Ben Horowitz isn’t impressed with most business books. Most of what they discuss—setting audacious goals, constructing a winning strategy, building a cheerful culture—isn’t the hard part of building a company. The hard part is firing your friends when they no longer fit your company’s goals, it’s staring at impending bankruptcy and throwing your hail mary to save the company.
Most business books try to give a recipe for success, but “the hard thing about hard things” is that there is no recipe for those hard situations. This book is a collection of advice and first-hand experiences to help company operators deal with the hard times.
Ben Horowitz began his career at the dawn of the Internet, working at browser and server company Netscape before it sold to America Online. He then co-founded Loudcloud, a cloud computing company, at the height of the bubble in 1999. As the bubble crashed, the company faced an endless series of existential crises, from running out of money to having their largest customers go bankrupt to facing tough competition. Ultimately, he pulled the business around (which had rebranded as Opsware) and sold to HP for $1.6 billion in 2007.
This grueling experiences led him to do two things:
The book covers a wide span of topics, including handling the psychology of a failing company, building a good place to work, scaling a company, and being a good CEO.
Most people start their companies with boundless enthusiasm. The sky is open, the possibilities are endless, and success is inevitable.
Then reality hits. Your plans have not lived up to their promise. You don’t have the traction you hoped for. Things seem to be unraveling. Your key first hires start leaving. Your customers start churning. It seems to point to inevitable failure.
This is the Struggle. The Struggle is when the impending failure of your company swallows every thought and sensation in your waking life. The Struggle is when you question why your idiot self ever started a company. The Struggle is sleepless lonely nights when you feel you’ve failed everyone who was dumb enough to believe in you.
Every entrepreneur has gone through the Struggle, from Steve Jobs to Elon Musk. Greatness is born from the Struggle. The Struggle is a make or break moment. If you are weak and you succumb to the Struggle, you will fail. If you are strong and you can get through the Struggle, you have a fighting chance.
Here are suggestions on how to cope with the Struggle and find a way out of it:
Take care of the people, and the products and profits will follow. If you reverse the priorities, you’ll end up with a miserable workplace and possibly sabotage your success.
You can best take care of your people by making your company a good place to work, which has the following attributes:
A poor place to work inverts all of these. People aren’t clear what their jobs are; they don’t know if their work means anything; their work gets stymied by dumb obstacles; and people despise whom they work with.
Every company wants to hire the best people they can find. Ben’s general advice:
When you’re a startup, you may prefer to promote people from within. But hiring executives from outside will help you move faster. They know how to do things that your company doesn’t know right now.
The problem: if you’ve never done the executive’s job before, you might not know how to hire for it. Here are pointers:
Training new people is one of the most valuable activities a company can do. It is wonderfully high-leverage—each person spends 2,000 hours per year working for your company. Say you spend ten hours to train a group of ten people, who collectively work 20,000 hours in their first year. If you improve their performance by 1%, you have converted 10 hours of your time into 200 hours of extra team productivity.
There are two types of training in a company: functional training, which provides the knowledge and skills to do the job, and management training, which trains managers to manage their teams.
In general, functional training should do the following:
Beyond these generalities, functional training should be customized to the job that needs to be done.
Management training prepares managers to lead their teams. It should do the following:
Once you hire the right people and train them, you’ll need systems in place to keep them productive and happy. Maintaining a strong work culture, facilitating communication, and providing frequent feedback are all important.
Culture consists of key values that define what your company does and how it does it. Examples of key values include frugality, customer obsession, and beauty of design. Good key values meaningfully distinguish you from your competitors.
A strong culture is practically useful—it helps you filter for hires who will fit, and it shapes the behavior of people at the company.
Beyond just articulating vague cultural values, implement a simple, scalable behavior that reinforces the key value. For example, Amazon emphasizes frugality with its famous door desks. Jeff Bezos knew that competing in the cutthroat online retail industry would require the lowest pricing, which required the company to save as much money on overhead as it could. He built the company’s first desks by buying a door and screwing legs into them. This reinforced the cultural value of frugality and how the employees are saving money to save the customers money. These small actions reinforced the key cultural value across the company in a highly scalable way.
One-on-one meetings are private meetings between a manager and her direct report. Compared to email or group meetings, they’re relatively informal and intimate, and thus provide a good avenue for discovering issues and ideas that aren’t fully formed.
Here’s how to run a one-on-one:
As a manager, you should constantly be evaluating people and giving feedback. This gives people ways to improve. In turn, this makes them more productive and makes them feel you care about their development.
You should develop a personal style around giving feedback based on your own personality. However, here are general pointers that apply to everyone:
When you’re at five people, you don’t need processes. Everyone communicates with each other by talking across a table, and decisions are made quickly. There is no politics because everyone can hear each other.
When your company grows, these problems become exponentially more difficult. You will need to build processes to keep people communicating, making good decisions, and sharing knowledge.
In general, here are the main principles of designing a good process:
Processes help deal with the touchiest issues of compensation, promotions, and complaints. If you don’t handle these well, politics will set in, and people will get ahead by means other than merit. The full summary has more detailed advice around this, but the general premise is to create a well-defined process, then stick to it regardless of what politics people try to play.
The most important responsibility of a CEO is leadership. You can measure a leader by the quantity and quality of people who want to follow her.
In practice, people want to follow leaders who do three things well:
Knowing what to do consists of two activities: articulating the vision and making decisions to achieve the vision.
Articulating the vision: The vision is the story for what the company is capable of doing and why it’s exciting to work on. It’s also the strategy behind how the company can achieve this vision. It answers the deepest questions of why: “Why is this important to build? Why is the world better off because of our work? Why should I work here instead of anywhere else?”
A compelling vision gets talented people to work for you when they have the option of working anywhere. It also retains people when your company struggles. It aligns the entire team to make decisions that support each other.
Making decisions: Just as engineers output code and marketers output advertisements, the CEO outputs decisions. A good CEO makes high-quality decisions quickly. As CEO, you should be gathering information in every interaction you have with employees, customers, competitors, and outsiders.
Once you know what decision to make, be bold. You will never have enough information to make a decision with complete confidence. Your decisions may be unpopular with your team. A courageous CEO makes the right decision, no matter how hard it is.
A compelling vision is well and good, but to make it real, you need a team to build toward it. This means hiring great people, then getting them to do good work.
The best way to accomplish both is to make your company a great place to work, which is the subject of most of the book and the advice so far.
Having defined a vision and made progress toward the vision, ideally you’ve achieved the results you were looking for. But what are “good” results? It depends on the size and nature of the opportunity, which are idiosyncratic to each company.
Therefore, you should measure your results against your own company’s opportunity, not anyone else’s company.
In closing, Ben gives a reminder that building a company will be a struggle. But greatness is created through the struggle. And if you endure the struggle and trust your ability to overcome it, you may just make your dreams real.
Ben Horowitz isn’t impressed with most business books. Most of what they discuss—setting audacious goals, constructing a winning strategy, building a cheerful culture—isn’t the hard part of building a company. The hard part is firing your friends when they no longer fit your company’s goals, it’s staring at impending bankruptcy and throwing your hail mary to save the company.
Most business books try to give a recipe for success, but “the hard thing about hard things” is that there is no recipe for those hard situations. (Shortform note: Paraphrasing Leo Tolstoy, “All happy companies are alike; each unhappy company is unhappy in its own way.”) This book is a collection of advice and first-hand experiences to help company operators deal with the hard times.
