Silicon Valley divided over choice between founders or managers

Because I was traveling this weekend, I don’t have a good overview of the most important tech news. Therefore, I devote this newsletter to the only topic of conversation last week in tech circles: founders or managers — who are better?

My apologies for not managing to send out my newsletter last week, but it is available here:

• OpenAI loses $158 per second, yet is worth $100 billion
• Nvidia breaks revenue records but is very quiet on customer success
• Shares of AI-driven companies rose sharply in August
• Energy consumption of AI threatens climate goals of Big Tech companies, who appear to try to change the rules of the game?
• Telegram and other social media are obviously being targeted by governments
• podcast of Taylor Swift's boyfriend, and his brother, to Amazon for $100 million
• Midjourney will produce hardware

In Silicon Valley last week most conversations were dominated by the discussions about “Founder Mode”, following a blog post by Paul Graham, founder of the world’s most successful startup incubator Y Combinator. Graham argues that startup founders shouldn’t listen to investors who often insist on appointing experienced CEOs and managers, which Graham says often has disastrous consequences.

Founders or managers?

Operating in “founder mode,” according to Graham, means adhering to a founder’s mindset and management style. It’s about bypassing rigid organizational structures and fostering close collaboration between departments. In contrast, startups in “manager mode” attract competent, experienced managers to lead teams with minimal interference from the CEO:

“The way managers are taught to run companies seems to be like modular design in the sense that you treat subtrees of the org chart as black boxes. You tell your direct reports what to do, and it’s up to them to figure out how. But you don’t get involved in the details of what they do. That would be micromanaging them, which is bad.“

Airbnb almost successfully managed into the ground

He was inspired to write his blog post by a recent speech by Airbnb co-founder Brian Chesky at Y Combinator. In it, Chesky highlighted the pitfalls of conventional wisdom when scaling businesses, often advising to hire good people and give them autonomy. When he followed this advice at Airbnb, it led to disappointing results.

In his own words, inspired by Steve Jobs, Chesky developed a new approach, which now seems to be working, given Airbnb’s strong financial performance — although residents of the inner cities of Barcelona and Amsterdam will think otherwise, awash in a wave of rolling suitcases and higher rents due to Airbn’s “success”.

Many founders in the audience shared similar experiences as Chesky and realized that the usual advice harmed rather than helped them. Chesky pointed out that founders are also often advised to run their companies as professional managers upon strong growth, which often proves ineffective.

Apple and Microsoft successful in manager mode

According to Chesky and Paul Graham, founders possess unique skills that managers without entrepreneurial backgrounds often lack. By suppressing these instincts, founders can actually harm their companies.

Risa Mish, management professor at Cornell University, contrasted that in Observer that it was precisely Steve Jobs who was succeeded with great success by the experienced manager Tim Cook. Microsoft has also performed many times better under Satya Nadella than anyone ever expected.

“But it could be as simple as the difference between a team trying to create new things and a company focused on growing existing products and revenue streams,” Mish said.

Examples abound in both camps

Mish has apparently forgotten that Steve Jobs was fired from Apple in the 1980s by CEO John Sculley, who came from Pepsi Cola and ironically was recruited by Jobs himself.

The only innovation Sculley introduced at Apple was the legendary flop Newton, because he was unable to match the undeniably huge market potential of the mobile device (later proven correct by the iPhone) with the right timing, the most important skill for an innovative CEO. The technology was far from ready for a device like the Newton; high-speed mobile Internet was lacking and the small processors were still too weak.

Before I digress further: contrasted with the success of executives Tim Cook at Apple and Satya Nadella at Microsoft is a literally and figuratively (numerically and symbolically) equally great success in the person of Nvidia founder Jensen Huang, who has been CEO of the chipmaker he himself founded for more than three decades.

Nor will Salesforce shareholders shed any tears that founder Marc Benioff has been in charge there for more than a quarter century and, according to The Information, is even working on a comeback, as if that was necessary since Benioff was never out of it. In short: whether it’s successful founders or successful managers, there are plenty of examples in both camps. Time for a quantitative comparison!

The data shows: founders perform better

Fortunately, the dilemma has since been studied quantitatively and it turns out that Paul Graham’s thesis is correct: founder mode is often superior when it comes to value creation, according to an analysis of PitchBook data.

Pitchbook concludes:

“In each of the past five years, VC-backed founder-led companies grew in value significantly faster than non-founder-led companies. This year, the relative rate of value creation for founder-CEOs was 22.4%, compared to 4.7% for non-founder-CEOs. In the chosen methodology, the relative rate figure reflects the percentage of value increase between funding rounds, expressed on an annual basis. Among companies that raised funding this year, median value growth was $3.6 million higher among founder-CEOs. According to Graham, founder-CEOs of high-growth companies are especially “more agile” than professional CEOs. That detail-oriented approach can lead to higher growth through product improvement, or by better motivating front-line employees.”

