Lured by enormous compensation packages and the excitement of fast growth, many big-company executives are leaving cushy positions to run start-ups.
Lured by enormous compensation packages and the excitement of fast growth, many big-company executives are leaving cushy positions to run start-ups.
Top Fortune 500 execs are jumping ship to run start-ups. Can they cut it in a world without limos?
Stranded at Newark Airport on a Friday night, sandwiched among the dronelike business travelers and souvenir-shop kitsch, Alex Mandl came face-to-face with a horrifying reality.
That night, for the first time, there would be no plush corporate jet to wing him away.
Mandl, lately the president and chief operating officer of AT&T Corp., had just assumed the reins of a pint-sized wireless company in northern Virginia. By resigning from the number two spot at $52-billion AT&T to join a start-up that at the time didn't even have a name--it's now called Teligent Corp.--Mandl had become the most visible icon of an unlikely phenomenon.
Executive defectors, you might call them: blue-chip corporate chieftains who kiss the security of the executive suite good-bye, descending from their powerful posts to head up little-known growth companies. Such defections are still few in number, but they're occurring at a pace that would have been unthinkable only a few years back--and they've captured the imagination of the business world.
"I had a pretty good job," Mandl says in grandiose understatement. Namely, he was widely considered the heir apparent to one of the world's largest corporations. "The odds were, I would succeed [AT&T chairman and CEO] Bob Allen," he says. "But I basically woke up one morning and said, 'This opportunity is so attractive that if I don't take it, I probably will never do this kind of thing."
On his first day of work, a year ago September, Mandl showed up to vacant offices and went about hiring the company's first employee, a secretary. He spent the following week working on telecom issues, just as he had at AT&T--only at a slightly less elevated level: the office phone system he had installed didn't work and had to be ripped out.
A charming thought, that: Alex Mandl, master of the telecom universe, struggling to fix the damn phone.
But truth be told, visitors hoping to see the former president of AT&T sweating it out in gritty start-up digs, with his sleeves rolled up, will be disappointed.
At Teligent's tony headquarters there are no cinder-block desks in the hallways, no empty pizza boxes. Instead, we're sitting in Mandl's palatial, leather-filled office, enjoying the wide-angle view of the Potomac River as it flows past Washington, D.C. A public-relations handler is present throughout my interview with him.
There are other telltale signs that one is not dealing with a dyed-in-the-wool entrepreneur. Instead of the usual rough edges, the shoot-from-the-hip scrappiness, Mandl exudes a certain gravitas. His gestures are deliberate, his words chosen coolly, creating a sense of distance between him and whomever he is speaking to. Even his eyelids, when they fall, lift lazily. A big-company man.
"Alex was our number one draft pick," says Bill Berkman, a member of the wealthy Pittsburgh clan that quietly laid the groundwork for Teligent during the 1990s, amassing the Federal Communications Commission licenses for a swath of the microwave spectrum. To lasso Mandl, the Berkmans provided a healthy--no, a shocking--compensation package: $20 million to sign, plus an 18% equity stake in the company.
Now, here's the $20-million man, gesturing through the wall of glass toward the barely visible tower of the National Press Club across the river. "It's over there, between the Capitol and the Washington Monument," Mandl is saying. Atop that tower, I'm told, are several featureless devices about the size of a shoe box. Most of Teligent's communications--its local and long-distance calls, its Internet use--are conducted through the air between one of those small boxes (an antenna, actually) and another antenna on its office building's roof.
It is this so-called "fixed wireless" technology (like a cellular telephone, except the user doesn't move) that Teligent will be peddling to customers--mostly small businesses in large cities--when it goes operational, this month. In essence, Mandl is wagering that beaming microwaves to and fro will be cheaper, and will provide wider bandwidth, than tearing up streets to lay fiber-optic cable. It's an audacious gamble, surely. Not only must a customer's antenna have a direct "line of sight" with the receiving antenna, but the microwave signals have an unfortunate tendency to get lost when it rains.