We’ll start with Ben Horowitz’s background, from his childhood to his wild ride through the dotcom crash. This will form the context for the advice that will constitute the rest of the book.
Ben Horowitz grew up in Berkeley, California, the son of Jewish members of the Communist party. Berkeley was a diverse enclave for left-thinking people, hippies, and a mix of social classes.
In high school, Horowitz was the odd combination of a star student and a football player. He crossed social groups with ease, hanging out with bookish students in his classes and the athletes during practice. He saw how differently both groups viewed the world and had selective filters for information; while the athletes raved about a new rap record, the academics fussed over Reagan’s most recent policy announcement. This taught him the value of gathering different perspectives to build a more complete picture of the world.
After graduating from Columbia University in 1988, he became an engineer at Silicon Graphics (SGI). SGI was paving the way for computer graphics for use in entertainment and games.
While excited about SGI, within a year he was recruited to a new startup, Netlabs. Unfortunately, the founders had been replaced by professional management (at the behest of the company’s investors), and the new management was clueless. They didn’t grasp the market or the technology, and the company was aimless. This reinforced to Ben how important it was to have founders run their companies.
As typically required by startups, Horowitz worked a lot, which destroyed his home life. Horowitz’s second child had been diagnosed with autism, which required more time at home and stretched him thin. He realized he was putting himself first and sacrificing his family. Ben decided to quit Netlabs and joined the much more established Lotus Development to start a more stable job.
In 1994, while working at Lotus, he learned about Mosaic, one of the first graphical web browsers. Before that point, the Internet was an esoteric technology used by academics and required abstruse commands to operate. In contrast, Mosaic was a graphical web browser that made the Internet accessible to everyday people. It gave Horowitz a glimpse of the future, and he was converted—he was wasting time working on anything else.
A few months later, Jim Clark (co-founder of Silicon Graphics) and the 22-year-old wunderkind Marc Andreessen (leader of the team that developed Mosaic) founded Netscape to capitalize on the innovation. Horowitz seized the chance to interview for a job at the new company.
A brief history lesson: While today, we know the Internet to be the global innovation it is, in 1994 it was still in its infancy, nowhere near mainstream. Instead, software giants like Oracle and Microsoft were racing to build their own proprietary technologies to become the Information Superhighway of choice. The Internet was just one competitor in this battle.
The vision of Netscape was to make the web browser safer, easier to use, and more functional. In doing so, they would popularize the open Internet, freeing it from the shackles of a closed, proprietary corporate future.
Ben went through the interview process, and his final interview was with Marc Andreessen. The discussion was an intense exploration of Ben’s views on software and the future of the Internet. In turn, Andreessen revealed his impressively deep knowledge of computing history and his inspiring insights into technology. Horowitz thought Andreessen lived up to his wunderkind reputation and was convinced Netscape would shape the future.
Ben got the job to lead the Enterprise Web Server product line. The division sold two products: a web server selling for $1,200 and a secure web server (featuring Netscape’s new technology SSL) selling for $5,000. This was still a small part of the business—at the time, Netscape made most of its money by selling its browser to commercial users.
In August 1995, just 16 months since their founding, Netscape went public in their IPO. They priced their stock at $28 per share; at the close of their first trading day, the stock shot up to $58, giving Netscape a value of $3 billion. (Shortform note: While Netscape was unprofitable at the time—then a rarity in IPOs—investors were enthusiastic about how its revenues had doubled every quarter that year.) The IPO was a shock to the business world—the Internet was now a verifiable industry worth taking seriously.
The good feelings didn’t last. The software behemoth Microsoft announced that it had developed its own browser, Internet Explorer, and that it’d be bundling it with Windows 95. Since Microsoft had a near-monopoly on operating systems, this meant the world’s computer users would by default use the free Internet Explorer. And since Netscape made most of its money selling its browsers, they were in deep trouble.
Knowing selling browsers was no longer tenable, they decided to focus on selling web server software instead. This was Ben Horowitz’s business line. Microsoft was selling a high-powered, expensive server suite called BackOffice. If Microsoft was going to undercut them with Internet Explorer, Netscape could undercut them too. In response, Netscape decided to launch a low-cost, open alternative called SuiteSpot, which cost just a fraction of the price.
In one of the book’s most memorable anecdotes, Ben describes how they planned to unveil the new product as a surprise in March 1996, until Marc revealed the strategy to a trade publication. Dismayed, Ben sent an email to Marc:
I guess we’re not going to wait until the 5th to launch the strategy.
Marc sent a reply within minutes, CC’ing Netscape’s CEO and chairman:
Apparently you do not understand how serious the situation is. We are getting killed killed killed out there. Our current product is radically worse than the competition. We’ve had nothing to say for months. As a result, we’ve lost over $3B in market capitalization. We are now in danger of losing the entire company and it’s all server product management’s fault.
Next time do the fucking interview yourself.
Fuck you,
Marc
Ben thought he was going to be fired. But he wasn’t, and SuiteSpot became a $400 million revenue business. As for Marc, they’re still partners today at their venture capital firm. Ben notes warmly about how valuable it is to have partners who can freely point out errors in each other’s thinking.
Despite their efforts, Netscape couldn’t compete against Microsoft, which used its vast resources to build free products and undercut Netscape’s revenue sources. (Microsoft would later face antitrust issues for these practices.)
In the end, Netscape was acquired by America Online in 1999 in a stock-swap transaction. Netscape was valued at $10 billion at the time.
As the team migrated to AOL, they became disillusioned with the merger. AOL was a media company, not a technology company, and their cultures and interests clashed. Ben, Marc, and a few other co-conspirators thought about what to do next.
At AOL, Horowitz worked in the e-commerce division, partnering with online merchants. They repeatedly ran into a problem: Each time they tried to bring a partner online, AOL would send them so much traffic that the partner’s website would crash. The partners simply weren’t prepared to handle the server load of millions of people.
This sparked an idea: Could they build a company to handle the headaches of web server operations, such as security, reliability, and scaling to meet more users? They leapt at the idea, an early version of “cloud computing” and software as a service, and founded Loudcloud in September 1999 with Horowitz as CEO.
1999 was near the peak of the dotcom bubble. Feelings were exuberant, and the world was full of possibilities.
The money came easily. Just two months after founding, Loudcloud raised $21 million ($15 million from Benchmark and $6 million from Marc) at a pre-money valuation of $45 million. Two months later, they raised $45 million in debt from Morgan Stanley.
The money fueled growth. Horowitz was encouraged by their investors to run their companies as though “capital were free.” Within 6 months of founding, they hired almost 200 employees; in about the same time, they booked $10 million in contracts and nearly tripled that the next quarter. They also spent freely, including $5 million on a fancy new office to contain their headcount. Everything looked like it was working.
Then, in March 2000, the crash began. After 10 days, the NASDAQ had fallen by 10% from its peak; within a year, it would fall 72%. Companies went bankrupt and billions of market value evaporated instantly. Tech investors became skittish to fund companies.
Loudcloud was in trouble. Within a year, they had spent nearly all of their $66 million in funding on growth. Luckily, in June 2000, they were able to raise a Series C of $120 million at a $700 million pre-money valuation.
