While much of this book has been written from the perspective of investors in companies and how they can combine storytelling and number-crunching skills in investing, there are lessons for managers and founders of businesses as well. In this chapter I go back to the corporate life cycle that I introduced in chapter 14, but I look at the connection between narrative and numbers from the perspective of managers, owners, or founders rather than investors. As with investors, I argue that the qualities needed to be a successful top manager will change as a company moves from start-up to decline, perhaps explaining why the founders of many successful start-ups are unable to transition to becoming CEOs of more established businesses and why CEOs of established businesses do badly at start-ups. I also look at why it is critical that top managers at companies not only have clear, compelling, and credible stories to tell about their businesses at every stage in the life cycle but take actions consistent with these stories.
A Life Cycle Perspective on Managerial Imperatives
In the last chapter I introduced the corporate life cycle structure to explain how the balance between narrative and numbers shifts as a company transitions from a start-up to a growth firm and then moves to being a mature business before slipping into decline. Not surprisingly, the challenges faced by those who manage these businesses also change as they move through the life cycle.
The Managerial Imperative
In keeping with the narrative/number mix over the corporate life cycle, the challenges faced by managers/founders shifts as a company ages. Early in the life cycle, founders need to be compelling storytellers, capable of convincing investors of the viability and potential of a business, even when there are no results (or even products) to point to. As the firm transitions from the idea to the business stage, the promoters of the business need to bring business-building skills into the equation to convert promise to numbers. When the firm starts to grow, the test for managers is whether they can start delivering results that back up the story. In maturity, managers need to frame their narratives to match up to the numbers that are being delivered; continuing to tell a growth story when a company’s revenues are flat will lead to a loss of credibility. In the final stages, managers will be tested on their ability to get past denial, accept that the business is in decline, and act accordingly. Figure 15.1 illustrates these shifts.
Figure 15.1
The corporate life cycle and managerial challenges.
Early in the life cycle, having the right person at the head of the company is key to whether it succeeds or fails, but as a company matures, there will be a point in its life cycle, especially if it has found a formula that works and is in a settled business, when it may not matter much who its top managers are. ExxonMobil’s value is unlikely to change much with a different top management team, and that may well explain why you could be an investor in ExxonMobil and not know who its CEO is, or even care. In contrast, it would be foolhardy on your part to invest in a GoPro or Uber without finding out more about who runs these companies and without being comfortable with their styles and philosophies.
If you buy into this notion that the managerial challenge shifts as companies move through the life cycle, it stands to reason that the qualities you look for in a CEO are different at each stage. Early in the process, it is the visionary CEO who is best suited to telling the company’s story and convincing others that a business idea has potential. As you move from idea to product, while vision is still critical, it has to be supplemented by the capacity to build a business. As the business takes hold and you seek to scale up, it is the opportunistic CEO who finds new markets and businesses that the company can enter to grow efficiently. Once the company is established as a successful business, the CEO has to learn how to play defense, as competitors are drawn by success to imitate and improve on the company’s offerings. As the business moves into its mature phase, the CEO has to be a realist about growth and its costs, recognizing that going for more growth, at any cost, can be value destructive. In the decline phase, the CEO has to be comfortable with the conclusion that the best course for the company may be to shrink, liquidating assets that others are willing to pay higher prices for or that have outlived their usefulness.
Narrative and Numbers: Management Lessons Across the Life Cycle
While the challenges that management faces can vary across the life cycle, there are some constants that emerge from looking at successful businesses and their leaders over time.
1. Control the story: Managing is not just about delivering numbers and meeting analyst expectations. It is about telling a story about the business that allows investors to understand not only its history but where you (as the leader) plan to take it in the future. If top managers do not craft a credible story about the company, investors and analysts will step into the vacuum and craft their own stories, leaving the company playing a game that is not of its own choosing.
2. Stay consistent with that story: Managers are also judged on whether their story stays consistent over time. That does not mean that you can never change your story, as you often must in response to events, but it does mean that if your story changes, you have to explain why and how. If your narrative changes from period to period, with no explanation and perhaps to be in sync with whatever investors and customers are most enamored with in that period, your story will lose credibility and risk being displaced by alternate ones.
