"A friend of mine led his company from nothing to over $1 billion in revenue / This worked brilliantly up to about 500 employees."
I'm often confused by the apparent VC assumption with excessive growth and not building right-sized companies sometimes. Is this failure?
To me, this is a great time to say "I'm making lots of money, my employees are making lots of money, and it's ok to be at this size and there's nothing wrong"
It might have been a great time to stop at 100, or even 25, and you could have had a fantastic time, doing one thing supremely well, too.
There's honor in that.
I think the pressure to grow to unicorn sizes inherrent in VC things could often result in weird business choices.
It's important to remember the VC is motivated by the final selling price, and big companies sell more -- but that's totally not failure.
Yes, you've come across the core criticism of the VC business model. They fund 500 startups in the hopes that one of them goes big. Not big, gigantic! Humonguous! The next Google! Facebook! Dropbox! They need such a huge return for their business model to work (do you know how expensive it is to fund 500 pie-in-the-sky startups?)
With that in mind, if as a founder you're happy to settle for mid-size, you're going to get into headlong conflict with VCs who've funded you (and thus own majority shares of the company), because you're failing them according to their model.
You may be interested in jwz's and idlewords's comments, who frequently decry this model.
It's not about going public, it's about raising VC. So don't raise VC. But then the question is: how will you fund product development before you become profitable? If that's not a problem for you, you're in the minority.
You can raise VC without giving up majority control.
In two ways.
First, don't allow dilution to push you + any co-founders below majority. If you focus on building a profitable business, and you're not trying to be the next Uber, this is extremely doable. Ellison at Oracle, Gates + Allen at Microsoft, and Omidyar + Skoll at eBay were able to basically do this; Bezos & Family were also roughly able to accomplish this leading up to Amazon going public (his family still owns nearly 20%).
Second, use the Page-Brin voting shares control approach. Most investors will not like this, don't take their money. Find investors that sync with your vision for the company.
I took on a well known investor, and gave up a modest corner of my business. I retain majority, and will continue to indefinitely. The key is to be able to grow your business into the second or third inning with that first investment, then strictly control dilution thereafter. For example I could do two rounds of 15% dilution from here, and the investors would still not have majority control.
If your business needs to bleed large amounts of red ink, then you're going to put yourself into a corner accordingly. There probably is no good outcome unless you happen to be among the tiny number of companies that make it out of that start alive. For everyone else, you always have a choice.
I've always thought the VC model for software is fundamentally flawed.
Software is so easy to get started that if it can't bootstrap from a bare minimum product, maybe the idea isn't that great as a business.
On top of that, I think there's a bit of circular logic and wishful thinking involved in getting VC money. It encourages companies to spend more money than they need to on things like scaling and fancy design and excessive marketing, because they need to scale to meet VC expectations.
The VC model was essential for the hardware oriented companies that pioneered it because they needed a lot of equipment and capital to build chips and computers. There's so little capital cost with software nowadays, I don't know why VC still persists.
That is definitely not true of all software. Consumer and SMB Web applications, maybe, but domain-specific business software can be a rather nontrivial and capital-intensive undertaking. Those are the quiet companies engaged in the "boring" business of making money that you don't hear about.
That said, a lot of the money goes to marketing. Google AdAwords and low-touch web-based marketing doesn't work for all kinds of products; in an esoteric business market niche, the cost of customer acquisition is rather high, as trade shows, conferences and personal connections matter a lot more.
I don't think it's as hard as many people are making it out to be. Not every company is going through huge growth phases super early on, and that's where the need for huge piles of VC cash right now on any terms comes from. If you keep your costs low by growing carefully and maintaining at least some revenue while also being very selective and careful about the investments you take I think a lot of companies can do just fine even without being 100% purely bootstrapped.
There is an entire eco-system of startups outside the little typically SV/VC bubble where everyone is in it to disrupt everything and win big, there are tons of small companies growing at reasonable levels that will never be the next google or facebook. There's nothing wrong with a "mere" multi-million dollar company.