But even this $120 million wasn’t enough. The company was in operational trouble. They had forecasted booked sales of $100 million for Q3 of 2000. Instead, they finished with only $37 million in contracts (after all, their customers suffered in the dotcom crash too). And these numbers represented merely booked sales, the total value of the contract over 2 years—their customers paid them on a monthly basis, so they faced steep cash flow problems.
With revenue far lower than expected and 477 employees, within a few months by late 2000, Horowitz needed to raise money yet again. But this time, no one was biting. It looked like they might actually go bankrupt, which would mean losing all their investors’ money and laying off all the employees they worked so hard to recruit.
One unlikely option emerged: go public. Surprisingly, while private investors had withdrawn their investments, the public markets were still somewhat receptive to companies. (Shortform note: While the market had fallen 25% by September 2000, it would not bottom until two years later, in September 2002.)
With no investors offering to invest, Loudcloud had no other option. In September 2000, Loudcloud announced it was going public. Its S-1 filing with the SEC looked terrible, showing $1.94 million in revenue in the past 6 months, with forecasts of $75 million for the coming year. They were set to run out of money in 3 weeks if they didn’t IPO. The press pilloried them for being emblematic of the deeply unprofitable dotcom company.
Loudcloud started their IPO roadshow trying to price their shares at $10 each, which would value the company at under $700 million, below their Series C valuation. During the three weeks on the roadshow, comparable public companies lost half their value. They had to reprice at $6 a share, an even steeper loss from their private valuation.
Loudcloud raised $162.5 million in the IPO, but no one celebrated. They had survived, but at a steep loss in valuation, and even more trouble was to come.
As the economy continued its nosedive, Loudcloud’s business continued to worsen. Customers were harder to sign, and their existing customers started canceling. For their first earnings call, Loudcloud had to lower its revenue guidance from $75 million to $55 million. Doing so just after going public was a big red flag, and their stock dropped from $6 a share to $2.
In 2001, September 11th happened. On September 26, their largest competitor Exodus went bankrupt. It had been valued at $50 billion a year earlier and had raised $800 million at the beginning of 2001. Repeat: It had burnt $800 million in cash in just 9 months.
These were all grave warning signs for Loudcloud. Horowitz contemplated the fate of the company. If Loudcloud went bankrupt, what could they possibly do? His answer: He’d buy the software that managed their servers, Opsware, and build a company around that. Compared to the capital-intensive server cloud business, a capital-efficient software would be relatively easier to turn around.
He asked another question: Could they work on this business without going bankrupt? They could. He directed a small team of ten to make Opsware a standalone software that could run on any server platform. While he thought this might be the hail mary to save Loudcloud, he didn’t portray this to the rest of the company, lest they lose motivation on their core server business.
But the server business continued to struggle. In early 2002, their largest customer, which paid them $1 million per month and represented 20% of their revenue, went bankrupt. Loudcloud was still deeply unprofitable, and they were caught in a death spiral: With less money on their balance sheet, their customers had less confidence in Loudcloud’s stability, which hurt sales, which depleted their balance sheet even faster. Even if they laid off most of their headcount, their infrastructure costs were so high they couldn’t break out of the spiral. Loudcloud looked doomed.
It was time for Horowitz to make his plan public. They needed to exit the cloud business, thus reducing their infrastructure expenses, and turn into a software company. This meant finding buyers for the cloud business. After entertaining two top bidders, IBM and EDS, Loudcloud struck a deal with EDS:
The deal closed, and it felt like a burden had lifted. They could now rewrite their future.
While Horowitz saw the sale to EDS as a victory, Wall Street didn’t see it that way. Their stock fell to a low of $0.35 per share, representing a valuation of $30 million. This was half the $60 million in cash they had in the bank—a sign that investors thought Loudcloud was likely to go bankrupt.
Opsware was left with about 80 employees (150 had moved to EDS with the sale and another 140 were laid off). Horowitz even had to lay off loyal senior executives who had been appropriate for the server business but knew nothing about the software business. It was depressing but necessary—they were in survival mode.
Their task now was to create a product worth buying. Their software Opsware currently ran only on Loudcloud; they needed to generalize the software so any company could use it on any server platform.
As typical, Horowitz and the team ran into existentially threatening problems:
They continued soldiering on, working hard days to untangle themselves from a bleak future. They launched a revamped software in 9 months and, with a methodically managed sales team, started winning deals again.
Eventually, they reached a $150 million revenue run rate; from their low of $0.35 per share, their stock lifted to around $7 per share, granting a market value of $800 million.
Despite this momentum, the business was tough every quarter. Server technology shifted rapidly—virtualization was now getting popular, which would make what Opsware built more valuable but required retooling of their software suite.
At the same time, Opsware started getting acquisition offers from other companies. First EMC approached hinting at an acquisition; when this leaked to the press, their stock price hit $9.50 per share. This triggered even more companies to approach Opsware. In total, eleven companies approached within a month expressing interest.
On one hand, Horowitz wasn’t thrilled about selling the company, given all the labor they’d committed to clawing their way out of failure. On the other hand, looking at the future, the opportunity was large, but it’d require more years of hard work to stay competitive. The team was tired—when Horowitz surveyed his direct reports, all but one wanted to sell.
The bids came in between $10 to $11 per share, a good deal above their current market price, but Horowitz felt this wasn’t enough. After deliberating with the board and his executives, he had a firm number in mind—$14 per share, or roughly $1.6 billion for the company. If no one offered this, they’d go back to work.
Horowitz went back to the bidders and said the price was a firm $14. No one accepted. A quiet month passed until BMC Software countered with $13.25. Horowitz said $14 was firm. Two days later, BMC accepted.
Opsware immediately went back to the other bidders and announced they were selling for $14. If any other company wanted Opsware, it was their last chance to bid. Hewlett-Packard countered with $13.50, a test to see if Opsware was bluffing. Horowitz held firm—$14 was the going price—and HP countered with $14.25. This was the winning bid, and they closed the deal.
The grueling journey lasting eight years had ended. Starting with Loudcloud at the peak of the dotcom bubble and riding the torturous crash downward, to refocusing on Opsware and clawing their way up to a sale, Horowitz and his team accomplished a magnificent feat.
What should he do now? He’d gone through a company’s entire life cycle, from founding to going public to selling, and he felt it was time to retire from operating a business. But he’d learned so much, and not using this knowledge seemed like a waste.
Then he had an idea—start a venture capital firm, to help other entrepreneurs through the same struggles. We’ll cover this more at the end of the book, in Chapter 9. In the interim, we’ll cover Ben’s key management advice.
Most startup books talk about business strategy in the good times—how to form a competitive advantage, how to set big hairy audacious goals. Horowitz is more interested in sharing advice on how to deal with the bad times.
(Shortform note: This section incorporates part of Chapter 7 on being a good CEO.)
Most people start their companies with boundless enthusiasm. The sky is open, the possibilities are endless, and success is inevitable.
Then reality hits. Your plans have not lived up to their promise. You don’t have the traction you hoped for. Things seem to be unraveling. Your key first hires start leaving. Your customers start churning. It seems to point to inevitable failure.
This is the Struggle. The Struggle is when the impending failure of your company swallows every thought and sensation in your waking life. The Struggle is when you question why your idiot self ever started a company. The Struggle is sleepless lonely nights when you feel you’ve failed everyone who was dumb enough to believe in you.
