We all know the story: a couple of guys in a garage invent some breakthrough idea/technology, and presto – they’re multi-millionaires! That certainly has happened. But by the mid-1970s, venture capitalists were the ones who really controlled the tech companies. VCs not only held the purse strings, but they also brought MBAs and real-world experience to the table. As key investors, their job was to develop and execute a plan of action to grow the company – and the faster the better. In practice, this rush to scale meant that the original entrepreneurs were often sidelined in the company’s journey from tech start-up to viable business. So while entrepreneurs were (and are) revered in the Valley, for decades, the VCs were the real kings.
This all began to change 15 years ago, in the wake of the dotcom bust. According to Stanford Professor Steve Blank, everyone involved in the tech boom of the late 1990s expected to make a financial killing as soon as they sold their stock. But because VCs usually held preferred shares, they were able to sell before prices crashed (and before dubious business models were exposed). Entrepreneurs, on the other hand, were often locked in, and, in the aftermath, they were often left empty handed. Entrepreneurs felt burned by the whole dotcom experience.
These entrepreneurs carried their resentment into the next chapter of Silicon Valley history, giving rise to the “Founder-Friendly” model, in which entrepreneurs retain power and control over their companies as they grow. The dotcommers who’ve pushed this shift include PayPal co-founder Peter Thiel and Netscape co-founder Marc Andreessen. And over the last 10 years or so, the success of the founder-friendly model has encouraged other VC firms to follow suit.
But this phenomenon has also produced unintended consequences, say Steve Blank and Silicon Valley journalist Sarah Lacy.
First, the founder-friendly model is tightly linked with the rise of unicorns, which are privately held companies worth over a billion dollars (the key phrase being “privately held”). The powerful entrepreneurs exert more control over who sits on the board of directors and who owns preferred shares. They have also been reluctant to go public, which makes these privately held companies more insular and shielded from scrutiny and oversight.
Another troubling consequence of the founder-friendly model is that it’s spawned an entire culture of rule-breaking and corruption. Theranos, Uber, and Lending Club are epic examples of companies gone awry -- all linked to the founder-friendly structure. With founders at the helm (and seemingly untouchable) for much longer, deplorable behavior is not just tolerated – it’s encouraged.
It’s worth noting again how the ghost of Steve Jobs hovers over everything that happens in Silicon Valley. Jobs lost control of Apple in the mid 1980s, ousted in a showdown with then-CEO John Sculley. Jobs’ triumphant return 12 years later was seen as vindication that he, Jobs, should have been in control all along. He became the quintessential misunderstood genius, and proof that tech visionaries should also be CEOs.
So where are we now with the myth of the Silicon Valley entrepreneur? Is our hero a man (argh, always a man) possessed with transcendent skills in both technology and business, and who wields enormous power? This certainly seems to be the system in place today. But the bigger question is who will serve as a check on this power and influence. The VCs were just the first domino to fall. As we explore in the next episodes of Raw Data, what other checks are in place...and are those dominos teetering as well?
For more on the Silicon Valley business culture, see Steve Blank’s excellent 2017 article in the Harvard Business Review,
Steve Blank, Sarah Lacy.