Originally published May 29, 2012 at 12:01 a.m., updated May 25, 2012 at 6:19 p.m. at UT San Diego
King means that you want to sit on the throne and maintain control as the CEO and owner. Rich means that as the company grows, you’re willing to give up the throne and bring in a new CEO and outside investors. Think about it. Would you rather own 0.01682 percent of Google or 93 percent of Manny’s deli?
Yes, you can point to Bill Gates, co-founder of Microsoft, and Irwin Jacobs, co-founder of Qualcomm, and now Mark Zuckerberg of Facebook. All of them kept the CEO role and a great deal of stock as their companies grew. But they are the exception. Most of us are not in their league.
In his new book, “The Founder’s Dilemmas,” Harvard Business School professor Noam Wasserman has collected an astounding amount of data on the rich vs. king question and other key issues that high potential (mostly technology and science based) startups encounter. In examining 460 startups, for example, he found that “founders who keep control personally give up a significant amount financially. Such founders tend to build a less-valuable startup.”
And listen to this: “Founders who kept control of both the CEO position and the board of directors held equity stakes that were only 52 percent as valuable as those held by founders who had given up both the CEO position and control of the board.” In other words, if you rule the roost, your chicken coop is worth half of that of a competitor who did not have complete control. Wasserman points out that first-time founders don’t understand the various stages of growth, they don’t realize that those stages will pose different challenges to the CEO, and they don’t yet know whether they have the skills to deal with the issues.
Rule # 217: It’s what you don’t know that you don’t know that will kill you.
Last September, we met Wasserman at Barbara’s Harvard Business School reunion, and we were impressed at the research that he has conducted on why startups succeed and fail and how to avoid common mistakes. His book should be required reading for all entrepreneurs. And on the subject of replacing the CEO, Neil can tell you that the board of directors fired him as CEO from his first software company, and it was sold one year later for over $100 million to Cisco.
An important issue into which the book delves is who makes the best co-founders — friends, family, strangers or co-workers? What Wasserman found is that “co-founders with prior social relationships are often the least likely to deal with the elephants in the room.” Our personal corollary to that, however, is that founders who work with people they have worked with before have a higher success rate. The key difference is social versus business.
For example, Apple co-founders Steve Jobs and Steve Wozniak were good friends before they started the company, and later they “failed to discuss crucial issues about roles and rewards that were too uncomfortable for best friends to broach.” And of course, after a couple of years, Woz left Apple.
What we like about Wasserman is that his evidence is empirical. He mined quantitative data from almost 10,000 founders. The result is clear and somewhat painful. You might start out as the founder genius, but your chance to be really rich is exponentially increased if you give up the lead reins. The trick in that puzzle is knowing the right time to do that and to whom.
Neil Senturia and Barbara Bry, serial entrepreneurs who invest in early-stage technology companies, take turns in writing this weekly column about entrepreneurship in San Diego. Please email ideas to Barbara at firstname.lastname@example.org