He had an incredible amount of early traction. For every startup/VC dyad, there's going to be a power imbalance. Either the founder(s) and their company are in high demand (rare), or the VC is (typical).
The side that has the leverage is going to get the best terms. Normally that's the VC. (Liquidation preference, your first born, board seats, etc.)
Should founders just take less investment if their initial product isn't wildly popular? Tho burning VC money to do market exploration (and failing) doesn't sound too bad (isn't that what it's for? :)
I'd love to see more nascent startups follow the GitHub path, and seek product-market fit before attracting investment.
Aaron puts on his speculation hat
GitHub didn't need VC funding. They were incredibly profitable from selling their enterprise product, and took funding because one or more of the following were true:
1. The founders wanted liquidity. Like, buying a Gulfstream or three liquidity.
2. The founders were getting bored and wanted to put the 'fuck you, we IPO'd' notch in their collective belt.
3. Early employees with equity were getting restless about their lack of liquidity and threatening to quit unless they got theirs.
I've got another hypothesis for GitHub: the dynamics of the market changed in a way that it became winner-take-all, which then made it make sense to take VC.
When GitHub started, they were a developer tools company, and the common wisdom was that developer tools have very little lock-in, there's room for multiple players in the space, etc. Sometime at just over a million users, that assumption ceased to be true; you now get companies that host on GitHub because all their prospective employees are familiar with it, and users that sign up for GitHub because their employers use it. With that network effect, it makes sense to grow as quickly as possible to exploit the network effect, and if they didn't take VC, they'd risk some other startup doing that.
It's not just GitHub: pretty much everyone in the developer tools market started taking VC right around then. StackOverflow in 2010; Atlassian in 2011; GitHub in 2012. In Atlassian's case, they were founded in 2002 and didn't take VC until much later. Also, developer-oriented startups started getting funded, eg. Parse, Meteor, Codecademy & other bootcamps.
I understand the antagonism towards VCs, but they have financial reasons why they push for only unicorns. Best reasons I have heard so far are:
1) The only way VCs can make large amount of money for their investors is via a liquidity event. Investors would much rather prefer .25% of a 1B dollar public company than 25% 10M dollar private company, because you can liquidate the former far more easily.
2) Overhead costs are significantly less when you focus on fewer companies, which is what happens when you push all companies to be a unicorn. A VC would much rather care about 5 companies with significant promise than 500 small companies. In the latter situation, you would need way more employees to make sure your investments are safe.
3) Funding a few unicorns is better for marketing purposes. VCs need to raise money from institutional investors, hence need to "wow" them.
I think the pressure to grow to unicorn sizes
inherrent in VC things could often result in
weird business choices.
Yes.
It's important to remember the VC is motivated
by the final selling price, and big companies
sell more -- but that's totally not failure.
Maybe not to you, but it would be to the VC. This is a fantastic reason to possibly, just maybe set your startup sights somewhere other than landing funding. Do you want to be beholden to someone who is—ultimately—trying to flip you for a 9 or 10 figure win, or do you want autonomy and the opportunity to pursue a 'modest' success?
Yeah, except that the VC wants to continue to squeeze more milk from the cow. "More pasture land!" he demands. "Add growth hormones!" he suggests. The cow dies, then he gets to write posts about how the cow's desiccated udders were the bottleneck for his sweet milk.
The only challenge with saying "eh, this is big enough, I'm satisfied as are my employees" is that the business world is not static.
Your competitors are nipping at your heels, markets change, technology changes, and if you get complacent and say "this is good enough" your business can be swept out from under your feet and suddenly you are struggling or dead.
Like it or not business is a treadmill. You can never stand still or you risk falling off.
The problem with leaving oxygen in the room is that someone else will grab it - and burn you alive.
The only natural resting place is "right-size": when you've dominated your market/niche. Choose it wisely.
Be the integrator – When Larry Page took over as CEO of Google, he spent a huge amount of his time forcing every product group to get to a common user profile and sharing paradigm. Why? Because he had to. It would never have happened without the CEO making it happen. It was nobody else’s top priority.
This is a good example where a strong leader can push the entire company in (what I think even Google would now admit was) the wrong direction, and because they are so powerful, the core products can suffer.