Vulnerable businesses need entrepreneurs

Vulnerable companies need entrepreneurs. In my opinion, which is based on experience and observation but not supported by quantitative research, companies that regardless of their age rely primarily on one product or one revenue source should preferably have a founder at the helm.

Take Google, which is currently under pressure due to the rise of OpenAI with ChatGPT, while their revenue comes largely from ads, especially through the search engine.

As soon as the search engine generates less traffic, revenue will drop, and things will get very tough for Google. CEO Sundar Pichai is clearly a competent manager, but the next few years will show how good an entrepreneur he is.

We need only think back to the temporary successes of Nokia and Blackberry to see what happens when companies that lean on innovation are led by executives unable to adapt their products when they are attacked head-on.

Zuckerberg’s flexibility

An excellent example of a relatively young founder who has mastered the craft is Mark Zuckerberg. When Instagram appeared to be a threat to Facebook, he quickly bought it for a billion dollars. An amount many frowned upon, but insiders knew it was a bargain. WhatsApp was about 20 times as expensive, but still a good deal.

When Snapchat posed a major threat to Instagram with Stories, Zuckerberg simply had Instagram copy Snapchat’s full functionality, without ego. This saved Instagram. He is currently trying something similar in response to TikTok.

I am convinced that a classical manager would never have bought Instagram and Whatsapp or let Instagram respond so quickly to competition from Snapchat and TikTok. That Zuckerberg has now spent tens of billions on obscure Metaverse adventures is, by comparison, a rounding error.

Conclusion from thirty years as an entrepreneur and investor

Interestingly, many successful entrepreneurs say they have been mentored for years by a small group of experienced advisors who enjoy their trust. For example, ex-Intuit CEO Bill Campbell, about whom the excellent book Trillion Dollar Coach was written, was a famous advisor to Steve Jobs and the founders of Google, among others.

In Silicon Valley, investors and former entrepreneurs Reid Hoffman, Peter Thiel and Marc Andreessen are frequently mentioned names as examples of valued advisors. It is precisely in the combination of entrepreneurial experience and investment experience that they prove to be of unique value.

This topic is close to my heart because, after almost ten years as an employee during my school and college days, I have been an entrepreneur for 15 years and an investor and advisor for 15 years since.

Coachable crazies

My conclusion is that coachable entrepreneurs have the greatest chance of success.

One of the advantages of having been an employee first is that I learned mostly how I didn’t want to deal with people once I became an employer. During my time as a young entrepreneur at Planet Internet, however, I have been immensely supported by valuable advice, both from entrepreneurs and managers.

In retrospect, I only realized how lucky I was that entrepreneurs like Eckart Wintzen (BSO) and Maarten van den Biggelaar (Quote Media) took the time for me, as did members of the Board of Directors of the Telegraaf and Ben Verwaayen of KPN.

It didn’t escape me that Quote, Telegraph and KPN were shareholders, and that perspective obviously always came into play. But that doesn’t diminish the quality of their opinions.

Later, as an advisor at the same Quote Media and at EDM event producer ID&T, I saw how talents such as Jort Kelder and Duncan Stutterheim might appear to the outside world to be stubborn, but in practice, at crucial moments, they listened very carefully to advice — and then, as they should, made their own decisions.

It became more difficult in constellations where, on the contrary, many different winds were blowing, as I experienced with the OV Chipkaart: a consortium of public transport companies that competed among themselves, which tendered to a consortium of companies that in turn competed among themselves.

At the Silicon Valley startup Jaunt, I experienced something similar. This virtual reality pioneer had a mix of top level tech and media people within both the team and the investors, a true fusion of Silicon Valley and Hollywood.

Making VR cameras as well as VR productions, having offices in Palo Alto and Santa Monica and owned by shareholders that ranged from the traditional profit-seeking Silicon Valley vc funds, to strategic investors like Disney, Sky, German publisher Axel Springer and Chinese media investors; so a mix of American, European and Asian investors. You end up with a sort of mash-up of fried rice and sauerkraut, or a pizza with ginger and kale. Separately excellent, but the combination doesn’t work. It lacks focus and a unified mindset, which a good founder as CEO does have.

That’s a long run-up to my conclusion: the best CEOs are founders who are maniacal in their vision, but coachable in their execution; call it coachable crazies. And then preferably coachable by both experienced founders and managers.

Thanks for your time and attention and see you next week!