As I have played catch-up on some of my reading, the November-December 2017 issue of Harvard Business Review had an article I enjoyed reading and that got me thinking. Steve Blank, one of the great business minds out there and especially within the world of technology, wrote When Founders Go Too Far, which touched on how founders now tend to stay at companies longer, and how this is not always optimal.
It was great reading from a couple of standpoints, and one really stood out. As a long time sports fan and member of the media, there were a couple of undeniable parallels to the sports world.
The first came early in the article, when he looks back to the 1980s and 1990s:
Many founders were wildly creative but lacked the discipline or skills to drive profitable growth. They also lacked the experience and the credibility to manage a large company, which is what everyone hopes a start-up will become someday. To the investment banks that acted as gatekeepers, such credibility was crucial for an IPO. Part of the IPO process was the road show, for which the bankers would fly the company CEO and CFO around the country to present to institutional investors; the last thing institutions wanted to see was an inexperienced founder at the helm of a company. To venture capitalists, who generally controlled the majority of a start-up’s equity and board seats, green and unskilled founders were a problem that had to be solved if they were to reach their IPO payday.
As I read this, I thought of how the draft in pro sports, especially the NBA Draft, is no longer one led by the best college players. It used to be that players proved something in college, because plenty of players had potential but never began to tap into it. Nowadays, though, it’s all about upside, and proving something in college matters not. In fact, it’s gotten to the point where players almost seem to be penalized for staying in college longer. Some of the most productive college players were not even lottery or first-round picks.
It’s in the same way that some companies are able to continue raising funds even while not turning a profit: upside. The belief is that one day they will turn an endless stream of great profits. But that belief has no results to back it up. In the same way players are drafted on “upside” despite not having produced much, companies keep raising funds despite not turning a profit, or even getting closer to that. This is not to slam investors in companies, as they don’t make the decision to do this lightly and are generally very smart people. It’s only to note what has happened nowadays.
Later, we get another parallel to the sports world then and now, when he talks about some ways to address what he describes as a power imbalance:
Second, the general partners who are the active leaders of VC firms should engage with their limited partners (the institutional investors who put up the capital) about the trade-offs between ethical issues, heightened agency risk, expected returns, and the amount of power and control they are ceding to founders. Do the LPs expect firms to invest in unicorns despite concern over the treatment of employees, a lack of diversity, or questionable behavior toward regulators and other authorities? Is it acceptable for a VC to say, “We think this will be a great, valuable company, but we’re going to pass on investing because of concern over these issues”?
The parallel might not be very clear here, but let’s apply this to sports.
Imagine a player who was drafted with a very high pick is now a free agent. He has had some good years and development, but nothing close to what you expect out of someone drafted that high or with the upside he was thought to have. It’s more like what you would expect of someone drafted late in the first round. Basically, he’s shown that he can be a good player, but hardly a franchise player, though he also looks like he has untapped upside.
Imagine, as well, that team after team decides not to sign him to a big contract – a “max deal” in the NBA, or to, say, a six- or seven-year deal in baseball at an average of about $20 million a year, or similar in football.
And now come back to reality. Such a player is sure to get that kind of deal – from someone. There will be a team to take a chance on that player at a high price.
Similarly, an elite player with off-field concerns will still get a big deal, unless those off-field issues surface far too often. It may not be with a team one imagines, or who the player likes, but that deal is almost certain to come.
Considering pro sports is a big business, it makes sense that there would be some parallels. Oftentimes, casual fans only notice the business aspect of sports tangentially, like when a player is traded or not re-signed for reasons they can’t understand. They understand the competitive aspect, but not the other workings.
This is not an exact comparison, to be sure. Athletes who haven’t tapped into their full potential, or whose potential was perhaps overestimated, are a little different than companies that some areas for concern if they try to grow. However, it’s all about a risk assessment, and it may be a question of whether or not to pull the trigger or to do so at a certain cost/valuation.
This is an interesting subject, and anyone who has been paying attention has noticed that a lot of companies are waiting longer to go public, if they ever do that. When you’re able to raise the kind of money for big valuations without the public market, there’s not much incentive to do an IPO. That seems to go right along with founders staying longer; oftentimes, going public is one of the last steps for founders, because so many would rather start another company or help another at an early stage that stay on to run a public company. Certainly, the requirements of Sarbanes-Oxley could be a factor, but given the valuations of companies that in the past might have gone public earlier, if at all, it may only be a small factor for many of them.
For me, though, the parallels to sports were the first takeaway, and they started a good article in a pretty good issue of the magazine to boot.