I think that is a fair point and worth the distinction.
G+ did not did not need to be deployed in such a heavy handed fashion, and if it hadn't there is a very strong probability G+ would be highly utilized and valued today.
Just left an example of this, founder built a product with a core cadre of about 5 developers, after a slow first 5 years, the market caught up, and then sales doubled every year for next 5 years ($100M plus in sales).
CEO was highly involved with the product, even led the dev team for several years. Unfortunately he was little more than an enthusiastic amateur when it came to technical matters, and had strong opinions on how to implement things. His team was not experienced, so didn't recognize the hole they'd dug themselves. This led to a lava layered mess that failed to scale to the largest customers.
Enter investors, a rewrite, and plummeting sales. CEO was replaced with a sales guy. See ya, good luck with that!
Out of curiosity, how did the investors and rewrite result in plummeting sales? Was it the distraction from improving the product that let competitors get ahead?
As you wrote it, it seemed the core issue was the technical debt that blocked to large customer sales/hurt retention. So if that was fixed in the rewrite (a big assumption admittedly), I'm left wondering what exactly went wrong.
The business was overly optimistic and misunderstood the scope the project and announced it way to soon ie at the beginning of the year. Miscommunication and lack of effective project management caused the rewrite to go way over the already unrealistic deadlines. Sales dried up as everyone was waiting for the new hot.
Investors exacerbated the problem by requiring a 10% head count reduction for no other reason than "it will make everyone else work harder". With blood already in the water, and the train wreck of the rewrite, they started losing their top talent. I bailed because it was clear they missed core functionality, and supporting the new release was going to be a nightmare. And yes I did try to raise awareness of the issues I saw, to the point of shouting in meetings and being a jackass, to no avail. Note I only did that once, then checked out mentally, it's just not worth it. Should've left then, but stuck around for another year.
When the release finally happened, it was situation where vp of IT had to make a deadline or lose his job, so the new release was crippled from the start. Sales went from doubling every year to falling well below the previous year.
Scrolling through comments, and here's a perfect description of my current company! Except its not my company. Guess there's nothing new under the sun.
Thanks for sharing your story. I can't stand arbitrary deadlines/targets just because a number sounds good. But the fact that the core functionality was overlooked is really telling of the challenges you faced.
Great article. While it's great to have a CEO who stays engaged with the product even as the company scales up, it's awful when they continue to micro-manage it the way they did when the company was 10 people. You hired product managers (and perhaps product manager managers). So let them do their jobs and create great products!
When you're running a 500+ person company, you're not going to go into the code and start optimizing the graph traversal algorithm--you hired smart engineers to do this. You're not going to fire up Illustrator and start drawing buttons--you have artists for this. You're not going to write the company blog yourself, or fix the automated test systems yourself, or design the marketing materials yourself. So why do you feel the need to over-ride your product managers on product direction, feature set, user acquisition plans, retention strategy, etc? Doing so de-motivates the professionals you have whose job is to do these awesomely.
Unified vision matters. Peer commentator already noted Steve Jobs, but I wanted to focus on this.
Steve didn't draw the buttons, design the hardware, or write the code -- but he sure as shit told the relevant teams exactly what he wanted -- often directly, with a very shallow management hierarchy -- and told them to try again if they didn't pull it off.
At the same time, he did have SVP-level and VP-level people writing serious, core OS-level code themselves. They were better managers by virtue of actually understanding and having a coherent vision for what it was they were managing.
If the management chain doesn't set product and marketing direction at a company whose purpose is to sell products, then what the hell are they doing in charge?
I had a CEO like that once. He was very good at giving them impression that he could do the job of anyone in the company better than that person and the only reason anyone else was hired was cause he couldn't be in 200 places at once.
Could he not do other people's jobs, not do them as well?
If he was correct in his assessment, was the issue that it affected morale?
Right now, I feel I could do maybe 15 peoples jobs. Not as well, certainly unless I were full time, and so I cede control to them as long as they can explain their decisions.