To hear Mandl tell it, though, the difference between running 110-employee Teligent and 130,000 -employee AT&T boils down to this: "There are a lot less zeros."
Despite the absurd contrast in scale, Mandl insists, "there are a lot of similarities to running a large business." As for Teligent's puny size--well, that's just an embarrassing symptom of adolescence that will soon pass as Teligent becomes a "billion-dollar enterprise...with thousands of employees," as Mandl is so fond of saying. The other members of his "dream team," as some call the cadre of prominent telecommunications executives he has hired, evince a similar disposition. "I like numbers that start with b's," says Kirby G. Pickle, Teligent's president. Presumably, b would stand for billion.
Galactic ambitions aside, this executive-defector phenomenon does have a certain beguiling logic: instead of waiting for a company's growth to outstrip its founder's managerial talents, simply bring in the heavyweights from the get-go. But trying to grow a company too big, too fast seems to have been the undoing of several executives who took the entrepreneurial plunge. Their embarrassing flameouts make one wonder: just as entrepreneurs have famous shortcomings as managers, might professional managers fall short as entrepreneurs? Teligent backer Rajendra Singh might as well be talking about all big-company refugees when he says of Mandl in particular: "We knew Alex could do big things. The question was, could he start with small things and make them big?"
It would be hard to pinpoint when this wave of executive defections began. But if one had to do it, December 1994 wouldn't be a bad choice. That's when David Beirne finally got James Barksdale on the telephone.
Then an obscure, 31-year-old headhunter based in equally obscure Ossining, N.Y., Beirne had been trying to cold-call Barksdale about an opportunity at a 100-person Silicon Valley start-up known as Netscape Communications Corp. The attempt was mildly preposterous. Barksdale had built a sterling managerial reputation during his 12 years at Federal Express and had gone on to run 10,000-employee McCaw Cellular Communications, the nation's largest cellular-phone company. Beirne couldn't even penetrate Barksdale's coterie of assistants. So he resorted to an old reporter's trick: he called the executive offices around 1 a.m. The night security guard picked up and, not knowing any better, gladly proffered Barksdale's direct extension. "I called the next day," says Beirne with a liberal dash of bravado, "and I nailed him at his desk."
The rest is Silicon Valley history: Barksdale joined Netscape, and its August 1995 initial public offering netted him more than $100 million. It was the headhunt heard round the world.
Armed with such a high-profile precedent, Beirne subsequently placed former Lotus Development Corp. CEO Jim Manzi at Nets Inc. He moved Ross Cooley, head of Compaq North America, to a start-up called pcOrder.com. And he landed Alex Mandl.
In March 1996, when Beirne approached Christos Cotsakos about the top job at a $23-million company called E*Trade, Cotsakos responded that he was perfectly happy as co-CEO of ACNielsen, the $1.4-billion market-research concern, thank you kindly. At last yielding to Beirne's browbeating, however, he agreed to have breakfast with E*Trade's founder at 6:30 a.m. the following Monday. Cotsakos ended up remaining at the company, a purveyor of on-line investing services, until midnight. He returned for breakfast the following day, a Tuesday. Again, he left at midnight. On Wednesday, he was offered the job. "I called a bunch of my friends," recounts Cotsakos, "and they all said, 'Don't do it. You'll be out of the mainstream. You can't command the big armies anymore."
But on Thursday he took the job. Why?
Pose that question to the turncoat executives themselves, and you'll hear a lot about their pent-up urges "to be creative," "to build something that has my handprint on it," "to grow something from the ground up." And in those responses there is undoubtedly an element of truth. After all, being a corporate administrator isn't necessarily a great deal of fun. "I probably worked just as hard at AT&T as I do now," says Mandl. "It was just on the wrong things: the power struggles, the budget debates, the political issues." Says John R. O'Neil, who advises executives about career decisions at the Center for Leadership Renewal, in San Francisco, "When I meet with them in private--and I meet with a lot of them--they say their jobs get boring as hell."
