-led companies delivered shareholder returns that are three times higher than those of other S&P 500 companies.

Such performance can sometimes continue long after a founder leaves. We analyzed examples of sustained success at 7,500 companies in 43 countries, visiting many in person, to determine what made them stand out. Great founders imbue their companies with three measurable traits that make up what we dubbed “the founder’s mentality.”
Those three traits: insurgency (i.e. disruptive innovation), obsessive focus on customers, and permeating the vision of the founder throughout the entire organization.

I have not had a chance to read their research, but it rings true. I did my dissertation on Apple, once led by Steve Jobs — perhaps the most unique founder of the 20th century; in America, only Henry Ford, Tom Watson Sr., Hewlett & Packard and maybe Howard Hughes come close.

Jobs was driven to make “insanely great” products, to the point of being a tyrant (slightly more human after he had kids). Since his death five years ago, they’ve had mediocre leadership and nothing they have done has come close (something us shareholders must lament).

One caveat: while I lionize great founders — and aspire to be a good founder once again — there is an important confound. Firms have their best people, best ideas, greatest disruption and greatest impact during their initial growth phases; a second round of growth and disruption (as in the Jobs II era, 1997-2011) is virtually unheard of. Big companies don’t grow as much as small ones, nor is the CEO (of any stripe) able to have the same impact. (And unlike Jobs, most tech founders have their greatest impact in this initial period, not running the stable successful mature company).

Still, nothing I’ve seen this year does as good a job summarizing the great debt society owes to those who roll the dice, take great chances and endure years of high-stress intensity to create a new company. The decline in US startups is troubling not only for economic growth, but for the lost opportunities for employees, customers and complementors as well.

Wednesday, October 5, 2016

Hire great workers, even if you can't keep them

Silicon Valley — like the Big Four accounting firms and big law firms — has a well-deserved reputation for hiring bright young people and working them hard until they move on. While the impermanence of SV employment (6-12 months is not uncommon) may be unique, the idea of hiring good people is not.

In his new book Superbosses: How Exceptional Leaders Master the Flow of Talent, Dartmouth leadership professor Sydney Finkelstein argues that a key trait of the best bosses is that “you’re better off having the best people for a short time than average people forever.”

That philosophy fits well with my own experience as a manager during my 15 years as an “executive” (of 5-15 employees) at my startup company. At my entrepreneurship blog, I summarize the comparison of his comments (from his recent WSJ article) with my own experience.

I have great respect for Finkelstein. In an earlier book, he provided the clearest explanation of why once-great Motorola destroyed itself because (as I saw in my cell phone research) of its inability to come to grips with the disruptive shift from analog to digital mobile phones and base stations.

However, there is one line in the article that would give a chuckle to any veteran Silicon Valley watcher — where he lists Larry Ellison as one of “the world’s greatest bosses”). Yes Ellison is a self-made billionaire worth $40+ billion and one of the world’s 10 richest people. And surprisingly, Oracle has had a great run of growth for the last decade, even if the stock price is below where it was in the summer of 2000.

This is the same Ellison whose ego is (or was) so large that his biographer titled the book The Difference Between God and Larry Ellison: God Doesn’t Think He's Larry Ellison. So while Ellison was successful and had some smart people working for him, I don’t know that I would hold him up as a role model (even in Silicon Valley) of how to best lead people.

Saturday, September 17, 2016

Silicon Valley's ambivalence towards growth

Last month, the latest mayor of Palo Alto explained his slow growth philosophy against both economic and housing growth. An interview with Curbed San Francisco began

Curbed SF: Everybody agrees that too many people can’t afford Palo Alto. So why is it like this?

Mayor Patrick Burt: There are a number of factors. First, we’re in a region that’s had extremely high job growth at a rate that is just not sustainable if we’re going to keep [Palo Alto] similar to what it’s been historically. Of course we know that the community is going to evolve. But we don’t want it to be a radical departure. We don’t want to turn into Manhattan.

Curbed: But there’s a pretty big margin between Palo Alto and Manhattan. What are you comfortable changing?

Burt: We're looking to increase the rate of housing growth, but decrease the rate of job growth.

Curbed: You want fewer jobs?