But often I feel like that statement, even if true, bodes poorly for the company. Is that because of how employees respond to that attitude?
> Right now, I feel I could do maybe 15 peoples jobs.
I don't know you, so I'm not sure, but in my experience you are wrong. I understand where you came from, being a co-founder myself I know at the beginning you have to do the jobs of 15 or more people so you still believe you are as good as them.
But there are two problems:
- You should hire someone that is better than you. Even if you are the best in your field, you should hire someone that could possibly replace you.
- In almost every non menial job, you need to keep your skills updated. You cannot keep up with 15 different jobs and still run a company with 15 people. So after few months you are no more as good as them.
Be aware, you should understand the job of the people you manage. It is ok to ask them why they made some choice, it is ok to challenge them in a respectful way. But they probably know better. It is not just a morale problem, it is a specific problem.
When you become a manager, your task is no more doing their jobs. Your task is to help them become better at doing their jobs. (The next step is to become a leader, where you simply inspire). I saw a lot of managers at different levels (startup CEOs, mid-level manager) failing because they believe they are better at their jobs than their employees.
He certainly couldn't do many of the technical guy's jobs as well as they could. Even if he'd run the whole thing by himself 5 years earlier he had not kept up with the new systems when everything had grown by 10x.
Even for relatively simply things like helpdesk jobs he could just "make it so" since he was the CEO (eg just give customer a credit) rather than having to go though the normal procedures but his technical knowledge was still out-of-date there.
He wasn't the nicest person in general. The problem was that he assumed he could jump into any situation and was as expert as any other staff member. So he'd start telling the network guys what to do to solve something (and trying to login to the routers) despite having virtually no idea how the routing protocols used on the network worked.
The problem was he assumed that any employee only knew a subset of what he knew, so that employee's only value-add was saving him time, not any expertise.
Something like: "I know your job better than you do, now get out of my way so I fix the problem quickly and get back to important stuff that you don't understand"
> The problem was he assumed that any employee only knew a subset of what he knew, so that employee's only value-add was saving him time, not any expertise.
Wow, if I didn't know any better, I'd bet we worked at the same company! However, my guess is that the above attitude is commonly found among type-A founders. They would not have gotten to where they are without a healthy dose of arrogance.
> They would not have gotten to where they are without a healthy dose of arrogance.
I've seen this idea expressed on occasion. I don't think it's true. They need drive, they need confidence, they need decisiveness, they can certainly use a dash of charisma... but outright arrogance? No.
Arrogance is the refusal to consider even the possibility that one might be wrong. No dose of it is "healthy".
In small companies that are truly solving hard problems, having a CEO who could legitimately do everyone's job points to a hiring failure. In a less ambitious company, having a CEO who could legitimately do everyone's job probably means that the CEO is under-employed.
It is far more common for CEOs to think they can do everyone else's job than for that to actually be the case.
Product managers are potentially both the most helpful and potentially most damaging hire you can make, as you are ceding them control (if you do) over the very definition of the value your company provides.
I think someone like Steve Jobs keeping a lot of that control there is definitely of value - in not delegating it.
I've worked with a lot of PMs that were like "this dialog needs to be more orange" (one defunct startup from many years ago), and miss the picture, because they are just kind of faking it -- they are the guy with the opinion and the title, because somebody had to do it, but not really trying to make the best choice for the end user.
There are some that could be exceptional. (Speaking of several different companies where I've experienced this). You need to have someone with a really good gut feel and instinct, and a lot of passion to believe in the thing they are doing. But if a PM is a "CEO of a product", that makes it the most important choice in your entire organization -- for that product. If you have one product, that's huge.
An alternative approach is to get a company really involved, to where everybody on the team has input in the product, and that you source the ideas from everywhere, but yeah, somebody still has to drive it.
Depending on who you talk to PM can mean like 37 different things, and no one person can concentrate on all 37 -- you do need people doing all of those things, but I think it's GREAT if the person at the helm of your company is all about the product. Else, you're just cranking size and numbers?
The purpose of the company, to me, is about creating the things you believe in and want to create - the business is the means to the end, and the food on the table along the way. Approaching it from a pure business perspective is missing a lot of the fun and opportunity.