But only the terminally naïve would believe that's the sole reason corporate higher-ups are gazing ever more fondly at entrepreneurial posts. At least two other forces are at work.
First, there's the opportunity to compete from infinitely more advantageous ground--ground ceded to new businesses by something called "disruptive innovation." That's the term used by Harvard Business School associate professor Clayton M. Christensen to describe what happens when innovations in an industry undermine established products or services. For a variety of reasons, Christensen argues in a recent study, it's practically an ironclad law that large, incumbent businesses--even extremely well-managed ones--are unable to capitalize on that sort of innovation. Not a single vacuum-tube maker could survive the transition to transistors, he points out. Likewise, today's telecommunications executives, straining to move their corporations' lumbering legacy systems just an inch or two, look up from their labors to see nimbler upstarts sprinting by, capitalizing on industry deregulation and the latest technologies.
It was too much for Joseph P. Nacchio to bear. "My view is that the big companies are not positioned well to deal with this changing environment," says the 26-year AT&T veteran, who jumped ship to skipper Denver-based Qwest Communications. "In this industry, the next 10 years belong to the entrepreneurs."
In many ways, Nacchio's story parallels Mandl's: again you have a senior AT&T executive...seduced by a billionaire tycoon...and a hefty paycheck...to join a telecommunications start-up that's peddling more capacity. Nacchio justifies his decision in big-picture terms. "Even though they have much smaller revenues, the companies deploying the newest technologies will exert a disproportionate amount of influence on how the industry shapes itself," he reasons. In other words, the new economic models--and therefore the new industry heroes--won't be produced by the likes of AT&T.
So Nacchio was primed for a change when railroad magnate Philip F. Anschutz approached him last October about his new venture. They met in an airplane hangar at the Teterboro, N.J., airport. Anschutz described his plan for laying a fat, coast-to-coast fiber-optic cable underneath his railroad tracks. Would Nacchio want to come run the business?
Nacchio could think of plenty of reasons to leave AT&T behind. As executive vice-president in charge of its residential long-distance business, 40,000 employees strong, Nacchio was presiding over a steady decline in market share. ("I tell you," he broods, "when you play the whole football game on your side of the 50-yard line, you generally lose the game.") He'd recently been nudged out of the contest to succeed chairman Bob Allen. And besides, he claims, he'd always fancied himself a small-company man trapped inside a big company's body, or in his words, "an entrepreneur struggling inside of a big company."
The meeting lasted three hours. Fourteen days later, Nacchio and Anschutz had a handshake deal. The compensation package: $11 million for Nacchio to sign up, plus a share of any increase in Qwest's market value. The company's valuation has already quintupled in the wake of its June initial public offering, to more than $5 billion, which should net Nacchio another $27 million by year's end. Not bad for a few months' work.
And here lies the most potent motivator of all: the chance to get really rich, really fast. "What these people have noticed," says Howard Fischer, a Philadelphia-based executive recruiter, "is that the real wealth is being created by entrepreneurs, not corporate executives." That is, longhaired garage tinkerers and swashbuckling entrepreneurs have come to populate the rolls of America's wealthiest people, and the cuff-linked, wing-tipped set now wants a piece of the action.
The players offer their best protestations. "Some of my competitors say I'm just buying these executives," says David Beirne, the headhunter. "I laugh at that. It's not about money. Maslow's hierarchy of needs has already been satisfied." But it's simply difficult to imagine executives crossing the entrepreneurial Rubicon without the lure of such sums on the far side. Concedes Mandl, "If the equity piece had not been of significant value, then this would not have made sense."
Whatever the reasons Mandl and his ilk are changing jobs, the bigger question might be why anyone would want them to. Does hiring these executives make any sense?
