Archive for July 11th, 2008

Ok founder, now get the hell outta’ here!

July 11, 2008

Remember VMware, the company as recently as January, had appeared to be rocketing into Silicon Valley stardom?

The company was founded in 1998 by Ms. Diane Greene and her husband, Stanford University computer-science professor Mendel Rosenblum, to develop software that allowed a single computer to run as multiple “virtual” servers simultaneously, with several different operating systems and numerous applications such as databases going at the same time. Mr. Rosenblum remains an adviser to VMware. The company was later bought by EMC, the Massachusetts data storage giant. EMC acquired VMware in 2003 for $635 million and retained 86% of its stock.

On Aug. 13 last year, EMC spun VMware out as a distinct stock offering and the company was an instant hit, recording the biggest technology initial public offering since Google’s in 2004. Its stock shot up from a $29 offer price to $51 at the first day’s close of trading. Within a few weeks, VMware’s market capitalization placed it as the world’s fourth most valuable software company. But VMware’s stock price, which peaked at nearly $125 on Oct. 31, has been in a tailspin in recent months and the company faces increasing competition from Microsoft, Oracle and Sun.  Going by the recent downward revision of its earnings guidance, VMware’s stock fell $13, or a little more than 24 percent, to $40.19 at the close of trading.

And then? Instant justice. Reacting to the decline in its fortunes, the Board of Directors fired co-founder and Chief Executive Diane Greene, replacing her with a former Microsoft executive Paul Maritz apparently to help the company combat its growing competition and take it to the next level.

Often founders find themselves in the crosshairs when performance suffers or a founder’s style clashes with that of a new boss. Shares of Sun Microsystems climbed immediately after founder Scott McNealy announced he was leaving the CEO post. Jones Soda founder Peter van Stolk left amid languishing profits saying, “I didn’t want to be one of these guys who hang on too long. As the company grows, different skills and requirements are needed to move the thing forward, and they aren’t necessarily entrepreneurial skills.”

This Harvard Business School case study concluded that “An inherent paradox in succession is that a founder who has been doing a good job actually increases the chance he or she will be fired.”

But there can be such a thing as showing a founder the door too soon. Often, a clear transition hasn’t been mapped out. Other times, the founder has specific relationships with vendors that are vital to the company’s operations. Sometimes, the Street just likes the person.

There are of course conflicting reports of EMC’s high handed interference that Ms.Greene detested.  But I find the inherent flexibilities (or are they liberties) remarkable.  If Board finds the CEO can’t take the company to the next level, be she a co-founder – she can still get canned.

I think here is a lesson for many smug founder entrepreneurs that stay anchored as CEOs refusing to acknowledge their role has become less relevant.  So is here some learning for Boards to play a proactive role – that of an activist – in ejecting those CEOs to save the day for customers and shareholders.  I am not saying that is the case at VMware, a truth that will be revealed only in the days ahead.

But I certainly like the spunk.  And the insecurity that comes with it spurring many a CEO to deliver or else.  Steve Jobs was fired by the Board of Apple and we all know how he got back and delivered.  Hope Ms.Greene shall have her go too.