Comments on: The New Deal – A Founding CEOs Value is Non Linear

By: Jay Gould

Jay Gould — Thu, 29 Jul 2010 01:41:37 +0000

How do you determine that the founder has failed to find the repeatable business model (at what point is their effort considered a failure versus continuing their iterations towards the eventual successful model)?

By: Brandon

Brandon — Mon, 26 Jul 2010 14:42:39 +0000

I assumed that vesting would be tied (contractually) with metrics. Will the vesting language just say, “The CEO will vest when he finds a repeatable business model?” If so, said CEO needs to find a new lawyer.

By: Thyaga

Thyaga — Wed, 21 Jul 2010 15:45:45 +0000

I hope my comments below has some relevance, since I am an entrepreneur and I am active within Boston based entrepreneur community.
1. Entrepreneurs tend to become attached (emotionally & financially) with the company. Lots of their ego & pride plays into this. These aspects make it very difficult for them to let go of their control on the company.
2. Entrepreneurs believe in being optimistic and show confidence about future prospects for their businesses. Hence they tend to make aggressive plans and over promise VCs on the schedule and deliverables. VCs tend to get control of the company when they sense that the plan is slipping out. Who does not like to protect their investments. Hence they fire founding CEOs. I don’t see this any way different from an entrepreneur firing an employee those who under performer and can’t deliver.
After-all there is nothing wrong with investors thinking like a owner of the business.
3. There are few reasons why only few founding CEOs continue to remain in the pilot seat. They grow with the company by acquiring new skills – ability to delegate, being a team player, demonstrate needed patience & crisis management, identify good talent & hire, team management & motive employees, understand basic financials, control on emotions & anger management, becoming a master sales person.
4. Majority of entrepreneurs love to create something new & original. They love to build it from ground up. After working on an idea for couple of years, work should become routine and sometimes boring. At this stage entrepreneurs may turn out to be less motivated and hence less effective. VCs views such founding CEOs are the bottleneck and decide to eliminate them.
5. VCs tend to think that founders are no longer required since product had few initial releases and they can have seasoned manager to take from there. Long-term product success is tied to it’s ability to constantly innovate and evolving. Hence remain essential for a client. This requires a good vision, curiosity and domain expertise within the company. Founders take with them when they leave.
VCs realize this truth after they change few CEOs. Then they resort to recovering their investment. A quick sale is an easy out of such situations. When it become difficult to sell the company VCs don’t hesitate to cut their losses by shutting the company down. They have to focus on other ventures those have good future prospects.

By: Thyaga

Thyaga — Wed, 21 Jul 2010 14:44:23 +0000

I can hear your frustration. An idea, hard-work & passion of the entrepreneur is not just sufficient for creating a real business.
We need to understand that VCs are in this business to make money for their investors and for themselves. They take money from various sources including pension funds, mutual funds, private equity, wealthy individuals, sovereign funds, etc. When they can’t demonstrate returns in a reasonable amount of time, then VCs are out of business and no one will lend them money again.

By: Thyaga

Thyaga — Wed, 21 Jul 2010 14:35:02 +0000

You are right on the dot. Real customers, revenues & profits is the best way to validate any business. The time & efforts taken to get there must be reasonable.

By: Getting what’s coming to you » BrainHuddle

Getting what’s coming to you » BrainHuddle — Tue, 20 Jul 2010 20:18:22 +0000

[...] Blank wrote a recent blog post about the role of a founding CEO is to find a repeatable and scalable process. If they do that they should get all their shares. [...]

By: JohnBasilGeorges

JohnBasilGeorges — Tue, 20 Jul 2010 16:52:39 +0000

Steve -

I understand, but your post has some inherent assumptions in it that in my opinion have plagued the VC industry. The inherent assumption is that “founding CEOs have to go”. I claim this is why one reason (financing being the main reason) that one in ten startups are successful. As a successful entreprenuer myself, I was allowed to take the company all the way from founding to sale last year during bad economic times, and as much as I criticized myself and held myself accountable for everything, the company could not have prospered without me despite VCs that wanted me out. It’s all about control and I advocate that entreprenuers keep control for as long as possible since they know their business best.

By: steveblank

steveblank — Tue, 20 Jul 2010 00:54:44 +0000

Great comments – sounds like my post was slightly incoherent.

Katherine – I’m old fashioned about revenues and profits as well, but there are venture funded companies that grow to >10 million users/subscribers and create a valuable company for someone to acquire. These acquiring companies then figure out how to make money from the user-base. Take a look at Union Square Ventures portfolio.

JohnBasil – my bad in writing the post so you misunderstood it. I’m not advocating removing the founding CEO’s. Nor was the post about the value of keeping the founders in startups. The post was proposing a way to fairly compensate those CEO’s when the board decides its time for them to go.

