Founders do it better

Successors to successful founders rarely do as well, according to two Bain consultants who’ve studied the topic.

The headline in Monday’s WSJ made it clear:

The Company Founder’s Special Sauce
No one leads a firm as effectively as the person who started it.
By CHRIS ZOOK and JAMES ALLEN
Dec. 18, 2016 5:03 p.m. ET

‘The Founder,” a new film starring Michael Keaton, tells the story of McDonald’s Corporation founder Ray Kroc as he turns a few small restaurants into a ubiquitous international chain. It’s a tale of founder-driven corporate growth—something that has become too rare today. This breed of entrepreneurial spirit makes for a good story, but it’s also crucial for the economy.

Research we published in July finds that of all newly registered businesses in the U.S., only about one in 500 will reach a size of at least $100 million in revenue. A mere one in 17,000 will attain $500 million in revenue and sustain a decade of profitable growth. Despite their rarity, these successful firms are a bedrock of the U.S. economy.

A study out earlier this year from Bain & Company, where we work, shows that over the past 15 years founder-led companies delivered shareholder returns that are three times higher than those of other S&P 500 companies.

Such performance can sometimes continue long after a founder leaves. We analyzed examples of sustained success at 7,500 companies in 43 countries, visiting many in person, to determine what made them stand out. Great founders imbue their companies with three measurable traits that make up what we dubbed “the founder’s mentality.”

Those three traits: insurgency (i.e. disruptive innovation), obsessive focus on customers, and permeating the vision of the founder throughout the entire organization.

I have not had a chance to read their research, but it rings true. I did my dissertation on Apple, once led by Steve Jobs — perhaps the most unique founder of the 20th century; in America, only Henry Ford, Tom Watson Sr., Hewlett & Packard and maybe Howard Hughes come close.

Jobs was driven to make “insanely great” products, to the point of being a tyrant (slightly more human after he had kids). Since his death five years ago, they’ve had mediocre leadership and nothing they have done has come close (something us shareholders must lament).

One caveat: while I lionize great founders — and aspire to be a good founder once again — there is an important confound. Firms have their best people, best ideas, greatest disruption and greatest impact during their initial growth phases; a second round of growth and disruption (as in the Jobs II era, 1997-2011) is virtually unheard of. Big companies don’t grow as much as small ones, nor is the CEO (of any stripe) able to have the same impact. (And unlike Jobs, most tech founders have their greatest impact in this initial period, not running the stable successful mature company).

Still, nothing I’ve seen this year does as good a job summarizing the great debt society owes to those who roll the dice, take great chances and endure years of high-stress intensity to create a new company. The decline in US startups is troubling not only for economic growth, but for the lost opportunities for employees, customers and complementors as well.

Hire the best — and let them go

When I had my software company, in a typical year half of our employees were software testers, for which we hired local college students or occasionally high school students. We mostly got students who grew up nearby, and were attending the local junior college (three miles away) or the CSU or UC a half hour down the road.

The expectation was that this was a temporary job while they were in school. We hired a few college seniors, and a few didn’t work out, but most stayed 3-4 years. We taught them everything they needed to know about both running routine tests and isolating bugs so they could be reproduced by the programmer when it came time to fix it. (I’d like to say I created these processes, but they were created by our former director of product development and QA manager — who both sadly died well before their time).

Most of our business was with HP. When we went to visit their local office for a testing meeting, I was surprised to see how they used a completely different approach. There, QA was a career that you could do after a four year degree and stay with for many years. Because the best college graduates wanted to be programmers, the testers were (for the most part) those interested in computers but not talented enough to be programmers. (Our QA manager had years of experience, but his lack of even an A.A. meant he’d never be hired by HP).

For pretty much all of our student employees, this was the best computer-related job they could get in our local area without a degree. We got brighter employees without prior experience who didn’t stay very long, but we got the benefit of their aptitude and good work habits while we had them. Later on, I realized how fortunate we’d been to have them, as they went on to work at HP, IBM, Microsoft and other tech companies. One has started two companies and has mentored other entrepreneurs. The one student programmer we hired is now a full professor of computer science at MIT.

I was reminded of this when reading a Wall Street Journal column today by Sydney Finkelstein, a Dartmouth leadership professor. I know him from his great book on leadership that (in part) chronicled the leadership failures that brought Motorola crashing to earth in his book Why Smart Executives Fail.

The column has a provocative title and opening:

Why the Best Leaders Want Their Superstar Employees to Leave
By Sydney Finkelstein

Should bosses try to hold on to their star performers?

For most of corporate America, the question might seem like nonsense. Star performers are seen as so valuable that managers should pull out all the stops to keep them—or else see their companies take a big hit in productivity.

Yet some of the best managers not only allow their top performers to leave, but actively encourage it.

He talks about his study of leading execs across 18 industries for his new book, Superbosses: How Exceptional Leaders Master the Flow of Talent. While I might quibble with a point here or there (notably the idea of Larry Ellison as one of “the world’s greatest bosses”), the data are compelling. For example, a sidebar to the article says that at one point, 20 of the 32 NFL coaches either trained with Bill Walsh or someone trained by him.

This is the part of the article that really resonated with my experience:

The stories of these bosses reveal a crucial shared belief: You’re better off having the best people for a short time than average people forever.

The bosses were uncompromising when it came to recruiting. They didn’t want average; they wanted mind-blowing. They searched high and low for unusually talented individuals, often experimenting with nontraditional hires (and tolerating higher levels of churn when some of these hires didn’t work out).

But once unusually talented people were inside the organizations, the bosses accepted that some would leave. Top employees, the bosses realized, were almost always on a rapid growth trajectory. They were ultra-ambitious, perpetually angling for the next big opportunity, and it stood to reason that at least some of them would eventually need to leave the company to keep their careers moving ahead.

Even at our little software company, we were fortunate to have some truly exceptional teenagers and 20-somethings just starting their careers. This lesson is a reminder that — even if I’m no superbosss — for my next startup we should keep a policy of hiring the most talented people we can find, even if we have to train them from scratch or can’t hope to keep them for more than a few years.