Burt: I know, it’s a strange idea to contend with. But this doesn’t mean we want no job growth. And it doesn’t mean we want reckless job growth. We want metered job growth and metered housing growth, in places where it will have the least impact on things like our transit infrastructure. …
The interview seemed in response to the resignation of a city planning commissioner who resigned two weeks earlier because her family could no longer afford to live in Palo Alto. It’s hard to disagree with part of Park’s argument that economic growth requires housing growth — but Burt (a medical device CEO) seems ambivalent about the latter as well.

In today's Wall Street Journal, former hedge fund manager Andy Kessler notes that the cheapest house in Palo Alto has 959 square feet, backs to the train tracks, and costs $1.35 million. (That's roughly double what a comparable house cost when we looked at moving to Palo Alto in 2002).

Kessler continued:
I wanted to ask Mayor Burt: Is stifling job creation really going to help? Or would that only boost surrounding towns? Palo Alto has already capped the annual growth of office space. It took years to approve a new $5 billion Stanford Hospital extension, which the area desperately needed. Even worse, there is a funny quirk in the zoning laws that limits what’s allowed in so-called Pedestrian and Transit Oriented Development areas (downtown). This includes restrictions on research and development, a catchall for limited manufacturing, “storage or use of hazardous materials,” and “computer software and hardware firms.”

I can tell you outright that the only hazardous materials in an office of software coders are their high-test caffeine concoctions. But the software firms are many. Amazon has its search team in Palo Alto. The big-data firm Palantir has been gobbling up buildings for its engineers. Facebook had several before moving to neighboring Menlo Park. SurveyMonkey has a huge site near the train station.

Even Palo Alto’s residential areas are filled with startups, real-life versions of Erlich Bachman’s house from HBO’s “Silicon Valley.” They’re easy to spot, having more cars parked during the day than at night. These companies offer high-paying and productive jobs that are great for society.
In the 1970s and 1980s, San Francisco was decrying “Manhattanization” but today that is a fait accompli. Meanwhile, most of the Bay Area (particularly the City and the Peninsula) is emulating the trends of excessive living costs that drove large companies and jobs out of New York City during that same period.

The explosion of housing prices in the Bay Area over the past five years is pricing ordinary workers out of the market. Yes, it is possible to commute from New Jersey (which here is called "Contra Costa County"), but such commutes strain highway and mass transit infrastructure (and push suburban and exurban housing prices up too).

Kessler notes that the solution to high housing costs is (surprise!) building more housing. I understand the importance of making available single family homes, and I think it is a strength of both California and the U.S. more broadly. Still, anyone driving along I-280 knows there are large swaths of undeveloped land in the Bay Area — that in LA would be houses but in the Bay Area are called “open space.” According to Wikipedia, the housing density of Palo Alto (2,500 residents/acre) is half that of nearby Cupertino, and less than one-fourth that of Santa Monica — another upscale, highly desirable community. (Burt’s hyperbole is demonstrated by noting that the actual housing density of Manhattan is nearly 30 times that of Palo Alto).

So will Silicon Valley voters (let alone politicians) embrace the full implications of economic growth by developing undeveloped land or increasing housing density? Or will it continue down this path of being available to well-paid tech elites, while ordinary (non VC-funded) entrepreneurs and businesses have to move elsewhere?

Monday, July 25, 2016

Yahoo's last hurrah

Monday began the final act of Yahoo, as it announced the purchase by Verizon of its traditional business for $4.8 billion. The WSJ noted

The sale doesn’t include, among other things, Yahoo’s cash, its shares in Alibaba Group Holding Ltd., its shares in Yahoo Japan, and Yahoo’s noncore patents, called the Excalibur portfolio. These assets will continue to be held by Yahoo, which will change its name at closing and become a registered, publicly traded investment company.
Also excluded was the Excalibur patent portfolio (excluding patents purchased by Verizon) valued at $1 billion.

At the close of business Monday, Yahoo’s market cap was $36.4b, suggesting that these residual assets are worth about $32b — or 6.5x as much as Yahoo’s traditional businesses. (It seems misleading to call 13% of the company’s value “core”). TechCrunch values the Alibaba and Yahoo Japan shares at $31.2b and $8.3b so something doesn’t add up.

