The Weekly (11/17)
Nov 17, 2023
Conventional wisdom says a startup CEO should make way for a professional CEO once the company has achieved product-market fit.
Despite that ‘conventional wisdom’, investors have long found merit in founder-led companies.
Legendary Silicon Valley investor Ben Horowitz actually prefers it: “The technology business is fundamentally the innovation business…professional CEOs are effective at maximizing, but not finding, product cycles. Conversely, founding CEOs are excellent at finding, but not maximizing, product cycles.” Founders, in Horowitz’s opinion, have the courage to innovate despite the doubters.
Founders traditionally have been able to have a longer-term approach to their business because the company is their life’s work.They also spend more capital on research and development, expand their teams faster, and oftentimes deliver higher revenue growth.
But the disruptive vision comes at a price. Because of these tendencies, founder led companies often generate less cash as a result.
In a time where interest rates have risen, growth is no longer rewarded, and cash is king, there are signs that the so-called “founder premium” may be waning. Cash today is far more important than cash tomorrow and that dynamic is hurting the approach many founders have taken.
From 2018 - 2021, founder-led companies outperformed their non-founder peers. It makes sense in a time when investors cheered bold visions and high growth rates.
But as interest rates turned, that dynamic has flipped. From 2022 to today, those same companies are no longer outperforming. Investors are demanding a controlled cost system and a path to profits.
So it begs the question, what is the path forward?
One option is to temper ambitions, restructure the founder’s approach, and prioritize capital efficiencies. We’ve seen this playbook already this year from Facebook’s founder, Mark Zuckerberg. The ‘year of efficiency’ has been rewarded by investors and the stock is up a staggering 165% YTD. The same is true for Tobias Lutke at Shopify who cut staff, sold off non-core businesses, and turned a profit last quarter. Marc Benioff and Salesforce have done the same thing.
The above lends itself towards the “maximizing product cycle” approach that Horowitz explains. If you recall, that approach has been traditionally mastered by the ‘professional CEO’ and sits outside of a founder's typical playbook.
It’s a new paradigm for most leaders whereby investors are now championing Horowitz's maximalist approach. The world’s best have already focused their efforts towards here and their share prices have been rewarded.
But it’s a balancing act: maximizing product cycles cannot come at the expense of the insatiable search for finding the next product cycle. It’s the innovator's dilemma and who gets stuck will define the next wave of technology for generations to come.
Have a great weekend,
– Your Titan team
Cash Management
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