Every entrepreneur has gone through the Struggle, from Steve Jobs to Elon Musk. Greatness is born from the Struggle.
The Struggle is a make or break moment. If you are weak and you succumb to the Struggle, you will fail. If you are strong and you can get through the Struggle, you have a fighting chance.
Here’s how to cope with the Struggle and find a way out of it.
Being a CEO is unnatural. Humans didn’t evolve in a way that makes running a thousand-person company a natural thing to do. For instance, humans evolved behaviors to get other people to like them; as CEO, you will have to make decisions that will make people dislike you (at least temporarily).
This also means people aren’t born CEOs out of the womb. It is a learned skill. Even worse, it’s a skill that you can only learn by actually doing it. So if you’re a first-time CEO, you have no idea what you’re doing, and you have no idea how well you should be doing.
The good news is, most CEOs have failed repeatedly, and many are currently failing. Horowitz says that if CEOs were graded on a test, the mean score would be 22 out of 100. Many CEOs indeed don’t know what they’re doing; even among those who do, things simply go wrong because building a business is complex, the market is competitive, and the future is unpredictable. Every company goes through existentially threatening moments.
If you don’t know the mean score is 22, then you feel bad because you think you’re the only one underperforming. But now that you know better, you can focus on improving your score.
Despite being in the struggle, you must never give up. The only certain way you’ll fail is if you give up. When you see no good moves, you have to keep looking for a move.
Ben doesn’t like thinking about the statistics of the situation—that there might be a one in a hundred chance of things working and a 99% chance of failure. The odds don’t matter to him—there is an answer to your problems out there, and your job is to find it.
Great CEOs push through the pain.
In the Struggle, you will blame yourself. Every mistake will be your fault. You will turn over past decisions in your mind, and regrets will seep in.
At the same time, you might pity yourself. You were inexperienced—how could you have possibly known the decisions were bad? How could you have predicted the economy would take a sharp downturn? It’s unfair to play against a stacked deck.
This is all wasted energy. You can’t change the past, so regret is pointless. And no one cares why you failed or how difficult it was—they just know that you failed.
Focus on what you can do from today forward. Rather than focusing on what you did wrong in the past, focus on what you need to do right from now on.
On the other extreme, when bad news happens, don’t delude yourself into thinking the situation is fine. This makes you feel better but hides the problematic truth.
This is basic denial, and it will cause you to ignore problems you should fix right away.
People tend to like good news more than bad news. They act on the good news, and they reject bad news. (Shortform note: This might be tied to the psychological bias of loss aversion, where losses feel more painful than gains are rewarding. Accepting bad news would mean a loss in the status of the company, so it’s easier to pretend the loss isn’t real. Read more about loss aversion in our summary of Thinking, Fast and Slow.)
The key is to balance the right level of emotional involvement: Take the problems seriously, but be emotionally detached from them. This will let you work on the problems without getting so obsessed that you micromanage or become emotionally paralyzed.
If you’re struggling with a problem or a decision, write it down on paper. Articulate what you know and what you plan to do with the best logic you have.
Writing lets you separate the problem from your psychology and view it from a fresh objective lens. It can also be clarifying—a problem that’s an impenetrable knot in your head might simplify once you put it all out on paper.
There are plenty of people who have been through similar difficult situations. Often these people can’t give you great advice about your situation, since they know so much less about your company than you do, but they can offer psychological help.
You think that you’re so brave, you’re shouldering all the world’s problems and that your team wouldn’t be able to handle the bad news. You think that you need to be Mr. Sunshine, beaming positivity to your team to keep their spirits high.
This is arrogant. In reality, no one will take the problems harder than you. You founded this company, and you will sink with the ship. In contrast, your employees can easily find a job elsewhere; your investors have other investments.
Also, your team isn’t dumb. They know that things aren’t great all the time, and bad news spreads faster than you can control. If you become known for hiding bad news, your team will stop trusting anything you say. If you are honest with your team, they will trust and respect you, knowing that you respect them.
You hired all these smart people for a reason. It’s a waste to not have them thinking about your company’s most critical problems.
Talking about problems openly sets an important cultural tone: It’s OK to surface problems. In some companies, bad news is buried, messengers are killed, and managers bark, “don’t bring me a problem without bringing me a solution.” This seems counterproductive. Wouldn’t you rather hear about problems early? Doesn’t it make sense for someone to report a problem even if they don’t know how to fix it. You can set the example by sharing bad news.
When you have an existential problem, like a competitor that totally outclasses your product, it’s tempting to think about a simple silver bullet solution, often in the form of a pivot: “let’s go down market” or “let’s target a different buyer” or “let’s acquire this business to solve our problems.”
Sometimes, what you need is not a single silver bullet, but a lot of lead bullets. You may simply need to do the grunt work of improving your product in the dozens of ways that it is currently failing.
When the company fails to meet its plans, you will need to lay people off to survive. We’ll talk about the general principles, and then talk through three situations: a general layoff, firing an executive, and demoting a friend.
Here are general principles for every negative staffing change:
Now let’s apply this general advice to the three situations.
Root cause: When you need to lay people off, it’s because the company failed—failed to meet its targets, failed to execute its strategy, or had the wrong strategy in the first place. Don’t use other feel-good excuses, like “we’re getting rid of the bottom performers.” Admit the company failed; this builds trust with the rest of the team.
Managers should lay off their own people. Don’t be a coward and pass the task onto HR or an outsourced agency. The people being laid off want to hear the bad news from your face or from their manager’s. The people remaining want to know you have the courage to own your decisions.
Executives tend to be easier to fire, because they’ve fired plenty of people in the past. But given their higher position, the root causes and preparation can be more nuanced.
Root cause: Most often, it’s not the executive’s fault she’s being fired. It’s the company’s fault for having a bad hiring or onboarding process. Here are a panel of reasons:
In the next chapter, we’ll discuss how to run a hiring process to avoid these mistakes.
Inform the board. Ben advises broaching this with individual phone calls, then finalizing the decision at a board meeting. It can be especially sensitive if you have high executive turnover or if the executive was recommended by a board member. Steps to take:
Let the executive determine the outside messaging. The executive cares about protecting her reputation. Ben advises that you let the executive decide how to communicate the news to the team and the world.
Exit plan: The executive’s direct reports will want to know what the plans are to replace the executive and who they will report to in the interim. Horowitz recommends the CEO take on the executive’s role since this provides smooth continuity and helps inform your hiring plans.
When your company grows, people who have been in senior positions from the beginning may no longer be appropriate. It’s rare for a great manager of the 5-person team to also be great at leading the 50- or 500-person team. You may have to demote someone from her position, promote a colleague above her, or hire someone from outside for a role she was expecting to be promoted to.
Root cause: Explain that the person is under-equipped to do the job and why. You also have fault in not being experienced enough to coach her into the role.
Exit plan: If you want the person to stay, come up with a plan that lets her preserve her dignity and motivation. Working under her new boss might not be the best solution. Consider moving her to another team where she can learn new skills. Meanwhile, consider giving her a raise, just to reemphasize how valued she is.
In feudal Japan, the samurai code of honor bushido prescribed warriors to “keep death in mind at all times.” The purpose was to prepare constantly for death, to live life honorably and to plan for a good death with honor intact. Keeping death in mind would protect the value of each living moment.