At first blush, recruiting someone of Alex Mandl's stature would seem a bit like hiring Ken Griffey Jr. to bat cleanup for the Rotary Club softball team. Or getting Eric Clapton to play at your son's bar mitzvah. But then, we're living in accelerated times. This is the era of the superstart: companies, backed by a hot technology and investors with deep pockets, that promise to vault from obscurity into domination in a matter of years or even months, splashing into America's ever-willing IPO market. These superstarts, the logic goes, require superstar managers. Managers who can tame the start-up chaos. Managers who lend the enterprise credibility on Wall Street. Managers who won't be out of their depth as the company rapidly attains scale. If those managers happen to have spent their careers patiently working their way through the ranks of a colossal, steady-state organization, hey, no problem. Management is management, right?
"Poppycock," says Bill Unger, a general partner at Mayfield Fund, a leading Silicon Valley venture-capital firm. "That's absolute, utter trash."
Unger isn't shy about expressing his belief: corporate executives are singularly unfit to run the sort of early-stage companies Mayfield backs. "We might let somebody else hire them and let them decompress for a few years, then maybe hire them at their next job change." But generally, Unger says, "we've avoided them like the plague."
Even David Beirne, the headhunter who has done so much to lure executives into entrepreneurial roles, is sometimes dubious about his quarry's suitability for the job. "I think," he says, "there are very few who can make the transition successfully."
So what pitfalls await these crossover executives? For starters, they can feel like managers with nothing to manage. At a pip-squeak start-up, the tools of the professional manager's trade--issuing memos, instituting procedures--have little relevance and, indeed, can even be counterproductive. Notes Compaq émigré Ross Cooley, "A lot of the solutions that you bring from big companies can really be overkill at small ones." Furthermore, executives accustomed to slick presentations from their 200-employee technology staff must now plunge their hands deep into the gritty detail. For Malik Khan, a former Motorola executive who now runs tiny Sitara Networks, the comedown wasn't easy. At one point a colleague found him standing bewildered over a fax machine. Explains Khan, "I had not actually faxed a document myself before."
Another, less obvious challenge is more psychic than practical: the need to cope with sudden ego deprivation. "People who just months before would have given a king's ransom to kiss my ass wouldn't return my calls," says Joe Morrison, a former Mattel executive vice-president who now runs his own toy company. Even employees won't kowtow the way they used to. Says John Sculley, the former Apple Computer chief who now guides a handful of small high-tech start-ups: "The concept of 'boss' is very different. You have to prove yourself to your organization on a regular basis--that you are there because they want you to be the boss and because you're just another function in making the system work."
Added to those indignities are the terrible physical deprivations. "Like when you get into the backseat of your car and it doesn't go, because you don't have a driver anymore--the little things like that," says Joseph Nacchio. "Every time I have to drive into Manhattan to take a meeting instead of taking the helicopter, it really brings it home to me."
The problem, of course, is not that corporate executives are constitutionally incapable of driving themselves to work in the morning. Rather, it's that problems arise when, to satisfy their substantial ego requirements, they build cushy infrastructures their fledgling businesses cannot support, or insist on swinging for the fences in search of a commercial home run--both of which former Lotus boss Jim Manzi was accused of doing during his ill-starred sojourn at Nets Inc., which declared bankruptcy last May.
But what can most easily trip up the small-company neophyte, what's most likely to spell commercial disaster, is the failure to grasp a simple concept: cash flow. Says Joe Morrison: "At Mattel, money didn't really mean anything. It was very abstract. I don't think I ever saw a check." Hardly good preparation for life in a start-up, where a CEO often needs to worry about what hour a check will arrive. "In a big company, what you manage to is profits," says Bill Krause. "In a small company, what you manage to is cash." Krause was an executive defector before it was fashionable to be one, leaving a senior position at Hewlett-Packard in 1981 to run a four-person start-up called 3Com.
