Is ‘founder mode’ or ‘manager mode’ better? Here’s what the 22 Fortune 500 companies still run by founders show

Posted by Admin September 8, 2024 Bussiness

The buzziest buzz term in the tech world is suddenly “founder mode,” coined only days ago and fast propagating into business worldwide. Founder mode is a way of running a company—the way a founder would run it—as distinct from manager mode, the way it would be run by “merely a professional manager.” So says Paul Graham, a co-founder of the Y Combinator startup accelerator, who originated the terms in a recent essay. He disdains manager mode and finds founder mode far superior. So—is it?

Graham is well positioned to judge. Over the past 19 years, Y Combinator has helped to birth thousands of companies including Airbnb, DoorDash, Reddit, and Stripe. He was inspired to identify two modes of managing after hearing a recent speech by Airbnb co-founder Brian Chesky, who described his awful experience bringing in outside managers. The speech struck a chord with other founders in the audience. Graham’s distillation of their views:

“Hire good people and give them room to do their jobs. Sounds great when it’s described that way, doesn’t it? Except in practice, judging from the report of founder after founder, what this often turns out to mean is: hire professional fakers and let them drive the company into the ground.”

Not a warm vote of confidence in outsider MBAs. To see if such scorn is justified, let’s look at some data.

Founder mode vs. manager mode

The Fortune 500 includes 22 companies that are run by their founders (list below). We calculated each company’s performance during its current founder CEO’s tenure and compared it with the performance of the rest of the 500 over that same timespan. We measured performance by cumulative return, which includes stock price performance and dividends.

Result: a blowout in favor of the founder CEOs. Specifically:

· Cumulative total return during the founder CEOs’ tenures—The founder CEOs’ companies delivered a median of 1,129% vs. 57% for the rest of the 500.

· Performance vs. the S&P 500 (a performance score of 100 equals the market)—The median return of the founder-CEO companies was a performance score of 202, while the median of the rest of the Fortune 500 was 92.

· Performance vs. the sector (a performance score of 100 equals the sector)—The founder-CEO companies delivered a median performance score of 656.

The superiority of the founder CEOs is breathtaking. But if we used this data to declare that founder mode beats manager mode, the world’s statisticians would have us arrested for the crime of survivor bias. Those 22 founder-CEO companies are a tiny fraction of the many thousands of startups launched over the same time periods, and we don’t have data on how each was managed. For starters, what percentage of startups crashed and burned under outsider managers vs. what percentage crashed and burned under the founders? We would like to know that and much more.

Still, we know at least two relevant facts. First, we know that the forces determining who runs a growing startup have been well studied and explained. Noam Wasserman, dean of Yeshiva University’s business school, was on the faculty of the Harvard Business School when he studied thousands of startups and wrote The Founder’s Dilemmas. It describes in detail how entrepreneurs balance conflicting personal preferences that influence who—a founder or outsider—runs the business. In response to Graham’s distaste for outsider managers, he tells Fortune, “Founders who were great for the early stages, but do not have what it takes for the often very different next stage of company development, may instead be the ones who ‘drive the company into the ground.’”

Second, we know that on average, the few founder-run companies that make it to the Fortune 500 are formidably great performers, and we should know more about how they joined that exclusive club. Graham wrote in his essay, “There are as far as I know no books specifically about founder mode. Business schools don’t know it exists…. But now that we know what we’re looking for, we can search for it. I hope in a few years founder mode will be as well understood as manager mode.”

That’s a worthy goal. Founder mode should absolutely be studied and taught, not because outside managers are necessarily toxic, but because the research can make available to others the lessons learned by those rare founders—Apple’s Steve Jobs, Microsoft’s Bill Gates, Nvidia’s Jensen Huang—who managed their companies from nothing to greatness.