3. Act in accordance with the story: As managers make decisions on where to invest, how to fund those investments, and how much cash to return to investors, they will be watched closely to see whether their actions match up to the story they have told about the business. A CEO who frames a narrative about his or her business being a global player but never invests or seeks out opportunities in foreign markets will find that investors stop believing that story.
4. Deliver results that back up the story: As a CEO, you can tell a great story and stay consistent with it over time and with your actions, but if the results don’t measure up, you will still be found wanting. If your numbers consistently tell a different story than the one that you have been offering to markets, the numbers will win out. Thus, a CEO who pushes a high-growth story to investors while delivering flat revenues will have to either change his or her story or risk being ignored.
Here again, there is a tie to where the company is in the life cycle. Early in the life of a business, managers have to decide whether to push for a soaring narrative, in which they promise the moon, or be more restrained and settle for a smaller narrative. The trade-off is simple. A soaring narrative is more exciting and is likely to attract more investor attention and yield a higher valuation or pricing for the company than a smaller, more constrained one. However, a soaring narrative will also require more resources to convert into reality and is more likely to result in disappointments down the road.
CASE STUDY 15.1: CONSISTENT NARRATIVE—THE AMAZON LESSON
There is no company that better illustrates the value of having a CEO who crafts a narrative for a company, stays consistent with that narrative, and then delivers results that match the narrative than Amazon. In the period during which I have followed Amazon, which is almost since inception, Jeff Bezos has told the same story about Amazon, framing it as an innovative company that would fearlessly go after new businesses, with no concerns for profits, but with every intent of growing its revenues.1 Amazon started in retailing but has since expanded into the entertainment, technology, and cloud computing businesses. Along the way, the company has done exactly what Bezos promised: gone after revenue growth with no concern for profits in the near term but with a promise that it would find a way to make profits in the future. It is for this reason that I described Amazon as the Field of Dreams company in an earlier chapter.
While markets generally are not forgiving of companies that do not convert revenues to profits for long periods, Amazon is clearly an exception. Almost twenty years after its founding, it was still struggling to show a profit in 2015, but investors seemed to be willing to overlook that shortcoming. Jeff Bezos seemed not only to have won investors over with his Amazon story but to have changed the metrics the market uses to measure success, at least for his company, from profitability to revenue growth.
Even Jeff Bezos will eventually be called upon to deliver on the other half of his promise, which is that he will find a way to generate healthy profits on immense revenues, but markets have been patient for far longer with Amazon than for other companies, precisely because of the trust they have in its CEO.
CASE STUDY 15.2: BIG VERSUS SMALL NARRATIVES—LYFT VERSUS UBER IN SEPTEMBER 2015
In chapter 11 I valued Uber in September 2015 and generated a value of more than $23 billion, largely because of its ambitious push into other countries and new businesses. At the time of the valuation, Uber’s primary competitor in the United States was Lyft, but Uber was viewed as the hands-down winner of the ride-sharing battle. The contrast between the two companies in September 2015 can be seen in table 15.1.
Table 15.1
Lyft Versus Uber, September 2015
| |
Uber |
Lyft |
| Number of cities served in the United States |
150 |
65 |
| Number of cities served globally |
>300 |
65 |
| Number of countries |
60 |
1 |
| Number of rides (in millions) in 2014 |
140 |
NA |
| Number of rides (in millions) in 2015 (estimated) |
NA |
90 |
| Number of rides (in millions) in 2016 (estimated) |
NA |
205 |
| Gross billings (in millions of US$) in 2014 |
$2,000 |
$500 |
| Gross billings (in millions of US$) in 2015 (estimated) |
$10,840 |
$1,200 |
| Gross billings (in millions of US$) in 2016 (estimated) |
$26,000 |
$2,700 |
| Estimated growth for 2015 |
442% |
140% |
| Estimated growth for 2016 |
140% |
125% |
| Operating loss in 2014 (in millions of US$) |
−$470 |
−$50 |
Looking at table 15.1, there are three points to be made. First, Uber was clearly going after the global market, uninterested in forming alliances or partnerships with local ride-sharing companies. In September 2015 Lyft had made explicit its intention to operate in the United States, at least for the moment, and seemed intent on partnering with large ride-sharing companies in other markets. Within the United States, Uber operated in more than twice as many cities as Lyft. Second, both companies were growing, though Uber was growing at a faster rate than Lyft, as captured in both the number of rides and gross billings at the companies. Third, both companies were losing money, and significant amounts at that, as they went for higher revenue growth.
