As more venture-backed companies contemplate IPOs, one might wonder whether founders are learning enough about the challenges of becoming public company CEOs.
Certainly, some of the most hotly anticipated, venture-backed offerings of this year aren’t inspiring confidence in the way their boards prepared their leadership. Before going public in early November, daily deals giant Groupon was forced to amend its S-1 three times to satisfy SEC concerns over its accounting practices and an email leaked to the press led the company to cancel its first IPO roadshow. (The widely reported missteps may still be impacting the company, which saw shares fall below their $20 offering price last week and remain stuck there.)
Zynga, the social games juggernaut, has had a bumpy run, too, with numerous amendments to its prospectus and a recent stock scandal that revealed it has been redistributing shares among its employees. Expected to launch its roadshow on Monday, the company is now assigning itself half the $20 billion valuation that analysts had formerly estimated.
Few may be willing to go as far as Elevation Partners cofounder Roger McNamee, who recently told Dealbook that Zynga is “going to be a Harvard Business School case study on founder overreach — this will be a cautionary tale.” Yet there’s reason for broader concern, believe some.
“We do a horrifically bad job of explaining to entrepreneurs what skills are needed at each step” of their company’s growth, says Steve Blank, a retired serial entrepreneur who now lectures on entrepreneurship at Stanford, UC Berkeley and Columbia University. “We do it by osmosis, not by declaration, saying, ‘Here is the path.’”
One problem, in Blank’s view, is that some of the most brilliant entrepreneurs stuff their boards with “sycophants,” who aren’t willing to go to war with them, no matter the cost to the company. Another stumbling block are VCs who are loath to invest too much effort in a founder.
“It’s often the case that once an entrepreneur strikes on a repeatable, scalable business model, the VCs start whispering about an operating executive,” says Blank. “They start asking: Is this the right person to build up HR, accounting, and marketing? And the answer half the time is no.”
Not everyone is convinced there’s an issue worth addressing. Yael Hochberg, an assistant professor of finance at the Kellogg School of Management at Northwestern University, believes founders are forced out “less than 50 percent” of the time, often because they don’t have the skills to run what might evolve into a larger company. Those who stay put can usually “grow along with their companies if they have good management and a good advisory team around them.”
In fact, for those with a strong support network, says Hochberg, running a public or private company should become irrelevant. “If you’re able to grow Facebook and Groupon to where they are today, what’s the difference if they are private or public? You need a good CFO and good reporting staff to deal with all the transparency involved with being a public company,” she says. “But I don’t think for the purposes of coming up with new products and moving products forward, it’s any more or less challenging for an entrepreneur [if his company’s shares are made public].”
It’s a common mindset, one that the founders of Groupon and Zynga appear to share. It also glosses over an awful lot. Just consider good old-fashioned exaggeration. One of the most power tools at the disposal of startup founders, there’s far less room for it as a public company.
“It’s a marketing problem,” says Blank. ”In the tech world, we’ve never really articulated that the skill set for a founder is dramatically different than the skill sets for a public CEO, largely because the people who fund these entrepreneurs don’t want to tell them the odds of that happening are low.”
Or maybe there’s no formula that a startup founder can follow to successfully transition into a public company CEO. Maybe not all of the challenges can be taught in advance. (Maybe none of them can.)
Still, to renew and sustain public investors’ faith in the sector, tech’s newest issuers need to make a credible showing. So doing something different, something more — it may be worth a shot.