>Product managers are potentially both the most helpful and potentially most damaging hire you can make, as you are ceding them control (if you do) over the very definition of the value your company provides.
I think it ties into what paul graham wrote about hackers making things for users. The more layers you have between the hackers and the users, there's more potentially that your product won't be that great. I've worked with product managers who supposedly talk to the users directly and channel that into the work us developers have to do but they always seemed to just copy the competitor or only make small changes whose value is questionable.
>An alternative approach is to get a company really involved, to where everybody on the team has input in the product, and that you source the ideas from everywhere, but yeah, somebody still has to drive it.
It's probably better to create the position of product manager from within.
> So why do you feel the need to over-ride your product managers on
> product direction, feature set, user acquisition plans, retention
> strategy, etc?
As long as the CEO isn't micro-managing, why wouldn't they intervene on these topics if the product managers are going in a direction the CEO doesn't want to take the company just yet? The CEO's job is to set the strategy and vision; the manager's job is to execute. If you've hired competent managers, how they execute is up to them. What and why they execute is the responsibility of the CEO and, if the managers are off-course, the CEO must sometimes override them to line things back up with the vision and strategy.
Overall strategy: fine. Vision: fine. Feature-by-feature product definition? Not so much. If you, as CEO, want to do that, great--just don't go out and hire product management professionals. They'll have nothing to do, with you doing their job for them. They'll eventually leave out of boredom and/or frustration.
I suspect we're mostly in agreement. Going through and defining every single feature is micromanagement. However, product direction, feature set, and covering user acquisition plans and retention strategy are places where the CEO (a primary stakeholder) must have input and override where necessary; I see that as non-negotiable. There's certainly a balance that must be struck somewhere between the CEO micromanaging all the decisions and the product managers operating in a vacuum.
It's important to delegate, but the one thing you can't delegate is strategy. The product founder needs to step back from the details but maintain direct involvement in the product aspects related to company strategy.
The "The Product CEO Paradox" is applicable to anyone who leads the development of a product in a growing company, not just the CEO, but the Chief Engineer or CTO as well. It addresses the question of how to continue to make a useful contribution once the pace of development gets too rapid for a single person to keep up with.
It sounds like the failings of
the product CEO can be fixed with just
a good COO. E.g., the OP has:
> Then somewhere along the line,
employees start complaining
that the CEO is paying too
much attention to what the
employees can do better
without her and not enough
attention to the rest of the company.
Sounds like the CEO needs a good COO
for "the rest of the company". Okay.
It does appear that VCs commonly
miss this point. Maybe someone could
guess why, with three guesses, where the
first two don't count.
For a 101 level lesson on deception,
watch, say, Star Wars III --
that lesson is in the movie because
audiences are prepared to believe that
it is close enough to reality,
and many in the audience have good
reason to so believe. Deception, etc.,
go way back, at least to Shakespeare.
Don't fall for it.
In the OP, the recommended
solution for the product
CEO is to write down the vision
or whatever for the product. Good.
But now we are on the way
back to the most rigid
version of waterfall development --
documents mostly in advance
for each level of the
work. I tend to believe that
those documents, etc. are a good,
maybe nearly essential, approach
for the
scenario in the OP, but
that approach is the polar opposite
of lean and agile development.
For small projects, sure, lean
and agile are okay -- knock out some
code, see if like it, else change
it, rinse and repeat.
But for significant projects, I never liked
lean or agile anyway!
But, let's see: The product CEO
is to communicate only via
a carefully prepared, written
document and does prepare
one or more such documents.
So, now the VCs can think what
that they couldn't before?
Three guesses, and the first
two don't count.
There is:
> The CEO skill set is
incredibly difficult to master,
Hmm ... So, how did Gates, Ellison,
Page, Zuck do it?
Did they have
years of experience managing
people, from a lemonade stand
to the decorations for the homecoming
dance to the college PBK awards dinner
to a division in the US Army,
to salesman, local sales manager,
district sales manager,
chief marketing officer? Nope --
none of those.