Horowitz advises the same thing. Keep your company’s death in mind. This will make you focus when building your company. If you don’t want to go through the pain of firing an executive, then you’d better hire a great one from the start. If you don’t want to go through the pain of laying off half your team, then you’d better get the strategy right and hire appropriately.
Think about the last time you were in the Struggle to deal with future times.
What was the last time you felt like you were in the Struggle? What was happening? What did it feel like?
At the time, did you feel your struggles were unusual? Did you think that most other people in your position were succeeding? If so, what made you think this way?
Who could you have talked to to get better perspective on your struggle? Could you have talked to anyone else who was in that situation? How about sharing the problems with your team?
The last chapter had advice on what to do when things go wrong. From here, Ben switches to positive advice on how to do things right. This chapter and the next will focus on people management, what Ben considers the most important part of running a business.
Take care of the people, and the products and profits will follow. If you reverse the priorities, you’ll end up with a miserable workplace and possibly sabotage your success.
You can best take care of your people by making your company a good place to work. In Horowitz’s terms, in a good place to work:
A poor place to work inverts all of these. People aren’t clear what their jobs are; they don’t know if their work means anything; their work gets stymied by dumb obstacles; and people despise whom they work with.
Some might argue that a good workplace alone isn’t enough to build a successful company—there are plenty of workplaces with great cultures that failed because they failed to achieve product/market fit. Conversely, a good workplace isn’t necessary—there are companies with horrid cultures that still became massively successful.
So why build a good workplace at all? First, because good workplaces help during bad times. When your company starts failing, your team members will start questioning whether leaving is a better career and financial decision. In bad times, other than needing a job, the only thing keeping employees around is enjoying their work.
Second, having a good workplace is an end in itself. Even if your company fails, you can help people feel proud of the work they’ve done and the people they’ve worked alongside. This reputation will stay with you even after your company dies.
Every company wants to hire the best people they can find. Ben’s general advice:
Ben’s advice focuses on hiring executives, but the principles can be generalized to hiring individual contributors as well.
Ambition comes in two flavors. The wrong kind of ambition emphasizes a person’s personal success regardless of the company’s success. The right kind of ambition emphasizes the company’s success, with the person’s success coming only as a consequence.
Hiring people with the wrong kind of ambition pollutes the company. These people are demotivating to work for—why work endless hours just to further the manager’s personal career? In contrast, working alongside people with the right kind of ambition is invigorating—everyone is working toward a mission that is larger than themselves.
You can screen for ambition in the interview process. People with the wrong kind of ambition do these things:
People with the right kind of ambition do the opposite:
When you’re a startup, you may prefer to promote people from within.
So why hire senior executives at all? To move faster. They know how to do things that your company doesn’t know right now, and bringing in outside knowledge will help your team learn faster and grow more quickly.
For any senior executive, consider how much of their job requires inside knowledge vs. outside knowledge. This will influence whether you should promote from within or hire from outside.
In the last chapter, we discussed common root causes of failure in hiring executives, such as hiring for the wrong stage of your company and hiring for lack of weakness rather than strength. This often happens because you are hiring people who do their jobs better than you can.
Here’s a process for hiring executives to avoid those mistakes:
In an appendix, Horowitz provides sample questions for hiring the head of enterprise sales. They fall into a number of categories in job function, management skills, and general abilities.
(Shortform note: The questions here are framed as questions for the interviewer to score the candidate on, but they can be adapted to be questions posed to the candidate directly)
Job Function
Management Skills
General Abilities
Executives at big companies and executives at startups have very different working styles.
In big companies, executives have lots of demands on their time, from departments they manage, to colleagues who want help, to customers and partners who want attention. Thus, big company executives are great at prioritizing, improving processes, and designing organizations. They don’t need to create as much as they need to filter, triage, and optimize.
In startups, nothing gets done until you do it. No one wants your attention, and the ball doesn’t move forward unless you push it. Therefore, startup executives need to be able to do the functional work well, know how to build a team from scratch, and know how to build processes from scratch. Startup executives need to create new directions themselves and push them forward.
Therefore, a big company executive might be a poor fit for a startup. He might land in your company and sit around waiting for things to happen. Then nothing gets done, and people resent his high compensation.
This isn’t a total dismissal of all big company execs. You just need to be careful when hiring them and when onboarding them.
When interviewing a big company exec, ask questions that indicate awareness of the difference in job needs:
When you hire a big company exec, onboard them well to increase their chances of integrating:
You likely have friends who run other companies that employ very talented people. You likely both have an unsaid agreement that you shouldn’t actively poach each other’s employees.
But in practice, the more realistic situation is that your friend’s employee seeks you out without your company’s solicitation. This person interviews well and is a real standout, and you want to make an offer. What do you do?
It’s a trickier situation than on the surface. Realize that employees mainly leave when something is not going well; your friend’s company may be on life support, and your hiring a star employee may take away a key resource your friend needs at her weakest moment. Even worse, other employees at your friend’s company might see the defection and get the same idea, causing a vicious cycle.
Some people justify this with, “If her company is leaking employees, wouldn’t she rather the employees go to a friend?” This doesn’t compute as well as you think. Consider this analogy—if your spouse were leaving you, would you want him or her dating your close friend?
Here’s how Horowitz advises you deal with the situation:
Training is one of the most valuable activities a company can do. It is wonderfully high-leverage—each person spends 2,000 hours per year working for your company. Say you spend ten hours to train a group of ten people, who collectively work 20,000 hours per year; if you improve their performance by 1%, you have converted 10 hours of your time into 200 hours of extra team productivity.
Many companies think that since they hire such smart people, training isn’t necessary, that they’ll figure it out themselves. This is woefully misguided and a wasted opportunity. Companies also think that they don’t have time for training, but this is also short-sighted. Training is the very thing that makes people productive, so it is the first thing to prioritize.
There are two types of training in a company: functional training, which provides the knowledge and skills to do the job, and management training, which trains managers to manage their teams.
In general, functional training should do the following:
Beyond these generalities, functional training should be customized to the job that needs to be done.
Functional training should be a mandatory component of all teams in the company. You can enforce this by denying their requests for more people until you validate their training program. Likewise, for new employees, training should also be mandatory before they can start doing work.
Management training prepares managers to lead their teams. It should do the following:
Senior executives bring a wealth of knowledge and experience with them, but they can also bring problems. Here are common issues and how to deal with them:
Once you hire the right people and train them, you’ll need systems in place to keep them productive and happy. You should also prepare to change your management practices as your company grows—what used to work with just 5 people working around a table will fail when you have 50 people.
This chapter covers an array of topics, from company culture to measuring performance to reducing office politics.
Culture consists of key values that define what your company does and how it does it. Examples of key values include frugality, customer obsession, and beauty of design. Good key values meaningfully distinguish you from your competitors.
A strong culture is practically useful—it helps you filter for hires who will fit, and it shapes the behavior of people at the company.
Beyond just articulating vague cultural values, implement a simple, scalable behavior that reinforces the key value. Here are examples:
These small actions reinforced the key cultural value across the company in a highly scalable way. Importantly, they also change how people behave in the business and how the company accomplishes its goals. In contrast, foosball tables and free snacks don’t actually drive how the business operates; therefore, they’re not part of culture, they’re just perks.
