Y Combinator co-founder Paul Graham set the venture world abuzz this week with a blog post about the virtues of running a startup in “founder mode” instead of in “manager mode.”
Operating in founder mode means hewing to a startup founder’s mindset and management style. It’s about bypassing rigid organizational structures and encouraging close collaboration across department levels. By contrast, startups in “manager mode” bring in competent, experienced managers to run teams with minimal interference.
“The way managers are taught to run companies seems to be like modular design in the sense that you treat subtrees of the org chart as black boxes,” Graham wrote. The concept, he added, was inspired by a recent talk Airbnb co-founder Brian Chesky gave at Y Combinator.
It turns out that Graham’s thesis is correct: Founder mode is often superior when it comes to value creation, according to an analysis of PitchBook data.
In each of the past five years, VC-backed companies led by a founder grew in value significantly faster than companies led by non-founders, our analysis shows. This year, the relative velocity of value creation for founder-CEOs was 22.4%, versus 4.7% for non-founder CEOs. In our methodology, the relative velocity figure reflects the percentage increase in valuation between financing rounds, expressed on an annualized basis.
Among companies that raised financing this year, the median valuation growth was $3.6 million higher under founder-CEOs.
In Graham’s view, founder-CEOs of fast-growing companies are more agile than professional CEOs. That hands-on approach could lead to higher growth by improving the company’s product or motivating front-line employees.
The debate over founder mode versus manager mode is another iteration of a long-standing question at the heart of the VC ecosystem: How investors balance a reputation as being “founder-friendly” with a desire to scale a company beyond what many entrepreneurs might be skilled at running.
Silicon Valley has seen plenty of examples of investors pushing out a startup founder as their company has matured. Sequoia, for example, encouraged Google’s cofounders to hire an external CEO (Eric Schmidt) after the company hit the $100 million revenue mark in 2001. Uber founder Travis Kalanick was famously moved out of his role in 2017 by a group of Uber’s backers including Benchmark‘s Bill Gurley.
It isn’t necessarily true that all founders operate in “founder mode,” or that it’s a magic solution. Founder-led companies outperforming others may in part be the result of survivorship bias.
“If a company is doing well, there’s no need to change the leadership,” said Kyle Stanford, PitchBook’s lead VC analyst. “If it isn’t, a new CEO may come in.”
Data analyst Collin Anderson contributed to this article.
Featured image of Y Combinator co-founder Paul Graham by Araya Doheny/Getty
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