The business models of the two companies, at least when it comes to ride sharing, were very similar. Neither owned the cars that were driven under their names and both claimed that the drivers are independent contractors. Both companies used the 80/20 split for ride receipts, with 80 percent staying with the driver and 20 percent going to the company, but that surface agreement hid the cutthroat competition under the surface. Both companies offered incentives (think of them as sign-up bonuses) for drivers to start driving for them or, better still, to switch from the other company. They also offered riders discounts, free rides, or other incentives to try them or to switch from the other ride-sharing company. At times, both companies had been accused of stepping out of bounds in trying to get ahead in this game, and Uber’s higher profile and reputation for ruthlessness had made it the more commonly named culprit. The other big operating difference was that unlike Uber, which was attempting to expand its sharing model into the delivery and moving markets, Lyft, at least in September 2015, had stayed much more focused on the ride-sharing business, and within that business, it had also been less ambitious in expanding its offerings to new cities and new types of car services than Uber. Table 15.2 captures the narrative differences between Uber and Lyft, at least in September 2015.
Table 15.2
Uber Versus Lyft—Narrative Differences
| |
Lyft |
Uber |
| Potential market |
U.S.-centric ride-sharing company |
Global logistics company |
| Growth effect |
Double ride-sharing market in the United States in the next 10 years |
Double logistics market globally in the next 10 years |
| Market share |
Weak national networking benefits |
Weak global networking benefits |
| Competitive advantage |
Semistrong competitive advantages |
Semistrong competitive advantages |
| Expense profile |
Drivers as partial employees |
Drivers as partial employees |
| Capital intensity |
Low capital intensity |
Low capital intensity, with potential for shift to more capital-intense model |
| Management culture |
Aggressive within ride-sharing business; milder with regulators and media |
Aggressive with all players (competitors, regulators, media) |
In short, my Lyft narrative was narrower and more focused (on ride sharing and in the United States) than my Uber narrative. That put Lyft at a disadvantage in terms of both value and pricing in September 2015, but it could work in its favor as the game unfolds. The adjustments to the Lyft valuation, relative to my Uber valuation, were primarily in the total market numbers, but I did make minor adjustments to the other inputs as well.
1. Smaller total market: Rather than use the total global market, as I did for Uber, I focused on just the U.S. portion of these markets. That reduced the total market size substantially. In addition, I assumed, given Lyft’s focus on ride sharing, that its market was constrained to the car service market. Notwithstanding these changes in my assumption, the potential market still remained a large one, with my estimate about $150 billion in 2025.
2. National networking benefits: Within the U.S. market, I assumed that the increased cost of entry into the business would restrict new competitors and that Lyft would enjoy networking benefits across the country, enabling it to claim a 25 percent market share of the U.S. market.
3. Drivers become partial employees: My assumptions on drivers becoming partial employees and competition driving down the ride-sharing company slice of revenues parallel the ones that I made for Uber in September 2015, resulting in lower operating margins (25 percent in steady state) and a smaller slice of revenues (15 percent).
4. Lyft is riskier than Uber: Finally, I assumed that Lyft was riskier than Uber, given its smaller size and lower cash reserves, and I set its cost of capital at 12 percent, in the 90th percentile of U.S. companies, and allowed for a 10 percent chance that the company would not make it.
The value I derived for Lyft with these assumptions is captured in Table 15.3. My value for Lyft in September 2015 was $3.1 billion, less than one-seventh of the value that I estimated for Uber ($23.4 billion) at that time.
Table 15.3
If narrative drives numbers and value, the contrast between Uber and Lyft was in their narratives. Uber is a big narrative company, presenting itself as a sharing company that can succeed in different markets and across countries. Giving credit where it is due, Travis Kalanick, Uber’s CEO, had been disciplined in staying true to this narrative and acting consistently. Lyft, on the other hand, seemed to have consciously chosen a smaller, more focused narrative, staying with the story that it was a car service company and further narrowing its react by restricting itself to the United States.
