Blog Post

Mark Zuckerberg and the founder-as-CEO problem

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

As Facebook’s stock continues to slide, amid what appears to be growing skepticism about its future revenue prospects, there has been a consistent drumbeat of opinion around a single thought: Should Mark Zuckerberg be replaced as chief executive officer of the company he created? Some critics of the company — not just of its IPO, but of its advertising model and mobile strategy as well — seem to believe that Zuckerberg is “in over his hoodie,” as one popular phrase puts it. Silicon Valley (where Facebook was raised, if not actually born) has a reverence for the founder-as-CEO, at least in part because of transformational stories like the rise of Steve Jobs at Apple. But is it always best to have a founder running a gigantic public company? Or does the founder mystique contain just as much potential for disaster as it does for success?

Given the kind of hopes and dreams — in many cases, vastly over-inflated ones — that were riding on Facebook’s initial public offering, it’s probably not surprising that the company and its young CEO would be getting a storm of criticism after the fact. Based in part on its massive valuation in private markets such as SecondMarket, Facebook was expected to go public with a market value of $100 billion or more, and many were hoping it would climb skyward from there. How could it not, with close to a billion users, and engagement rates that are off the charts?

Is Zuckerberg really “in over his hoodie?”

As it turned out, of course, that $100 billion was a pie-in-the-sky target, and Facebook stumbled out of the gate and has been falling ever since — at less than $20, the shares are almost 50 percent lower than they were when the company first went public. The skepticism dial was turned up even further when the company came out with its first quarterly report as a public entity, and many analysts saw a less-than-encouraging picture: a company with problems in mobile — which everyone seems to agree is the future of content — and some underwhelming estimates about future performance.

Within days of the earnings report, there were calls for Zuckerberg to step aside: one of the first came from Reuters blogger John Abell, who wrote a post stating: “Facebook needs a new CEO”. Abell said that Zuckerberg might be a visionary, but that’s not what Facebook needs right now:

“He needs to get out of the way –- not because we can judge him a disaster based on a single’s earnings period, but because he isn’t playing to his strength… Facebook needs its spiritual leader and chief innovator in a hoodie. But it doesn’t need him as CEO, placating investors in a collared shirt. There are plenty of people who could manage the Facebook business.”

Pando Daily founder Sarah Lacy responded to Abell with a fairly venomous post, in which she argued that Abell simply didn’t know what he was talking about. It is well known, she argued, that “founder CEOs unequivocally have the most success, and the general school of thought in the Valley [is] that you are almost always better off not ousting a founder, even if that founder is doing a horrible job” (Andreessen Horowitz, a leading example of the new breed of SV venture funds, has written about why it believes founding CEOs are almost always better). Lacy also noted, quite rightly, that Zuckerberg has helped build a $70-billion-dollar corporation, and she pointed to perhaps the most egregious case of a flawed “anyone could run that business” approach — namely Yahoo.

Not every founder is Steve Jobs — some are Jerry Yang

There’s no question that the revolving door at Yahoo is a classic case of mismanagement writ large. But one of the CEOs through that door was the company’s co-founder Jerry Yang, and he had even less success in turning Yahoo around than anyone else — which helps to make the somewhat obvious point that not everyone can be Steve Jobs, returning to save their company and transforming it into a stock-market superstar. And yet, supporters of the founder-as-CEO model seem to believe that the odds of such an outcome are higher with the founder than with someone else. That’s in part why there was so much positive response to Larry Page returning to the CEO spot at Google (although the benefits of that move are still debatable).

Certainly there are plenty of companies that were arguably mismanaged after either being acquired or having the CEO forced out, a list that would probably include MySpace and AOL. And there are companies where having a visionary at the top has clearly helped — such as Amazon with Jeff Bezos. But there are also companies where having a founder remain has caused more problems than it solves, and Research In Motion is arguably one prominent example.

Insiders and investor alike talk about how Jim Balsillie and Michael Lazaridis made sense as co-CEOs for a time at RIM, but eventually their commitment to a certain vision changed from a benefit to a gigantic flaw. The result? Billions of dollars in market value destroyed almost overnight.

To take a smaller example, Twitter swapped out co-founder Evan Williams and replaced him with Dick Costolo, someone with no personal stake in the early vision of the network. Has that been a good thing or a bad thing? It has certainly changed the orientation of the company towards revenue-generating models like advertising — a move that appears to be driven primarily by a desire to justify the company’s alleged market value. Would it have been better to stick with a founder as CEO? And if it wasn’t better for Twitter, then why is it better for Facebook?

