A Founder Exits
Uber just fired its founder, Travis Kalanick. The $68 billion question is: Will this ultimately prove a good thing – or a bad thing – for Uber’s investors, drivers, and customers? Research suggests that it is likely to lead to a less innovative and thus less successful Uber.
Kalanick may be a “bad person”, or maybe he’s actually a good person who needs to grow up. (I do not have any insights on whether he deserved to take the fall for the awful things that happened on his watch.) Either way, the venture capitalists and board surely agonized over the pros and cons of firing him. Perhaps they were encouraged by research that finds that replacing founder-CEO’s can be a good thing for pre-IPO companies. An academic paper by Ewens and Marx found “evidence” that venture capitalists can actually improve the performance of companies by replacing founders.*
Uber, however, is not the typical pre-IPO company. It is the dominant player in a global transportation niche that it created. And it has a $68 BILLION valuation. That's a scale more akin to leading public companies. Hence, let's consider how S&P 500 companies have fared with and without their founders at the helm. Recent research by Bain & Company uncovered that founder-led companies within this universe have out-performed non-founder-led companies by as much as 3x over a 15-year period.** Bain attributes that success to an “owner’s mindset”, a drive to “change the world”, and an obsession with knowing their customer.
Another academic study by Lee, Kim, and Bae showed "a significant drop in innovation performance" in the years following the departure of a founder-CEO from large public companies.***
Travis Kalanick, for all his flaws, does deserve this acknowledgment: He created Uber from nothing. Within just eight years, he built a $68 billion global company from scratch. It’s an extreme example of “zero to one”. Kalanick discovered spare capacity that no one realized existed. Who knew that so many people were willing to get off their couch and drive me to a meeting? More astonishingly, who knew that I’d be comfortable with all these strangers picking me up in their cars?
Kalanick's Ted Talk: "getting more people into fewer cars"
More than once has a desperate Frank Byrd said, “God bless, Uber.” Two years ago, I was in Singapore and couldn’t hail a cab. I panicked, realizing that I’d be late for a meeting. In desperation, I pulled out my phone to see if Uber worked in this small country on the other side of the planet. I was shocked and relieved that it did. It was magic. My iPhone (created from another founder-led company) showed me an Uber was around the block. I made it to my meeting within seven minutes - and plenty early. A couple of weeks later in Hong Kong a similar incident occurred. Uber saved me there too.
Some will argue that Kalanick was just lucky to come up with the right idea at the right time. These skeptics miss the point. As Michael Dell says, "Ideas are a commodity. Execution of them is not.” It took a force of nature to take Uber from an idea to reality. Where on earth is Uber’s board going to find someone in that league? Odds are they won't. My only hope is that they find someone capable of preserving the business that has given me so many "God bless, Uber" moments.
Amen of the Week:
“The people who started this company were not just involved but lived what we talked about. We weren’t just preachers. We went out and practiced it. And rightfully so. If this thing didn’t work, we were broke, out on the street again.”
“Founders are hard to replace.”
Bernie Marcus and Art Blank,
founders of Home Depot
Built from Scratch (1999)
Yours in the Field,
Frank Byrd, CFA
*Ewens, Michael and Marx, Matt.“Founder Replacement and Startup Performance.” October 11, 2016.
**Zook, Chris. “Founder-Led Companies Outperform the Rest — Here’s Why.” Harvard Business Review. March 24, 2016.
***Lee, Joon Mahn; Kim, Jongsoo; Bae, Joonhyung. “Founder CEOs and Innovation: Evidence from S&P 500 Firms.” February, 2016.
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