Founder CEOs, Platforms and Performance

Is there a double dividend at work?

Microsoft, Apple, Google, and Alibaba are now run by professional CEOs.  The transition from founder to professional CEO at the world’s largest platforms garners significant attention.   Amazon made global headlines in February when the company announced that Jeff Bezos will be stepping down as CEOs in the third quarter of this year.1

But these transitions are unusual events.  If we look across the top 100 platform companies, we find that founders continue to dominate the CEO ranks.  At present, founders make up two-thirds of the largest platforms (69% founders vs. 31% professional CEOs).  This puts platform founders in charge of over 2.8 million direct employees and a collective market capitalization of $6.7 trillion.  Their influence is even greater if we consider the full ecosystems they orchestrate and the resources these networks command.

When they do step away from running day-to-day operations, founders typically continue to play an active role in the company.  Bill Gates only stepped down from the board of Microsoft one year ago, 45 years after founding the company.  Jeff Bezos will transition to become executive chairman of Amazon’s board.

If we break the top 100 platforms into four groups of 25, we can see that the role of founders is even more pronounced as we move down the list to the second, third and fourth quartile of companies.   For example, in the fourth quartile 80%, percent are operated by founders, 80% of the market cap, and 90% of the employees. 

Are Founder CEOs More Innovative? 

How do founder CEOs compare to professional CEOs on performance metrics like innovation?   One school of thought suggests that they can struggle.  As firms grow in size and scale, founder CEOs may perform no better—and may even fair worse—than professional CEOs. 

Why?  The thought is that founder CEO-managed companies often lack the appropriate organization managing skills to sustain innovation as organizations grow. The skills that served founders well to handle the entrepreneurial challenges of establishing and scaling a company may not be suited for the administrative capabilities required to effectively manage a large, established company.  It is one thing to run a company of a couple hundred or even a couple thousand employees.  It is a whole other matter to run a company of tens of thousands. 

As a point of reference, the average number of employees at the top 100 platform companies is now 42,000.  Even if we exclude Amazon, which has seen its direct workforce grow dramatically in the past several years, the average number of employees is still 34,000.  Following this logic, it would make sense for investors to seek to have founders replaced by professional CEOs as platforms mature.  

Others argue that founder CEOs are much more innovative.  Rather than holding back innovation, founder CEOs are more likely to be entrepreneurial risk-takers as well as be more likely to pursue long-term growth than professional CEOs.  Because new business models, new technologies, or newly imagined products are risky and hard to commercialize, founder CEO-managed firms will generate more of these innovations than professional CEO-managed firms. 

Recent studies support this latter perspective. Research on a large dataset of public firms by Lee, Kim and Bae finds that founder CEOs are more effective and efficient innovators than professional CEOs. They ran panel data regressions on a sample of 1,453 firms and 2,354 CEOs, of which 333 are founders and 2,021 are professional CEOs, for a total of 8,856 firm-year observations. They found that companies managed by founder CEOs is correlated with a 31 percent increase patent count (without controls for level of R&D spending) and a 23 percent increase (with adjustment for R&D spending).2

Well-known VCs have made backing founder CEOs core to their investment strategy. In a letter announcing the founding of the now famous fund Andreessen Horowitz in July 2009, Marc Andreessen wrote:

We are hugely in favor of the founder who intends to be CEO. Not all founders can become great CEOs, but most of the great companies in our industry were run by a founder for a long period of time, often decades, and we believe that pattern will continue. We cannot guarantee that a founder can be a great CEO, but we can help that founder develop the skills necessary to reach his or her full CEO potential.3

This element of their investment strategy proved to be controversial.  So much so that Ben Horowitz followed up with a post defending the position on April 2010 titled:  “Why We Prefer Founding CEOs.” He argued that innovation is the core competency for technology companies and founders are better positioned to realize it. 

“Professional CEOs are effective at maximizing, but not finding, product cycles. Conversely, founding CEOs are excellent at finding, but not maximizing, product cycles. Our experience shows—and the data supports—that teaching a founding CEO how to maximize the product cycle is easier than teaching the professional CEO how to find the new product cycle. The reason is that innovation is the most difficult core competency to build in any business.”

The post also went on to cite the importance of founder CEOs in having:

  • Comprehensive knowledge

  • Moral authority

  • Total commitment to the long-term

The full text of the post is now archived here: http://bhorowitz.com/2010/04/28/why-we-prefer-founding-ceos/

Platforms Perform Better

At the same time, studies point to the superior performance of platform companies. The most comprehensive study to date comparing platform to non-platform companies found that platforms outperformed across not just market capitalization but other key metrics as well. Michael Cusumano, Annabelle Gawer and David Yoffie found that platform companies spent more on R&D and other expenses related to sales, marketing and administration but also grew faster in sales and operating profit than conventional public firms.

This research was based on the median values for Forbes Global 200 industry control sample (100 firms) vs. platforms (43 firms) over a two-decade period from 1995 to 2015.4  

Double Dividend? 

All of this points to an interesting question regarding the root cause of higher platform performance: A)Is it a consequence of the CEOs being founders?  B) Is it a consequence of the higher performance and innovation that flow from the network effects and other special attributes of the platform business model?   Or, C) Is it a third possibility that founder CEOs and platform models combine to provide a double boost to performance?

So far there has been little rigorous analysis of the relationship between founder CEOs, platforms, and performance.  Cusumano, Gawer and Yoffie do not mention the type of CEO or attempt to control for the potential of a founder advantage.  There could very well be some type of survivorship bias at work.  We may be concentrating on the roles and business model while overlooking other key factors that might explain success. 

As the platform economy matures, more and more founder CEOs will be replaced by professional CEOs.  There will need to be a new generation of platform leaders.  The question is will they be able to sustain high performance.   

In his note last month regarding his transition, Jeff Bezos attempted to assure investors that innovation was deeply engrained in Amazon’s culture and would not change.  He wrote:

Amazon is what it is because of invention. We do crazy things together and then make them normal. We pioneered customer reviews, 1-Click, personalized recommendations, Prime’s insanely-fast shipping, Just Walk Out shopping, the Climate Pledge, Kindle, Alexa, marketplace, infrastructure cloud computing, Career Choice, and much more. If you do it right, a few years after a surprising invention, the new thing has become normal. People yawn. That yawn is the greatest compliment an inventor can receive. When you look at our financial results, what you’re actually seeing are the long-run cumulative results of invention. Right now I see Amazon at its most inventive ever, making it an optimal time for this transition. 

Clearly, the relationship between founder CEOs, platforms and performance is an intriguing one and deserves close attention.


Leave a comment


For more on the how companies can prepare the next generation of platform leaders see:


Footnotes

1

https://ir.aboutamazon.com/news-release/news-release-details/2021/Amazon.com-Announces-Fourth-Quarter-Results/

2

M. Lee, Jongsoo Jays Kim, and Joonhyung Bae. "Are Founder CEOs Better Innovators? Evidence from S&P 500 Firms," Academy of Management Proceeding, vol. 1. 2016.

3

Introducing our new venture capital firm Andreessen Horowitz : pmarca (archive.org)

4

Michael Cusumano, Annabelle Gawer and David Yoffie, Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power, New York: HarperCollins, 2019