To a large extent, of course, all of this discussion is moot: thanks in part to Silicon Valley’s belief in the power of the founder as CEO, Mark Zuckerberg controls the fate of the company in a way that few others do, even Google’s co-founders. Not only does he control a majority of the stock through multiple-voting shares and proxy agreements, but he also controls the board of directors — the same board that would have to act in order to replace him as CEO. For better or worse, Facebook has become the ultimate test of the founder-as-CEO mythos. Will it become an Apple-style success story or a RIM-style cautionary tale?

Post and thumbnail images courtesy of Flickr user Jason McElweenie

17 Responses to “Mark Zuckerberg and the founder-as-CEO problem”

  1. Personally I think the market makers are trying to drive this man out of the company he created and failing.
    Some one is desperate to get their hands on this network and will drive it to $ 5 a share if it means they can get their hands on the information it contains. What would Sony or MGM do with this company?
    There is a concerted effort underway by the hedge funds and merchant bankers to gain control of this company any way they can and if they cant DESTROY IT.
    THEY WANT one of their own at the head to manipulate and collude with.
    Let the stock price fall Zuck will buy it back and carry on regardless

  2. I want to say that same kind of app as Shopycat for android as my final year project.only one month left to finish my app.Can you help how you suggest the gift. i appreciate any help

  3. Okay i am not sure why you omitted this but here you go. Mark has done a brilliant job, think of it this way –

    1. He took FB public and raised 16 B to place in the bank of the company
    2. The stock price is now half of the IPO, if Mark would tapped the street for this more realistic valuation FB would only have 8 B in the bank right now.

    Mark Z has grabbed 8 B more for the company coffers then anyone else could have. The only one complaining should be the smucks that got hossed by the investments houses selling them the IPO placement.

    If you are argueing that the value should be 100 B under Mark Z, you are high on something and not really familar with the process of business valuation.

  4. The question of MZ’s capabilities as a CEO should really be based on what the end-game is, otherwise one can take a stand on either side of the argument, as demonstrated by this article.

    Is the control MZ has/the IPO pricing a result of his brilliance as a CEO, or the brilliance of his team? And if the latter, did he say what he wanted them to do, or what he wanted to do and they made it possible? Unclear, probably a mix, and we may never really know.

    Is there an end-goal and is it viable? Depends on where you see the value of what Facebook has built. As an ad-business, one can make a strong argument that the future is grim. If one looks at it as a data business, Facebook is very well positioned. The challenge is that the business models that will be successful here are nascent and emergent. Facebook’s true value may not yet exist simply because it can’t yet exist.

    Perhaps MZ’s effectiveness as CEO or lack thereof will play out over time, and historical milestones (e.g. IPO) are not really relevant for the assessment. It is interesting to note, however, how many companies who built large valuations on size of user base and strong claims to the future being new and different with conventional metrics for success as being irrelevant, are no longer around.

    Perhaps success here has more to do with luck, the patience of the market, and unforeseen changes (macroeconomic and technical innovation) than with the skills/lack of skills of the CEOs. Americans tend to look at things through the cult of personality lens first: everything is the result of the actions of a hero or a poser.

    this tends to produce less than stellar results.

  5. This is all just funny to see. Mark had been portrayed as an amazing CEO overall and was running the next apple many thought just before they went public. Then they go public, and people are are stupid enough to invest in facebook when the stock was overpriced and everybody KNEW that too. No matter what the stock would have been priced at, it would have eventually kept dropping to $10-14 despite who the CEO is and no matter how well they run the company. Mark was brilliant for valuing his company at over double it’s initial value. The only ones at loss here are the stupid investors who were going crazy about owning a portion of facebook and are now underwater. They should have expected this all along. Mark really knows how to do is job, and there is nobody who can do it better for him; everyone believes that companies perform best when it’s original founder is the CEO of it. In some cases, like google, they do step out of the way, but everyone knows about the complete fail apple was a while ago when it’s CEO QUIT the job because it was performing so terribly. Zuckerberg obviously wants to bring success for his company, and if he stepped out of the way at any point in the company’s past, then facebook would have probably been gone, because MANY people could have just had the idea of it, but terrible execution of it. Zuckerberg should in-fact be blaming the PUBLIC for this to be occurring on him. Because he was perfectly fine conducting his business as the CEO of private facebook, and the reason they went public was not because Zuckerberg was obsessed with it or dying to do it, it was simply because everybody wanted to own a portion of facebook because they all wanted to receive instant wealth! There were too many shareholders of facebook accumulating, and that was why they went public. The idiots who DID invest in facebook to end their obsession had saw the results, and it wasn’t good for ANYBODY. All zuckerberg wanted was to let everyone invest in facebook, and now that he does, he is getting criticized for it to various levels. Mark is only 28 everyone…. he is the worlds richest person under the age of 30. That should be adequate for everyone to just shut up about saying he should step aside as CEO. Besides, with 57% of the voting and being the largest shareholder of the company, that is practically impossible, and mark isn’t stupid and won’t respond to all the peer pressure, because he would actually do what any normal person would want to do at this point, which is to prove everyone wrong. He can do it. The fact that facebook is still worth about 50 billion despite it’s incredible losses is AMAZING. At 50 billion, that’s worth more than several established companies that are running fine today. Imagine if any of you people were in Mark’s place. Obviously you would hate the stupid press to be writing about you daily and saying such annoying things that you cannot even have a say in. Hopefully facebook will be worth 100 billion again some time in the future. Mark is still super young, facebook is also VERY young, so it is too early to say anything. If they change business tactics and make some major adjustments, they could be what everyone wanted it to be.