The bible of Silicon Valley, the San Jose Merc, says the market cap of Yahoo is about where it was before 2008 market crash. USA Today says that CEO Melissa Mayer had the best outcome (as measured by share price) of the six CEOs of Yahoo’s 20 years as a public company. Her 152% stock price increase made up about half of the stock value lost by (interim) CEO Jerry Yang, who held the reins during the heart of the stock market crash. The 152% increase compares to the 175% rise in the NASDAQ composite index during the same period.

Yang had a chance to sell the company to Microsoft in 2008 but refused to do so; in response, I said “Yahoo is toast.” As with other tech stocks, whether you made money over the past few years depends on whether you bought at the bottom or near the top.

Still, crediting Mayer with the stock price increase over the past four years seems somewhat generous, given that the “traditional” business continued to decline in value. Instead, (as predicted) the increase came from the two strategic investments by Yang in Alibaba and Yahoo Japan.

Under the circumstances, things turned out better than feared. Over the last four years, Yahoo was no Google, Apple or Microsoft — let alone Facebook — but at least it is a positive outcome during a period when other mature tech stocks declined.

Mayer will be moving on, but hopefully (as with Verizon’s acquisition of AOL) many of the Yahoo employees will keep their jobs. The Yahoo company (if not the brand) will be disappearing, but given its waning interest, the backing of America’s most profitable (and second most valuable) firm will provide reasons for potential partners to take it seriously again.

Friday, July 22, 2016

Innovation requires freedom

From the Wall Street Journal, July 22, 2016, p. A13:

The Closing of the American Mind
There are dangerous signs that the U.S. is turning its back on the principles of a free and open society that fostered the nation’s rise.

I was born in the midst of the Great Depression, when no one could imagine the revolutionary technological advances that we now take for granted. Innovations in countless fields have transformed society and radically improved individual well-being, especially for the least fortunate. Every American’s life is now immeasurably better than it was 80 years ago.

When I attended the Massachusetts Institute of Technology in the 1950s, I quickly came to appreciate that scientific and technological progress requires the free and open exchange of ideas. The same holds true for moral and social progress. I have spent more than a half-century trying to apply this lesson in business and my personal life.

It was once widely accepted that progress depends on people challenging and testing each other’s hypotheses. This leads to the creation of knowledge that, when shared, inspires others and spurs the innovation that moves society forward and improves lives. … Recall Sir Isaac Newton’s statement that he achieved so much by “standing on the shoulders of giants.”

Despite our enormous potential for further progress, a clear majority of Americans see a darker future. Some 56% believe their children’s lives will be worse off than their own … I empathize with this fear. The U.S. is already far down the path to becoming a less open and free society, and the current cultural and political atmosphere threatens to make the situation worse …

Education in America, and particularly higher education, has become increasingly hostile to the free exchange of ideas. On many campuses, a climate of intellectual conformity has replaced open debate and inquiry, stifling discussion on a host of topics ranging from history to science to economics. Dissenters are demonized, ostracized or otherwise treated with scorn and derision. This disrupts the process of discovery and challenge that is at the root of human progress. …

Similarly, in business the proliferation of corporate welfare wastes resources and closes off opportunity for newcomers. It takes many forms—direct subsidies, anticompetitive regulations, mandates, tax credits and carve-outs—all of which tip the scales in favor of established businesses and industries. The losers are invariably the new, disruptive and innovative entrepreneurs who drive progress, along with everyone who stands to benefit from their work. …

Government, which often has strong incentives to stifle the revolutionary advances that could transform lives, may be the most dangerous. The state often claims to keep its citizens safe, when it is actually inhibiting increased individual well-being. See, for example, the FDA’s astronomically expensive and time-consuming drug-approval process, which University of Chicago professor Sam Peltzman argues has caused “more sickness and death than it prevented.” …

Unleashing innovation, no matter what form it takes, is the essential component of truly helping people improve their lives. The material and social transformations in my own days have been nothing short of astonishing, with a marked improvement in well-being for all Americans. If the country can unite around a vision for a tolerant, free and open society, it can achieve even greater advances, and a brighter future for everyone, in the years ahead.

Mr. [Charles] Koch is chairman and CEO of Koch Industries and the author of “Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies” (Crown Business, 2015).