I tend to go off the rails about stuff, but in very predictable ways. Certain things will always piss me off. Say we’re in a tech bubble despite record low P/Es and lousy IPO performance. Tell me no woman can ever raise money in the Valley, even though you’re neither a woman nor raising money and the evidence that many — including me — clearly have. Try to argue angel investing doesn’t lead to a richer entrepreneurial ecosystem. (That one was from Twitter this morning.) Tell me Aaron Sorkin is a great writer. I can’t not respond to any of those four things.
It’s for this reason that Paul Carr once bought and redirected the domain predictablyrabid.com to my personal site.
One thing that always pisses me off: misplaced entitlement. By that I mean, someone metaphorically coming to a dinner party at your house and complaining about the food you serve. No one forced you to come eat it! Clearly Michael Carney was aware of this when he dangled this Wall Street Journal article in front of me on Yammer this morning.
Here we go…
The article reports about the supposed mounting worries about dual-class share structures that protect entrepreneurs from activist shareholders. Never mind, this is a very small percentage of companies doing this — you could count them on two hands. The Journal’s logic says there is no way to fight back against an entrepreneur who goes off the rails, if you can’t oust the CEO.
Yes there is: Sell your shares in his or her company. No one is forcing you to invest. That’s why public markets are liquid. That is the ultimate shareholder vote of disapproval. And if you are concerned about these very structure existing in the first place: Don’t invest in these companies to begin with. See how easy that was?
That’s precisely what happened with Groupon. It had two classes of shares, and when investors lost confidence in the management team, investors sold, and the price fell. See that? Supply and demand at work! Zynga with its three classes of shares has declined too, as investors have worried it’s in too much of a hits-driven business that’s too reliant on Facebook.
Indeed, going public with this type of structure should be a double-edged sword only for the most confident entrepreneurs. It’s not enough that people believe in your company, product, or market opportunity. People have to believe in you specifically, because you cannot be kicked out of the company. The pressure is on to perform because there is no value to the asset with a terrible CEO who can never be ousted. This may well be one reason why the declines of the companies who’ve gone public with this structure that haven’t performed have been so spectacular.
And let’s look at the company in recent memory that the most time and energy has been wasted on various proxy battles and potential ousters: Yahoo. Yes, that worked well. Yahoo is killing it now. Hint: If four wildly different CEOs can’t make one of the Web’s largest assets into a growing valuable company, just kicking the CEO out doesn’t solve the problem.
Even if you disagree, the pros of greater control for good entrepreneurs — I’d include Mark Pincus in that along with Mark Zuckerberg and the Google duo, despite Larry Page’s misguided obsession with Google+ — far outweigh the cons. The markets have fundamentally changed in the last few decades. There is a dramatic rise in short term investing. The average time a stock is held is just two and a half months. In 1970, it was five years. It has gone down every decade since then. And these stats do not include high frequency traders who trade in minute increments. It’s not a coincidence that that has coincided with technology companies who can survive one product cycle and then fail. (Cough, cough, RIM.)
We complain all the time about tech companies who miss the next wave by clinging to an existing cash cow, but if they try to make a short-term disadvantaged bold move, activist shareholders punish them. Whiney Wall Street simply can’t have it both ways: Either you don’t get to invest in high-growth companies whose markets are still in flux, or you accept the rules they need to operate their businesses.
Here’s the beauty of public markets: Investors can invest or not. Unlike private investors they can sell at any time. For that reason, a good entrepreneur will likely entertain their concerns, because he’d like to have a high stock price for moral reasons, ego reasons, and the sake of his own net worth.
But anyone who runs his company for the pleasure of short-term investors is a fool. You know who wouldn’t do that? Larry Ellison. Steve Jobs. Jeff Bezos. The very tech entrepreneurs who have created the most value in recent years. Again, that’s not a coincidence. If a hedge fund manager were capable of running Apple, he’d be running Apple.