The advantage of a big narrative is that if you can convince investors that it is feasible and reachable, it will deliver a higher value for the company, as is evidenced by the $23.4 billion value I estimated for Uber. It is even more important in the pricing game, especially when investors have very few concrete metrics to attach to the price. Thus, it is the two biggest market companies, Uber and Didi Kuaidi, that commanded the highest prices toward the end of 2015. Big narratives do come with costs, and those costs may dissuade companies from going for the “big story.”
With Uber, you see the pluses and minuses of a big narrative. It is possible that UberEats (Uber’s food-delivery service), UberCargo (moving), and UberRush (delivery) are all investments that Uber had to make to back its narrative as an on-demand company, but it is also possible that these are distractions at a moment when the ride-sharing market, which remains Uber’s heart and soul, is heating up. It is undoubtedly true that Uber, while growing revenues at exponential rates, is also spending money at those same rates to keep its big growth going, and it is not only likely, but a certainty, that Uber will disappoint its investors at some time, simply because expectations have been set so high. It is perhaps to avoid these risks that Lyft consciously pushed a smaller narrative to investors, focused on one business (ride sharing) and one market (the United States). Lyft is avoiding the distractions, the costs, and the disappointments of the big-narrative companies, but at a cost. Not only will it cede the limelight and excitement to Uber, but that will lead it to be both valued and priced less than Uber. In fact, Uber used its large value and access to capital as a bludgeon to go after Lyft in its strongest markets.
As an investor, there is nothing inherently good or bad about either big or small narratives, and a company cannot become a good investment just because of its narrative choice. Thus, Uber, as a big-narrative company, commanded a higher valuation ($23.4 billion) but was priced even more highly ($51 billion) in September 2015. Lyft, as a small-narrative company, had a much lower value ($3.1 billion) but was priced at a lower number ($2.5 billion). At these prices, as I valued them, Lyft was a better investment than Uber.
Transitional Tectonics
If the qualities that make for a good CEO are different as you move through the life cycle, it stands to reason that transitions from one phase of the life cycle to the next will be fraught with danger for companies and their top managers. In this section I will start with the easy transitions, in which a company is able to navigate its way painlessly through, either because it has a long life cycle or because it has an adaptable CEO with multiple skills. I will then look at the more common problem of CEOs who are successful in one phase of the life cycle but become misfits in a different phase.
Easy Transitions
Given the different demands put on managers at each stage of the life cycle, can you ever have transitions happen seamlessly? It is unlikely, but there are three scenarios in which it can happen:
1. A company may be lucky enough to have a versatile CEO who is adaptable enough to change his or her management style as the company changes. Thomas Watson served as CEO of IBM from 1914 to 1956, presiding over its growth into a technology giant over that period and changing as the company changed. Drawing on a more recent example, Bill Gates proved to be adept at making the transition from the founder of a technology start-up to running one of the largest companies in the world during his tenure as CEO of Microsoft from 1975 to 2000. While it is early to pass judgment at Facebook, Mark Zuckerberg seems to be showing the same type of versatility while navigating Facebook from the start-up phase to high growth over the course of a few years.
2. If the life cycle for a company is a long one, the passage of time may allow for easier transitions, since CEOs will age with the company. By the time that key transitions occur, the CEO may be at a point where he or she is considering moving on. Henry Ford was CEO of Ford Motors from 1906 to 1945, presiding over its growth from a small, struggling start-up to the second-largest automobile company in the world, but the extended life cycle of automobile companies allowed for a transition at Ford to others better suited to running the mature automobile company it had become by the 1950s.
3. With some multibusiness family companies, the problem of transitions is managed within the family, with different family members (often from different generations) being given responsibility for businesses that best fit their skill sets. That will, of course, work only if the family in question is not dysfunctional, with family patriarchs or matriarchs who insist on sticking with what worked for them in decades past and younger family members put in charge of businesses they are unsuited to run.