Yann – Completely agree that its hard to determine the right metrics. If it were me I would declare that you found a business model when a unit of sales/marketing dollars produces a predictable unit of revenue/profit/users, etc.
I would shy away from share price over subsequent rounds as its more of a reflection of company hype, state of frothyness of the venture market, etc. It incents the wrong behavior.

steve

By: Dan rockwell

Dan rockwell — Tue, 20 Jul 2010 00:53:29 +0000

Seems like founding CEOs get screwed at every turn. More and more the startup scene seems like a sham. It really should be split up into different scenes with different goals for today’s ever increasingly aware environment and engagement. Those that want to flip and sell focus on that, make a widget make it profitable and flip it, passion or it. The CEOs that sign on for that experience are clear in what that experience end train is gonna be about, I mean that’s the cold hard logic of it yet humans are wildly passionate people and I don’t that’s as easily on/off as we’d like to think we can control. Meanwhile those that want to build for the itch of something with in, granted they aren’t as attractive to vc, can and do because the barriers are low, the risk can be ok and they dare on their own terms,profit or no profit. That may not be sustainable in the atypical biz light but they are chasing something else- and many companies today are built on the long term passion I dumno wtf I’m doing model ie a twitter etc, eventually models appear but the first game is grow and see.

It sucks that founding CEOs are like dead weight to vc today, were the guys and gals building the next big dream out of nothing and we get this shafted disrespect for that. True CEOs builders of tomorrow don’t want a dime cause the dimes will come to them in time, they want their vision enabled simple as that.

By: JohnBasilGeorges

JohnBasilGeorges — Mon, 19 Jul 2010 19:39:02 +0000

Furthermore, I truly believe that the energy and passion that is lost in companies that lose their founding CEO leads to their eventual decline or stagnation. They may do well for a while, but eventually they stagnate or decline. That is because they have no one to turn to at that point because they have lost their vision. Again, lets site another great example besides Apple. How about Microsoft? The list goes on.

By: JohnBasilGeorges

JohnBasilGeorges — Mon, 19 Jul 2010 19:36:03 +0000

I couldn’t disagree more with the generalities and fundamentals discussed in this email.There is data that supports the reverse. Just look at Steve Jobs and Apple as a case study. Apple went through several CEOs after they kicked out Jobs and the company floundered. Then they had to bring him back and they are doing great. Every case is different and unique, and must be treated uniquely. I have personally found CEOs that were able to take it all the way from startup to IPO and beyond and those companies have done better than founding CEOs that have transitioned out of their CEO role.

By: Bill Seitz

Bill Seitz — Mon, 19 Jul 2010 18:33:51 +0000

But, Steve, defining those new metrics *is* a negotiation. Esp. in setting the *value* for such metrics that defines whether the model is repeatable.

So it smells like there’s risk there of bad-faith from either party, because good chunks of equity are at stake…

By: Yann N

Yann N — Mon, 19 Jul 2010 18:10:11 +0000

It’s very hard to determine what is the right metric. And setting in stones may have adverse effects as the exec may be optimizing for ‘his’ metric, rather than the right one.

Shouldn’t we use something like the share price of the company over subsequent rounds. Use that as a proxy to determine whether value has been created?

Put in a hurdle over time, and if hurdle is met, founder/CEO keeps all options and even a parachute. If not, he’s like other non-performing employees…

By: Katherine Warman Kern

Katherine Warman Kern — Mon, 19 Jul 2010 17:26:11 +0000

I guess I’m a little old fashioned but isn’t there only one metric for determining if you have a business model – revenues?

Perhaps a secondary metric is profits – or – potential to make a profit at some reasonable scale?

@comradity

By: steveblank

steveblank — Mon, 19 Jul 2010 17:24:25 +0000

Nothing to renegotiate. The trigger for compensation is finding a repeatable business model. The metrics are just the way to know you found them. You’ll be resetting them as you Pivot.

By: Michael F. Martin

Michael F. Martin — Mon, 19 Jul 2010 16:48:57 +0000

Arguably, a non-linear reward schedule is embodied in Series FF stock.

By: Brandon

Brandon — Mon, 19 Jul 2010 16:04:50 +0000

What happens when you pivot and discover that your metrics are no longer the right thing you should have been measuring? Renegotiate? Over and over?

By: Jon Wetzel

Jon Wetzel — Mon, 19 Jul 2010 14:39:49 +0000

Fantastic post-
I agree with you 100%. I especially see this in the biotech startup atmosphere. There is a distinct difference between the visionary CEO and the day to day CEO and the sooner everyone is on the same page the less distractions there will be in years 3-5.

Jon

By: Adrian Scott

Adrian Scott — Mon, 19 Jul 2010 13:40:37 +0000

Thanks, any thoughts on how we can establish those metrics? Not sure we know which metrics are relevant if we don’t know which business model is coming out of the process… Should we have nonlinear vesting (e.g. akin to accelerated depreciation in accounting)?

Thanks for the post!