Rich vs King

2019-11-18

‘Why Did You Start Your Business?’

Founders get asked this all the time. What made you do X and why did you choose Y? Founder motivations differ and can be incredibly broad. It’s undoubtedly a blend of timing and inspiration, but ultimately what motivates us as founders is vital to understand.

Noam Wasserman’s, The Founder’s Dilemmas, examines early stage decisions by entrepreneurs that can make or break a startup and its team.

Wasserman argues that in the majority of cases, the motivation bottles down to a shoot-out between ‘Rich’ or ‘King’:

• ‘Rich’ – This is self-explanatory where money is the name of the game. This motivation is where a company’s purpose is typically seen as a vehicle to deliver shareholder profit (and ultimately build the founder’s personal wealth). 
• ‘King’ – Wasserman describes the motivation of some founders stemming from running and controlling their own business empire. Power is the driving force here.

‘So, Which Is Better – Rich Or King?’

Firstly what does this “King” type founder look like? Are they micro-managers who try to control every aspect of their business? Potentially yes, but not necessarily.

The key point of control is the control of the equity and likely resulting control of the board. Founders who maintained this type of control in their business typically exited at lower valuations, with lower returns or in most cases did not exit, as the company stalled as a “Zombie” or simply failed.

It may seem counter-intuitive that, in ceding more equity, co-founders and investors would lead to significantly higher returns. However, studies repeatedly show that founders that are “rich” motivated will achieve their goals with less control.

An element of this is obvious – selling equity to an investor who injects both financial and social capital into a business will likely have a better chance of success – sure you’ll lose some control, but sometimes you have to accept your weaknesses and bring others in to grow.

A great example of knowing when and how to cede control is often the CEO position.

For startups that are growing fast, strong leadership to make decisions and set the company direction is necessary. The qualities of a top CEO will differ from company to company and opinions on what makes good CEOs are constantly debated.

Ultimately, we can confidently say that the founding CEO is not necessarily the best person to run their company. Many founders have visions of being the next Steve Jobs or Bill Gates, founding a large company and running it for many years. However, Wasserman’s research of hundreds of American startups revealed that within three years of founding the startup, 50% of founders were no longer the CEO, and fewer than 25% were in the top seat when their companies went public. 

In fact, four out of five founders from Wasserman’s study were actually ousted from the CEO post, a direct challenge to this role of King. This suggests that, more often than not, foregoing the glamour of being a King, and instead pursuing Rich is the best route to growth.

‘One Step Backwards, Two Steps Forward’

The control point is where the founder’s dilemma is felt hardest. Professional investors (VCs and Super Angels) will sometimes push to replace the CEO early since they know that everyone’s financial returns will be maximised by implementing experienced leadership.

Admittedly, this isn’t always the case and/or investors aren’t always right. Sometimes founders can be stepped down too early, thus calling disruption or stalling company growth. The founder has the initial vision, sees the opportunity and hires people to help build according to that vision. Indeed, super successful VC firms such as Andreessen-Horowitz (A16Z) are well known for much preferring to back founding CEOs. However, AH are one of the few exceptions.

Another key consideration is that at different stages in the lifecycle of a startup, different skillsets will be required. For example, whilst a technology minded founder might be the best person to lead the company at an early stage, more business acumen and experience in marketing and sales may be required as the company grows. Therefore, the more successful a startup is at an early stage, and the more equity and board control that is given away, the more likely that the ‘successful’ founding CEO will be replaced by someone with more experience and/or different skillsets. 

Take the example of Google – founded by Larry Page (Founding CEO) and Sergey Brin. The co-founders made a great team but were initially inexperienced and unable to captain the incredible growth that Google and its technology were experiencing. Page knew he was not ready and with his board hired Eric Schmidt, who helped mastermind Google into the incredible technology giant it is today. Throughout Schmidt’s tenure, Larry Page importantly stayed involved at the board and executive levels. Then in 2011 – a whole decade after he initially stepped back – Page was now ready to retake the reigns and lead Google to their next stage of growth.

Google really is a perfect example of the founding team realising the huge potential their venture held whilst accepting their own shortcomings in relation to this. In their case, it made total sense to bring others in to ‘run’ things. Sure, ultimately Larry Page returned, but this was far from guaranteed in 2001 when he stepped back from his creation – what was guaranteed though, was that Schmidt presented the best opportunity for Google to kick on to the stage of hyper-growth.

So, how about Steve Jobs? The infamous control freak, who many would argue achieved both Rich and King…

Even Jobs accepted he was not right to be CEO of his booming company in the early 1980s. Upon accepting this, Jobs went out and hired Pepsi-Cola’s President, John Sculley. In hindsight, this was not the best hire (Apple’s prospects under Scully deteriorated). However, the decision to bring someone in was correct – Steve Jobs was not the right person at that time. It took the strenuous experience of acting CEO of NeXt Computers and later Pixar to build Jobs into the ‘iCEO’ we all know about today. Therefore, even Jobs faced the Rich vs King dilemma and learnt to avoid King.

In summary, all founders need to understand their motivations for their company. Do they want to maximise returns or retain control and power over their company? If it is the latter, they need to consider whether they are ready for such a role. 

Founders who understand that they are motivated more by wealth than by power will make the best decisions to help the company scale, including bringing in a more experienced CEO. On the other hand, those motivated by control may make more decisions that enable them to retain power whilst actually hindering the overall growth of the company.

It’s a prevalent dilemma because often founders face the choice to lose control to increase their wealth. However, it’s safe to assume that most entrepreneurs are motivated by maximising profit – therefore, avoiding the enticing trap of King is a must for those looking to scale effectively.