What about
guys in the flyover states who
build businesses big enough to
let them have, say, a 60 foot yacht?
But, still we're
talking something "incredibly difficult"?
IMHO the whole OP is
to make excuses for what
VCs still very much like to
do -- have the CEO their puppet
on their strings and, then,
pull the strings to get what
they believe they want where
firing the founding CEO is
to be expected. Such firing by VCs
used to be expected, and now
we see that with A16Z it is again.
Besides, this stuff about how
much A16Z likes product CEOs
looks like just misdirection
to keep from talking about
what A16Z really cares about:
A company with traction significantly
large and growing rapidly in
a huge market but where the
founders need/want cash and
are still willing to
sign a standard term sheet that
has the founders suddenly go from
owning 100% of the company to
owning 0% and a four year vesting
plan to get back some of the
ownership while the BoD can
fire them before their stock is
vested and, really, makes the
VCs' investments more valuable --
it's the VC's fiduciary responsibility
to their limited partners.
What is a founder to believe about
a VC? What's
in a blog post or what's in
a term sheet and the other
documents, maybe two inches thick,
worked out very carefully by
bright, well paid lawyers?
Instead, (A) plan the project so that
get to positive free cash flow
early on, (B) grow just organically,
that is, from retained earnings,
and (C) plan the project so that
have some good barriers to entry
to keep out competition long enough
for the growth.
Guys, it looks like A16Z just
wants your work, ownership,
and company and wants to
get those by having you sign
an onerous term sheet
while they give you some
excuses about why you
should give up your power as CEO
and, thus, really, all or a lot
of the financial benefit of your
work. They are after the founder's
money, guys.
In this day and age of high-quality, freely available information and education online about taking investment, do you have data to suggest this level of relationship/terms is common?
My assumption would be that CEOs are getting savvier and things like open source term sheets/agreements are helping level the playing field.
Some companies might be forced to take investment, some founders might be greedy, some might be uneducated. Some ultimately feel that the combined funding, connections, and experience they can tap is the only thing that will let them beat out the competition to being the 800lb gorilla in a hot new market.
> do you have data to suggest this level of relationship/terms is common?
Read the on-line stuff about
standard
term sheets. E.g., pay attention to
some of the details that a founder,
say, one that was just fired,
can encounter in handling the
options where they are already
vested -- net, they may
come away with zip, zilch, and zero
or nearly so.
IIRC there was
a lot at Fred Wilson's AVC.com,
especially part of his MBA Mondays
posts.
Long, broad advice has been, don't take
VC money unless you really need it.
As soon as you sign that term sheet,
take that check, etc., you are now
reporting to a BoD that can fire
you and, with the usual terms,
leave you with little or nothing
while the investors just walk off
with your company and all its
software, customers, value, etc.
The OP is giving various reasons why
"Really, Ms. Product Founder, you
didn't really want to be CEO,
did you? Of course you didn't.
So, just let us find a really good
professional manager to handle
that terrible, 'incredibly difficult'
work of CEO while you move on to
a better quality of life" and
the VCs get total control,
e.g., with their puppet CEO,
and essentially all the financial
value.
It's Star Wars III with
young, naive, angry, afraid,
gullible Anakin Skywalker
listening to the Sith Lord
about how Anakin really doesn't
want to be a Jedi Knight.
I saw a shared post on Facebook the other day with the title "302 Found". I'm guessing it was taken from the standard generated HTML Apache etc. will send when redirecting. Not sure if it's more Facebook's or that site's fault.
I'm often confused by the apparent VC assumption with excessive growth and not building right-sized companies sometimes. Is this failure?
To me, this is a great time to say "I'm making lots of money, my employees are making lots of money, and it's ok to be at this size and there's nothing wrong"
It might have been a great time to stop at 100, or even 25, and you could have had a fantastic time, doing one thing supremely well, too.
There's honor in that.
I think the pressure to grow to unicorn sizes inherrent in VC things could often result in weird business choices.
It's important to remember the VC is motivated by the final selling price, and big companies sell more -- but that's totally not failure.