Note also how the cultural examples above are highly distinctive and thus inappropriate for other companies. A company based around beautiful design, like Jack Dorsey’s Square, would find door-desks abhorrent. This is OK—a strong culture helps you filter out people who don’t belong and wouldn’t be happy in your company.
To track performance, you will need to choose metrics. However, a poorly defined metric can cause people to optimize for the wrong thing and might even sabotage your efforts.
Horowitz recounts a few examples:
Metrics have their place, but be judicious about how you define and use them:
One-on-one meetings are private meetings between a manager and her direct report. Compared to email or group meetings, they’re relatively informal and intimate, and thus provide a good avenue for communication.
Some people think one-on-one meetings are pointless, but they’ve usually been victims of bad ones. In reality, one-on-ones are fantastic opportunities to learn about problems, both in the company and with the employee. They’re also a place to bounce new, unformed ideas around before they’re ready for formal presentation.
Here’s how to run a one-on-one:
Here are questions that Ben likes asking in one-on-ones:
(Shortform note: This section originally comes from Chapter 7.)
As a manager, you should constantly be evaluating people and giving feedback. As a CEO, you should have an opinion on everything in your company.
Constantly giving feedback has a few benefits:
You should develop a personal style around giving feedback based on your own personality. However, here are general pointers that apply to everyone:
As a manager, you want to balance creativity with accountability. You want to give people freedom to come up with new ideas and notice problems, but you also want to hold them reasonably accountable so their work doesn’t get sloppy. Conversely, you don’t want to be so tight on accountability that you stifle creativity.
Here’s an example situation: Say an engineer comes to you and points out a deep product problem that she estimates will take 3 months to fix. Everyone agrees the problem is worth fixing if it takes just 3 months. She later finishes the task, but it takes 9 months instead. How should you react?
But it’s not black and white. Each situation demands a different response. How you should react depends on a few factors:
Adjusting your feedback this way will help balance creativity and accountability in your team.
It’s common for two departments to clash with each other. The sales team might blame the product team for moving too slowly and falling behind competitors. In return, the product team might blame the sales team for bringing too many competing priorities. These conflicts can drag everyone down, especially if the two departments need to work together frequently.
When these problems are irreconcilable, Ben suggests the “Freaky Friday” technique—have the department heads do each others’ jobs for a period. This is named after the film Freaky Friday, where a bickering mother and daughter switch bodies and have epiphanies about how difficult the other person’s life is; when they return, they have a newfound appreciation for each other.
Likewise, a department head who blames her colleague probably doesn’t appreciate the full extent of what the colleague has to deal with. Forcing her to take her colleague’s job will cast her actions in a new lens. After undergoing Freaky Friday, the two department heads will likely find more productive ways to resolve their conflict and bring harmony to both teams.
Most companies try to hire the smartest people they can find. As we’ve seen, intelligence with the wrong kind of ambition can cause deep problems with politics and morale.
Intelligent people can also be poor employees in at least three other ways:
There are a few interesting patterns to these problems:
Sports coaches often have to deal with diva superstar athletes. They face a conflict—do they tolerate their bad behavior, thus possibly lowering discipline across the team; or do they enforce their rules, thus risking losing the superstar?
One approach is to tolerate behavior from only one person. Coach Phil Jackson, coach of the historic Chicago Bulls, said of the unpredictable Dennis Rodman, “There is only room for one Dennis Rodman on this team.” (Shortform note: You should make clear you are tolerating this person only because she is unquestionably brilliant and vital to the team, and still enforce a line that even this person cannot cross.)
Software engineering has an idea of technical debt—if you take shortcuts now with hacky code, you incur a debt that has to be paid later through redesigning the software. Management has management debt as well—if you take the easy solution to fix a difficult situation, you will pay for it later.
Ben covers a few flavors of management debt.
Say you have two leading candidates for a senior role. They have complementary strengths and weaknesses—one’s great at the technical functions but a weak manager, and the other person is the opposite. The shortcut is to promote both people to the same role, thinking they can cover for each other’s weaknesses.
However, this causes problems with politics and accountability. Which members of the team report to whom? Which manager is responsible for which decisions? Can one manager override the other? And if the team performs poorly, who’s accountable? This lack of clarity will paralyze the team.
It’s better to promote one person to the role, then help her grow where she’s weak.
People need feedback to improve, and you probably know this. But performance reviews take time to run, seem “too corporate” for a startup environment, and risk offending people. So you choose not to run them.
Over time, you accrue the debt: People stay blind to their weaknesses and inevitably perform worse than their fullest potential. They might even get frustrated that they’re not getting feedback and guidance on how to improve.
Think about how you manage your team and compare it to the book’s best practices.
What metrics do you use to measure the performance of your team?
What is the ultimate goal your team is driving toward? Do the metrics signal progress toward this goal? Or do they measure something that’s only slightly related?
What is your perspective on one-on-one meetings? How could you make them more useful?
How frequently do you give feedback to your direct reports? Do you want to give feedback more or less than you currently do?
When you’re at 5 people, you don’t need processes. Everyone communicates with each other by talking across a table, and decisions are made quickly. There is no politics because everyone can hear each other.
When your company grows, these problems become exponentially more difficult. You will need to build processes to keep people communicating, making good decisions, and sharing knowledge.
How do you know it’s the right time to build in processes? When adding on a new employee feels harder than adding more work to your existing employees; and when this feeling is preventing you from growing the team quickly enough to reach the company’s goals.
Here are the main principles of designing a good process:
For more on this, Ben recommends reading Andy Grove’s High Output Management.
In an ideal startup environment, people are rewarded based on merit, on their productivity and contributions. In contrast, politics rules when people get ahead on grounds other than merit. Someone might get promoted because of a personal relationship with the boss; someone might get a raise she didn’t deserve because she’s more aggressive about asking.
When people get ahead with politics, it becomes a bad place to work. The people who don’t play politics resent the people who do and the managers who fall for it. Even worse, they start emulating the political behavior because it works.
How does a well-meaning company eventually get polluted by politics? It starts at the top. Even if the CEO is not political, if she doesn’t enforce disciplined processes around how the team is compensated and promoted, people will be incentivized to play politics.
The general solution to politics is 1) to hire people with the right kind of ambition (as we covered in the last chapter, and 2) to build good processes around important decisions. If the structured process is followed religiously, people will know the way to get ahead is to do well in the process.
Another tactic is to maintain your composure when someone brings something controversial to you, like a complaint about another employee or a competing job offer. Don’t react impulsively and try to make the person feel better right away; stay firm in handling it as part of your usual process. Anything you say here can be used against you when it turns into gossip.
Below we’ll cover three situations to build processes around: compensation, promotions, and complaints.
An employee comes to you with a job offer from another company. The salary is higher than what you pay your top performer on the team, and this employee is not the top performer. You don’t want to pay her that much, but right now you can’t afford to lose her because her work is critical to hitting your roadmap.
The bad shortcut is to match her offer and ask her to keep it secret. You get to keep her while limiting the damage (or so you think).
In reality, news of this will spread. She’s already talked to colleagues at the company about whether she should take this obviously better offer; when she stays, they’ll have questions. If she doesn’t want to lie, she’ll have to tell the truth. Soon everyone will know the way to get a raise is to interview for other jobs and threaten with a better offer.