Misfit CEOs
While easy transitions are ideal, it is much more common to see friction at transition points, as CEOs find it difficult to adjust to the new demands as their companies change. To the extent that those at the top of an organization find it difficult to let go, the stage is set for battles that can be bloody and often leave no winners. Here are a few examples of mismatches between businesses and CEOs:
1. The visionary who cannot build: Noam Wasserman, in a study of 212 start-ups in the 1990s and the first part of the 2000s, found that by the time these ventures were three years old, half of all founders were no longer CEOs and fewer than 25 percent stayed in place until these firms made their public offerings.2 Most of the CEOs who left did not do so voluntarily, with 80 percent of them being forced to step down. In many cases, the push for change came from investors (usually venture capitalists) who saw more potential value if the company was run by someone other than the founder. This has led to some pushback, with at least one prominent venture capitalist firm (Kleiner, Perkins, Caufield & Byers) arguing that investors are too eager to push out founders and replace them with “professional” managers (with no vision) and presenting evidence, based upon looking at more than a thousand financing transactions, that firms where founders stayed on as top managers are more successful at raising capital and creating value than those where founders were replaced.3
2. The builder who cannot scale: The second transition is to take a business that has succeeded in its initial try (by creating a product or service that is a commercial success) and to scale it up. The corporate landscape is littered with companies that emerged out of nowhere with dazzling growth but faded almost as fast, partly because they were managed by individuals who thought that scaling up just meant replicating what worked the first time around. Crocs, a shoe manufacturer, captured the world with its modified version of a nursing shoe, tripling sales between 2006 and 2007. Seven years later, faced with declining revenues and operating losses, the company announced a restructuring plan to streamline operations and become a smaller company.
3. The scaler who cannot defend: There are CEOs who are adept at going for growth but find it much more difficult to defend their turf. This is the challenge that growth companies face, and especially if the growth has been lucrative, when they become the status quo. Mike Lazaridis, along with co-CEO Jim Balsillie, grew Blackberry (Research in Motion) into one of the most innovative and valuable technology companies in the world but was unable to defend its smartphone franchise against the iPhone and Android assaults. By the time the duo stood down in 2012, the damage had already been done at Blackberry.
4. The defender who cannot liquidate: Growing old is hard to do, whether you are a person or a company. In perhaps the most difficult transition of all, a CEO of a mature company with a history of profitability will find it challenging to make the adjustment to a phase in which the objective is to shrink the company rather than to grow it. Empire builders are not well suited to dismantling them, a point that Winston Churchill was making in 1942, when he said that he “had not become the King’s First Minister in order to preside over the liquidation of the British Empire.” Well, history stops for no man, even one as great as Churchill, and it was Clement Atlee, who defeated Churchill at the polls in 1945, who oversaw the dismantling of the colonial empire.
Corporate Governance and Investor Activism
The corporate life cycle transitions, which test management skills and create the possibility of mismatched CEOs, also create the conditions that give rise to activist investing, that is, investing with the intent of getting companies to change the way they are run. With young companies, as I noted earlier, the activism comes from venture capitalists pushing for changes in management, but at later stages in the life cycle, it is private equity and activist investors that are the primary catalysts of change.
This should also provide some perspective on how investors should view the importance of corporate governance at companies. When companies are successful, investors tend to be casual about governance questions, arguing that since the company is well managed, there is little need for change. Consequently, they are too quick to accept shares with different voting rights, stacked and captive boards of directors, and opaque corporate structures at these companies. They will come to regret these concessions at transition points, when managers at these companies may need to be held accountable and perhaps constrained. This is perhaps the worst legacy of the Google story. While few will contest Google’s success at delivering growth and profitability in the last decade, the company has been structured and run as a corporate dictatorship. When Sergey Brin and Larry Page, Google’s cofounders, decided to go public with two classes of shares with different voting rights, they were breaking with a decades-long tradition in the United States of offering equal voting rights on all shares. The rapturous reception accorded to the offering by investors, and Google’s subsequent rise, laid the platform for a generation of newer tech companies that have followed the Google model of shares with different voting rights. Thus, Mark Zuckerberg controls more than 50 percent of Facebook’s voting rights, while holding less than 20 percent of its shares. It is possible that Google’s and Facebook’s stockholders will not pay a price for failing to protect their voting rights and that both the Brin and Page team and Zuckerberg will adapt well to corporate transitions. It is more likely, though, that at some stage in each of these companies’ lives, investors and managers will diverge on the best path forward, and that is when investors will come to regret their lack of power.