"None of these executives have ever had to manage cash," says Krause. "When I was at Hewlett-Packard, I could go around the world-- around the world--without a penny in my pocket. I'd arrive at the airport and get picked up by a minion, put in a car, and taken to a hotel, all without removing my wallet." That obliviousness to cash blindsided Krause during his early days at 3Com. The company raised its first round of venture capital in February 1981. It was supposed to last two years, but Krause made what he says is a classic big-company-man error: overestimating near-term customer demand. "You simply assume sales will automatically come," he says. "So you build up this huge organizational infrastructure, and you haven't sold anything yet!" He bulked up the company to 30 employees to contend with the expected gush of revenues. It didn't come. By Christmastime, the company's coffers were empty, and Krause and 3Com founder Robert Metcalfe had to plunder their personal bank accounts to meet payroll.
Both Krause and 3Com survived the debacle, but others have not been so fortunate.
In 1993 the founders of Telular Corp., a fledgling Chicago-based telecommunications company, wanted a marquee name to whip up enthusiasm for their forthcoming IPO. So they tapped Richard Gerstner, a 32-year IBM veteran who was thought to have been in the running for the top job there before he suffered a bout with Lyme disease and watched the job go to his younger brother, Louis. Gerstner's famous name played well on the road show, making for a successful IPO. But the story told by company insiders was one of a free-spending manager ill-served by his corporate mind-set.
Gerstner hired a gaggle of high-priced executives, erected a bureaucratic infrastructure, and expanded operations aggressively. While sales climbed from $6.6 million in 1993 to $17.7 million in 1994, operating expenses soared from $5.9 million to $33.8 million. As the company began to crack under the weight of the overhead, Gerstner pushed, unaccountably, to relocate to spiffier offices. "He wanted to replace tile floors with plush wool carpets," former Telular director Joel Bellows complained to the Wall Street Journal. "We had one senior executive for every million dollars in revenue." Gerstner parted ways with Telular in 1995, leaving behind a company shrunken to half its former size.
Finally, the huge up-front pay packages can be stumbling blocks in their own right. For one, they tend to undermine the hardscrabble, we'll-all-sink-or-swim-together spirit that's so often the glue that holds young companies together. "It just gets the whole thing off on the wrong foot," says Bill Krause, whose salary shrank from $140,000 to $72,000 when he joined 3Com. "How the hell do you walk into the same room as your employees when you've already made $20 million? What kind of culture are you going to have?"
And is it not a disturbing sign when the CEO's salary has to be broken out as its own line item?
So it was for Klaus P. Besier, who rang up great success as the head of SAP America, the $590-million software giant, before hopping to OneWave Inc., based in Watertown, Mass., in early 1996. In his first year there, Besier's compensation--so outlandish that "compensation to executive officer" required its own line item on the income statement--totaled $6.8 million. It was a year when OneWave generated just $13.2 million in sales. In other words, one man's pay chewed up more than half the company's revenues, thus contributing mightily to the year's $12.3-million net loss. It didn't help, either, that Besier ramped up staff rapidly while sales failed to keep pace. OneWave's stock price sank like a stone, plunging to $1.75 after a high of $21.50, and Besier was shown the door.
All of which comes as no surprise to observers like David Gleba, chairman of VentureOne, a venture-capital research outfit in San Francisco. "As a company grows, it grows organically, like a plant," says Gleba. "I don't necessarily buy the notion that by bringing in a pot that's large enough to hold a huge tree, you'll enhance the likelihood that the sprout will turn into a tree. You need to match the talent with the stage of growth. You can't take a seed and turn it into an oak overnight."
That may be. But these days, the vast influx of money pouring into the venture-capital industry is making it difficult to steer clear of corporate types entirely. "We create 20 new companies a year, plus or minus," says Mayfield Fund's Bill Unger. "We have an average of 6 to 10 CEO openings at any time. So there is a tremendous shortage of quality management to put into our early-stage companies. We can no longer turn up our noses at big-company people." (See "Searching for the Next Jim Barksdale," below.)
But perhaps we're missing something here. Could it be possible that, in asking whether the likes of Alex Mandl are fit to be entrepreneurs, we're asking the wrong question?