Run formal performance review and compensation processes. Decide how you want to compensate people based on their contributions, and make sure that is followed with no exceptions.
If someone comes to you with a competing offer and threatens to quit, you should simply say that her compensation will be reviewed with everyone else’s, and exceptions won’t be made.
Your VP of sales comes to you and says he wants to be COO one day. He asks whether you agree he has potential for the role; you say yes. He asks what skills he should work on to be competent for the COO role, and you make a list. He leaves, and you feel happy that you’ve coached someone to build his career.
Soon the VP of marketing comes to you in a panic. She says that the VP of sales has announced that the CEO is grooming him for the COO position and that other people should get comfortable with reporting to him soon.
Create a formal process around promotions for every employee and department. Make the processes consistent across the company.
First, define the responsibilities of each level and the expectations of performance. To be promoted to this level, a person must meet these criteria. Be as specific as possible in defining the criteria. You can even calibrate to current people: “must be as good at system design as Teri.”
Next, define a process for promotions. A standard process can look like this:
For senior executives, the promotion committee may involve the board of directors.
An employee brings in a complaint about her manager’s behavior. It’s news to you, but you listen empathetically and agree it sounds like pretty bad behavior that should be punished. You promise to look into it.
Soon, you hear rumors that you think the manager’s performing terribly and you’re set to fire the manager any day now.
If someone complains about another person’s behavior, get the two in the room and hash it out right there. This will reduce miscommunication and politics. Usually it solves the problem quickly.
If someone complains about another person’s performance, then you usually have one of two reactions:
A small startup doesn’t need titles, but as you grow, titles will become more important for a few reasons:
You have control over the names of the titles in your hierarchy. How you name these titles, and how they match up to competitors in the industry, is up to you.
On one hand, Marc Andreessen supports inflating titles. Like compensation, a title is part of a job offer, but a title is free. Therefore, give people loftier titles—a Director at another company might be Executive Vice President at yours. It’ll be one way to attract talent to your startup, especially if you can’t compete on compensation.
In contrast, Mark Zuckerberg at Facebook supports deflated titles—Vice Presidents at other companies have to join as Directors or Managers. The benefits:
Of course, Facebook has tens of thousands of employees and faces problems that your startup may not.
The Peter Principle suggests that people are promoted to their “level of incompetence.” At that point, they can’t be promoted further, and they stagnate at that role. This is largely unavoidable because you can’t predict ahead of time how well someone will handle the promotion. However, the Peter Principle causes a few problems:
To avoid the Peter Principle, be deliberate about promoting people only after they have the skills required of the title (we covered this earlier in the chapter). (Shortform note: Ben doesn’t explicitly discuss how to rid a level of poor performers, but the natural solution is to demote people who once had promise but now don’t meet the title’s expectations.)
As your company grows, the job requirements for every manager changes. Being the company’s only salesperson is very different from running a 5-person sales team, which is in turn very different from running a 100-person global salesforce.
Every time your company scales, people (especially executives) need to requalify for their job. What used to work at a smaller stage may no longer work at a larger stage.
You may feel disloyal to an executive who has done a tremendous job to date. But you don’t owe her the job. You owe it to the rest of the team to build a world-class team, so that everyone has a better chance of succeeding.
This applies to you as well. As the company scales, you may not be the best person to run the company, and for the sake of the company you might need to replace yourself.
As you ponder how your company will scale in the next few years, you may try to predict who on your team will work well at the larger scale and who will not.
Ben thinks this prediction is counterproductive, primarily because operating at scale is a learnable skill, not a natural talent. Therefore, it’s hard to predict how someone will perform at a scale they (and you) have never seen. For example, it was never clear whether Mark Zuckerberg or Bill Gates could scale beyond a small startup, yet they both learned to oversee tens of thousands of employees.
Prematurely judging someone as incapable causes real damage:
Instead, judge each person on the work they’re doing today. When it comes time to scale, evaluate what your company needs then and who can best do the job at that moment. Everything further in the future carries too little information to make good decisions right now.
As your company grows, how should you design how everyone fits together? Do you group people by functions (such as sales, marketing, product) or do you group by business line?
The general idea is that people who report to the same manager communicate the most. The farther away teams are in the org chart, the harder it is to communicate.
Every company needs its own organizational answer. Here’s how to design yours:
The HR department is like quality assurance for your people. Quality assurance doesn’t know how to produce a great product, but they sure can tell when something’s wrong. Likewise, HR can’t produce a great place to work by themselves, but it can tell when it’s bad.
An HR team will help your company in these areas:
When you hire a head of HR, look for these skills and qualities:
To review advice from Chapter 4, being a CEO is unnatural. Humans didn’t evolve in a way that makes running a thousand-person company a natural thing to do. This also means people aren’t born CEOs out of the womb. It is a learned skill; even worse, it’s a skill that you can only learn by actually doing it.
So when things go wrong, don’t beat yourself up too much. Remember the earlier advice about how to get through the Struggle—don’t give up, talk to people, clarify your problems, and be decisive while emotionally attached.
But make no mistake, you do have the responsibility, and no one but you has the responsibility. Every problem in your company is truly your fault—you set the direction of the company, you hired the people to work on that direction, and you created the environment that the people work in. If you miss a growth target or lose a key customer or have a toxic work culture, it is your fault.
It is a lonely job. No employee, board member, or friend knows anywhere near what you know about your business, so you will have to make difficult decisions by yourself.
But if you didn’t want this job, you shouldn’t have signed up for it. So learn how to do it better.
The most important responsibility of a CEO is leadership. You can measure a leader by the quantity and quality of people who want to follow her.
In practice, people want to follow leaders who do three things well:
We’ll cover each in more detail.
Knowing what to do consists of two activities: articulating the vision and making decisions to achieve the vision.
The vision is the story for what the company is capable of doing and why it’s exciting to work on. It’s also the strategy behind how the company can achieve this vision. It answers the deepest questions of why: “Why is this important to build? Why is the world better off because of our work? Why should I work here instead of anywhere else?”
A compelling vision has multiple benefits:
The CEO is responsible for articulating the vision. She doesn’t have to have originated the vision, but she needs to be its spokesperson and protector.
Steve Jobs was a master at this, getting people to follow him to his computing company NeXT in the 1980s, then getting people motivated at the failing Apple when he returned in 1997. Amazon’s Jeff Bezos also frequently communicates the company’s long-term vision around customer focus, as he did in this shareholder letter in 1997.
Just as engineers output code and marketers output advertisements, the CEO outputs decisions. A good CEO makes high-quality decisions quickly.
Making decisions requires a few key activities:
A compelling vision is well and good, but to make it real, you need a team to build toward it. This means hiring great people, then getting them to do good work.
The best way to accomplish both is to make your company a great place to work, which has been the subject of the past few chapters. In review, a great place to work requires these attributes of the CEO, the company, and the culture:
Having defined a vision and made progress toward the vision, ideally you’ve achieved the results you were looking for.
But what are “good” results? It depends on the size and nature of the opportunity, which are idiosyncratic to each company.
Therefore, you should measure your results against your own company’s opportunity, not anyone else’s company. It doesn’t make sense for a fruit vendor to grow as quickly as Facebook did. It doesn’t make sense for a hardware company to have margins as good as a software company. Hoping otherwise can be destructive.
