A Note to Tech CEOs: Lessons from the TechCrunch Debacle

Over the past month, Silicon Valley has been filled with drama - not over patent wars in mobile technology or the inability of HP to get out of its own way, but over the fate of TechCrunch, the widely read blog that covers start-up technology companies.  About a year ago, AOL acquired TechCrunch for $30 million and, with it, the site's mercurial editor, Michael Arrington. TechCrunch is widely read, because it covers interesting, young companies in a provocative and insightful way.  It is both a champion for entrepreneurs and a check against entrepreneurial exuberance.  Mr. Arrington is another matter.

At the time of the AOL acquisition, Mr. Arrington wrote that he was really excited about taking the site to the next level through AOL and that he expected to be a happy and productive AOL employee for many years to come.  He might have thought that at the time, but, apparently, being part of the machine can be oppressive.  AOL reorganized its content properties and put Ariana Huffington of the much larger and more successful Huffington Post in charge of rationalizing them all, which she set about doing with vigor.

Apparently, Mr. Arrington believed that this rationalization didn't apply to him or TechCrunch.  A few months ago, he started investing in start-ups after years of swearing it off and announced plans to raise a $20 million venture fund.  AOL was incredibly "understanding" - even investing in the fund - but told Mr. Arrington that he couldn't be both a venture investor and cover the companies he invests in.  This seems like a basic journalistic principle, but this was just too much for Mr. Arrington.

First, he asked AOL if he could buy TechCrunch back after having pocketed a big check not so long ago.  He noted that he would have to raise money to do that - presumably not from his venture fund.  Then he opined that AOL was exerting too much editorial control and, as a conglomerate, really didn't understand journalism.  He did all this right before TechCrunch's annual conference that features the hottest in technology companies - taking most of the attention away from the markets and companies that TechCrunch covers.  In the end, AOL suggested - no doubt in a strongly worded letter along with some pointed in-person meetings - that Mr. Arrington resign, which, thankfully, he did.

CNN's excellent Sunday talk show, "Reliable Sources" hosted by Howard Kurtz, did an excellent job of summarizing the different points of view on the TechCrunch imbroglio by interviewing two people back-to-back with very different opinions on the matter:

• David Carr, a senior TechCrunch editor, who comes across as a "tech brat" with an entitlement complex, and 
• Kara Swisher, the excellent tech journalist with attitude and AllThingsD co-Managing Editor.  

There's a link to it here.  All I can say is, "Go Kara!"  She delivers a very concise paddling of Mr. Arrington and his cohorts in 5 minutes or less.  As a bonus, AllThinsD added this comic, which says sort of the same thing but even less nicely.

I am a strategy consultant for technology entrepreneurs.  Hundreds of my clients have raised significant amounts of money or been acquired. Operational strings and raised expectations are always attached.  Most of the time, the founding entrepreneurs don't survive the transaction for more than 24 months.  Here's why:

• In most big companies, the acquired company is a a new product line, not a transformer of events.  Acquiring companies have to balance new versus old.  They want to reallocate staff to give new opportunities to current employees.  They often have a sales force in place to sell the new product line.  They want to the acquired company to comply with their systems and processes, not invent new ones.  There's about a 100 percent chance that those systems and processes will be more complex and onerous than the ones the acquiree had, but that doesn't necessarily make them worse.  Entrepreneurs hate bureaucracy.  It chafes at them.  Most can't adjust.
• You will have a boss, who will have opinions and give orders.  Get over it.  Most entrepreneurs had one or more bosses before they started their companies; however, many also hope to never have a boss again.  A Board of Directors, sure, but someone telling him what to do every day, definitely not.  
• Different people for different times.  The truth is that there are start-up, mid-sized, and big company people.  Few people fit into all three as a company grows and, therefore, succeeds.  Here are a set of statistics that should put in perspective:

• In a $1 billion IPO or company sale, a company is generally on its third CEO and has replaced most or all of its founding management team.  The founding CEO makes - on average - $6 million off of the transaction, because, by this time, it's been several years and investment rounds since he roamed the halls.
• In a $100 million sale, the founding CEO also makes on average $6 million.  Why is that?  Because investors and new employees have taken many of the newer shares - diluting the founder's shares.

In both of these cases, the Company has gone through multiple scaling phases, where it needed new employees with different skills, more internal governance, and many new business processes.  If the Company didn't do these things, it likely would have gone out of business or never grown to a big size.  This type of dilution is both necessary and "worth it" to gain a high value exit for the largest shareholders, which are the usually institutional investors that funded the scaling efforts.

Mr. Arrington sealed his own fate but good; however, most successful start-up CEOs go through the same thing - albeit with far less drama and, hopefully, none of the ethical problems that Mr. Arrington didn't believe were actual problems.  Some people would say that this is a shame and that entrepreneurial spirit should live on forever.  The truth is, becoming big and successful with big company executives is a natural business occurrence.  Even better, it leaves entrepreneurial CEOs with the time and resources to do the "next, new thing."