  6. IS you are wrong about the IPO in one respect, Facebook forgot one thing as a service company you must have trust, goodwill, and great service, unlike Apple, Facebook makes nothing, post IPO without those three items Facebook is a empty shell who will never come close to the IPO price. When you make nothing you must have trust, goodwill and service, a IPO leaving customers, and investors (one in the same with Facebook) gagging, leaves you in trouble.
    However, i do agree, Zuckerberg as CEO is not a problem the founder as CEO is the only person who will get Facebook, out the mess they are in (ie.. Apple), the founder is always the only person who cares at a personal level, hired guns (Cheryl) do not matter, even if they are the smartest person in the room.

  7. I would argue that Zuckerberg might be among the shrewdest, most competent executives out there. (Then again, time will tell if that’s true or not.) Consider the facts:

    1) He engineered a stock and voting rights structure that gave him control of the company even post-IPO and without a controlling interest. This gives him more freedom to run his company than just about any other public company executive I can think of. Investors knew about this upfront.

    2) The IPO team engineered an IPO at an amazing valuation, and it was scooped up by investors at the $38 (and above) price point. Pricing at that level was a risky move, but they seem to have understood the level of demand for their stock. That the value has halved since IPO is almost irrelevant: FB walked away with nearly $16 billion in cash, and last I checked, the whole point of an IPO was to capitalize a company, not create instant wealth (although that seems to be the common perception). Obviously, that fact isn’t irrelevant to FB employees who were paid partly in options, but I guarantee you that even at the current stock price, they’ll make out okay.

    So if I read this correctly, the “in-over-his-hoodie” executive just walked away from IPO with a warchest and near-complete control of the company he’s built from the ground up into one of the Web’s most indispensable properties. He doesn’t have to worry about board politics, proxy fights, and other common distractions. On top of that, he’s hired some amazingly talented executives (Cheryl Sandberg anyone?) to run the company’s operations. Yeah, clearly he has no idea what he’s doing.

    I have my doubts about Facebook’s ability to grow into its valuation, but that mostly has to do with my skepticism about the role of brands/ads in a social environment. That said, I think Zuck has a pretty keen sense of how to run a business.

    As for angry investors? Caveat emptor.

  8. keninca

    Whether the founder can be a good CEO depends largely on how closely the current or future business is to the original vision of the founder. In Facebook’s case, Zuckerberg didn’t envision the business he had today; he didn’t even envision a giant company. He had to be told he was sitting on a gold mine, and once Facebook was expanded from college students to the general public, there wasn’t much vision left to be implemented.

    Unlike Apple, which had to create new products, Facebook just kept selling the same thing. Unless the CEO has new ideas for expanding the company’s reach, he doesn’t need to be a founder. Yang may have had great ideas for the original incarnation of Yahoo, but once Yahoo’s service became ordinary, whatever ideas he had became irrelevant. I think it’s unfair to criticize Yang and other Yahoo CEOs because they didn’t think of the next big thing; having one great idea is no indication there will be another to follow, and what people were upset with Yahoo is that they didn’t come up with another hit. That criticism dogs Google, because none of their follow-on products to search are $30 billion ideas (why do people think it’s so easy to come up with $30 billion ideas?).

    Whether Zuckerberg is the right CEO for Facebook depends on your expectations from them. If you expect the CEO to come up with a way to monetize mobile, then he is no more likely than anybody else to figure it out (it’s a really difficult problem that nobody, at any company, has solved). If, instead, you just want somebody to maintain the Facebook brand (I hate that word), then he’s as good as anybody else – because it doesn’t really matter, the CEO in that case is just a figurehead (as long as there is responsible supervision, although given their purchase of Instagram, that is debatable).