All CEOs have different strengths and weaknesses along these three activities. A deep strength in one area can temporarily compensate for another—a CEO with a blindingly bright vision can attract people even if the organization is a mess. A CEO who achieves results can be a less articulate communicator of the vision.
However, you should find your weakness and work on it.
There are two types of managers:
Which type is best for a CEO? Ideally, she has elements of both. A One CEO without any Two capabilities will create a chaotic company. A Two CEO without any One capabilities will slow down decision making. However, in practice, Horowitz says that most founding CEOs are Ones.
Which type is best for executives? Ideally, they’re a hybrid of both—they’re Ones when running their own teams, but Twos at the executive team level. For example, a head of marketing would take direction on the overall company direction and how marketing fits into it, then make strategic decisions for marketing within those constraints. These are “Functional Ones.”
The best model for an executive team is a One CEO surrounded by Twos/Functional Ones. This allows for fast decision making and clear goal setting at the top, which is then carried into execution by the company divisions. In contrast, having One executives report to a One CEO can cause friction when the One executives make conflicting decisions.
This ideal model has a weakness—it makes CEO succession difficult. You have a few choices, all of which carry risks:
CEO succession is always hard. The ideal is to promote an internal One to CEO and hope the transition goes smoothly.
To be a good CEO, you need to be both intelligent and courageous. Intelligence helps you find the right decision to make. Courage helps you execute the decision, even when it’s terrifying.
Decisions can be terrifying for a few reasons:
Intel CEO Andy Grove faced all three. Through the 1970s, Intel’s main business line was in memory chips (employing 80% of its headcount), but in the early 1980s, Japanese companies began dumping chips at bargain prices. Grove knew the memory industry was done and jettisoned the memory business to go into microprocessors for personal computers. This was deeply unpopular at the time with both employees and investors, but it turned out to be one of the great decisions in business history.
A courageous CEO makes the right decision, no matter how hard it is. To paraphrase boxing trainer Cus D’Amato: The difference between a hero and a coward is not what they feel. They’re both terrified. But the coward runs away from that fear. The hero fights off the fear to do what she has to do.
Like any other skill, courage can be developed. You face decisions everyday between doing what’s easy, consensus, and wrong and what’s hard, contrarian, and right. Each time you make the hard choice, you will become a little more courageous.
Companies can go through peacetime and wartime periods. The company needs a different type of CEO in each period.
Peacetime is when the company is handily beating its competitors and its market is growing. It can focus on further expanding the market and on strengthening the company. The company values creativity and diversity of thinking.
Wartime is when the company faces an existential threat. The threat is often external and can be caused by the macroeconomic environment, competition, changes in the supply chain. The company needs to do everything it can to survive and a limited window to do it. The company demands discipline and shuts down dissent that can compromise the mission.
The CEO you need in peacetime is very different from the CEO you need in wartime.
Most management manuals are written about successful companies in peacetime. Very few are about what wartime companies have to do to survive, and so many CEOs don’t have training manuals on being a wartime CEO (Ben points out Andy Grove’s books as the rare exceptions).
At any given time, you need to know which situation you’re in and choose the right management style to execute it. It’d be a mistake to emulate Google’s famous perks and flexibility when your company is going to go bankrupt in three months.
Can a CEO be a good peacetime and wartime CEO? It’s possible but difficult. They require entirely different actions, and you need to know which situation you’re in and which rules to break.
At points in the company’s lifetime, you might get buyers who propose buying your company. On the one hand, it can mean more financial stability than you ever thought possible. On the other, it can mean letting go of the vision that compelled you to start the company in the first place and betraying a team that is still excited to chase that vision.
Necessarily, selling your company is part rational and part emotional.
On the rational side, answer two questions about your company:
If you answer “yes” to both, then you should stay independent. The reason is that you will estimate a lofty valuation for your company that likely no one will be able to meet, because your project relies on too many unknowns.
These aren’t easy questions to answer. You may think the market is larger than it really will be. You may think you’re in one huge market, but in reality you service just a small market.
Your answers to these questions will change over time. Ben’s perspective on selling Opsware changed from beginning to end:
There are emotional pieces to selling your company, from the commitment you made to the team to the personal commitments you make to your family. Ben suggests advice for two major pieces: your personal finances and your communication with the team.
For personal finances, pay yourself a reasonable salary when the business might start attracting buyers. During the startup phase, investors usually encourage paying the founders as little salary as possible to best incentivize growing a valuable company. However, when a business might be acquired, the attitude should shift—the CEO should be paid sufficient salary so she isn’t tempted to sell purely to make her bill payments.
For team communication, be transparent about your decision process for acquisitions. State that while your company has a chance to be number one in a large and growing market, then the company will stay independent. If not, it might be sold. When framed this way, the company owners and the staff are fairly well aligned. This transparency is better than dodging questions about acquisitions; your employees will take your vague answers however they like and start rumors.
Review your tendencies and responsibilities as a CEO.
A CEO has a few major responsibilities: articulate the vision, make high-quality decisions rapidly, hire a team, get the team to work on the vision, and achieve results. Which do you feel you are weakest at?
What should you do in the next month to improve on this weakness?
Do you consider yourself more of a One or a Two? Why?
Look at the people who report to you. Which people are Ones, and which people are Twos? Does this distribution of people concern you?
After selling Opsware in 2007, Ben spent a year working at HP thinking about what to do next. He’d now gone through a company’s entire life cycle, from founding to going public to selling, and he felt it was time to retire from operating a business. But he’d learned so much, and not using this knowledge seemed like a waste.
Then he had an idea—to help other entrepreneurs through the same struggles he faced. Why didn’t every founder know the mean score was 22? Why did every founder seemingly have to struggle alone to hire, fire, promote, and scale?
Venture capitalists, the investors of companies, were theoretically supposed to help founders through their struggles. But in reality, they often saw founders simply as inexperienced beginners to be replaced by professional management as soon as possible. Ben faced this personally when raising money for Loudcloud—an investor asked when they’d be bringing in a “real CEO,” “someone who knows what they’re doing.” He was initially crestfallen to hear this, but he learned the ropes and became a competent CEO. Now, coming out of Opsware, he wanted to help other entrepreneurs get better too.
The way he thought he could best achieve this vision was through a new kind of venture capital firm that placed the entrepreneur first. He wanted to solve the classic problems of venture capital firms then:
Ben reached out to his old co-founder Marc Andreessen, who had the same interests. They strategized how to build the firm they would have wanted as entrepreneurs:
They launched their VC firm Andreessen Horowitz in 2009. Their firm was new, but he and Marc weren’t—Marc especially was a technology legend for having developed Mosaic and Netscape. Building off this credibility, they kicked off a PR campaign to great effect, landing a cover in Fortune magazine.
Having now been a manager for over a decade, Horowitz was now primed to take everything he’d learned to build his firm. He knew to hire for strengths and not for lack of weakness; he knew to build a culture around the right values; he knew how to make teams work with each other to achieve the common vision. Most importantly, he knew how to coach founders through the struggles he’d faced as a CEO.
Andreessen Horowitz became a top-tier firm within just a few years—a feat previously unimaginable in the entrenched venture capital industry.
In closing, Ben gives a reminder that building a company will be a struggle. But greatness is created through the struggle. And if you endure the struggle and trust your ability to overcome it, you may just make your dreams real.