CASE STUDY 15.3: THE CHALLENGES OF MANAGING AGING COMPANIES—YAHOO AND MARISSA MAYER
Yahoo characterized the dot-com boom of the 1990s, going from start-up to large market capitalization company in the space of a few years. Its core business, built around a search engine, dominated online search in the early part of the online revolution, but Google’s rise cast a shadow over the company. After repeated attempts by different management teams to turn it around, the company hired Marissa Mayer, an up-and-coming executive at Google, to be its CEO in 2012.
By the time Marissa Mayer became CEO, Yahoo’s glory days were well in its past, as you can see in figure 15.2, which traces its history from young, start-up to its standing in 2012.
Figure 15.2
Yahoo’s operating history.
Not only had Yahoo decisively and permanently lost the search engine fight to Google, but it was a company in search of a mission, with no clear sense of where its future lay.
Ironically, the two best investments that Yahoo made during the years immediately leading up to 2012 were not in its own operations but in other companies, an early one in Yahoo Japan, which prospered even as its U.S. counterpart stumbled, and the other in Alibaba in 2005, a prescient bet on a then-private company. In earlier parts of the book, I argued that Alibaba was a legitimate symbol of the China story and valued it at almost $161 billion, just before its IPO. At the time of that IPO in September 2014, I valued Yahoo as a company, first by breaking it into its parts (its operations, Yahoo Japan, and Alibaba). Figure 15.3 provides a breakdown of my estimates of intrinsic value for each of the three pieces. Note that of my total estimated value of $46.2 billion for the equity in the company in September 2014, less than 10 percent (about $3.6 billion) comes from Yahoo’s operating assets.
Figure 15.3
The intrinsic value of Yahoo—a sum of the parts.
The challenge that Mayer took on was to turn around not only a company that had lost its way in terms of its core business, but one that derived most of its value from holdings in two companies over which she had no control. Her history of success at Google and the fact that she was young, attractive, and female, all played a role in some choosing her as the anointed one, the savior of Yahoo. The odds of Mayer succeeding at Yahoo, at least in the ways that many of her strongest supporters defined success, were low right from the beginning, for two reasons:
1. It is hard enough to turn a company around, but it becomes even harder when you are given control of only the rump of the company. The reality is that on any given day, the value of Yahoo as a company was more influenced by what Jack Ma did that day at Alibaba than what Marissa Mayer did at Yahoo.
2. In chapter 14 I argued that tech companies face compressed life cycles, growing faster than non-tech companies but also aging much faster, and that a twenty-year-old tech company like Yahoo is closer to being geriatric than middle-aged. I give long odds to any aging technology company that tries to rediscover its youth. Lest I sound fatalistic, it is true that there are counterexamples, aging tech companies that have rediscovered their youth, as evidenced by IBM’s rebirth in 1992 and Apple’s new start under Steve Jobs. Much as I would like to give Lou Gerstner and Steve Jobs all the credit for pulling off these miraculous feats, I believe that it was a confluence of events (many of them out of the control of either man) that allowed both miracles to happen. The Lou Gerstner turnaround at IBM was aided and abetted by the tech boom in the 1990s, and as for Steve Jobs, the myth of the visionary CEO who could do no wrong has long since overtaken the reality. By promoting both turnarounds as purely CEO triumphs, you set yourself up for the Yahoo scenario, where a new CEO (Marissa Meyer) is assumed to have the power to turn a company around, but we are then disappointed in her failure to do so. I was less disappointed in Mayer than were many others, since my expectations on what she could do at Yahoo were much lower right from the start.
In December 2015 Yahoo’s problems bubbled up to the surface as the board considered whether to sell its Internet business, leaving it effectively as a holding company, with Yahoo Japan and Alibaba as its investments. When the board delayed its decision, Starboard Value, an activist investor, pushed for more urgency and a plan for liquidation of the company. The corporate life cycle, in a sense, had caught up with both Yahoo and Marissa Mayer.
Conclusion
What are the qualities that make for a good top manager? The answer depends on where a company is in its life cycle. Early in a company’s life, you want a visionary top manager, adept at packaging and telling a compelling story. As the company grows, the skill set you look for will shift to include more business-building skills, and those will be displaced by more administrative capabilities with mature companies. Finally, in decline, you want a realist running the business, someone who has no qualms about shrinking its size. Given these shifting demands, it is not surprising that as companies transition from one phase of the life cycle to the next, the chances of a managerial mismatch also go up, creating the potential for conflict and change.