For after all, these people can't properly be called executives-turned- entrepreneurs. They're not being asked to create value from nothing. When they join a start-up, the business opportunity has already been spotted, the technology has been developed, and some cash has even been raised. (Where do you think all that signing money comes from?) The new recruits are given the very special task of taking the venture to scale. They're handed a seedling, not a seed. They're asked to become entrepreneurial managers, not entrepreneurs.
And, yes, the new elite are attempting to suspend all the rules. They'd like to grow that seedling into an oak overnight. By pulling down salaries that are without precedent in the history of company building, they would exempt themselves from entrepreneurship's cardinal precept: that a big upside necessarily comes linked with a big potential downside. ("Most people say, 'High return, high risk.' I believe in high return, modest risk," observes Mandl, as if the mere insight is what separates him from other company builders.) At times, they would even seem to confuse towering market capitalizations with sustainable economic value.
For instance, someone like Joseph Nacchio might argue that his $11-million signing package looks like a bargain in light of the $5-billion market capitalization pinned to Qwest after his arrival. And in a sense, he'd be right. Nacchio has created enormous value of a sort. He's raised money. The thing is, that's not the same as making money. And that task--winning customers, as opposed to simply winning over analysts--is the essence of the company builder's challenge. As yet, most of the superstarts haven't come close to proving that they're viable businesses. Sometimes that's easy to forget when investors are blessing them with unprecedented stacks of tender.
But then, the present economic climate is without precedent, too. In many industries, never before has the imperative of achieving scale quickly been so strong. In that light, the experiment of growing companies inorganically--not from the bottom up but from the top down--might not be so silly. Bringing in the superstar suits might prove sensible after all, especially if they're willing to follow Christos Cotsakos's advice.
"You have to be willing to learn all over again, to reinvent yourself," says Cotsakos. "You have to be stupid."
Jerry Useem is an associate editor at Inc.
Searching For The Next Jim Barksdale
By Jerry Useem
Is that charcoal-suited executive sitting across from you the next James Barksdale--Netscape's famous gold charm--or the next gold-plated belly flop?
Plenty of backers of start-up companies would like to know the answer to that one.
For start-ups looking to hire a big-name corporate executive as CEO, Barksdale is the benchmark. After high-profile runs at Federal Express and McCaw Cellular, Barksdale was recruited to run Netscape, which then had an initial public offering that hiked his net worth to $100 million. (Did wonders for a lot of other folks' net worth, too.) Now everybody wants a Barksdale of his or her own, and the rush is on for separating performers like him from pretenders like--well, they're too numerous to mention. (For a list of other defectors, see "Big Fish, Small Ponds," page 54.)
Strategies for divining who's who vary. Joe Schoendorf, a partner at venture-capital fund Accel Partners, talks business strategy with prospective CEOs and then springs the question, "What will you do if you're wrong?" Explains Schoendorf: "I want to put a little fear into the guy so he understands there's no certainty here--that this isn't the same as running another division, that all these things fly close to the sun. I'm looking for somebody who can provide assurance, not someone who needs it."
What did it for Rajendra Singh, one of the founding shareholders who brought AT&T president Alex Mandl to Teligent Corp., was the fact that Mandl had emigrated from Austria as a youth. "He brought all his belongings to this country in a single suitcase," says Singh. "I figured he could live without all the luxuries of a big company." Still others prefer executives from particular corporations. Hewlett-Packard, for instance, is a favorite poaching ground because it's broken down into small business units--not functionally organized, à la IBM--affording early-career managers the chance to run their own "business."
Venture capitalist Bill Unger of Silicon Valley's Mayfield Fund has developed a more complex screen. "What you have to do," he says, "is look for behaviors." To that end, Unger looks for someone who--
1. Has courted failure. "You might look for someone who has literally bet their job. In a large company, most people, if they fail, get reassigned to a new job. That's a key difference with a small company, where there's generally one product between you and bankruptcy. So you look for someone who took on a project so risky that failure would have put him or her out on the street. Or you look for someone who did things without necessarily getting permission."
2. Has hired people who subsequently moved up in the company. "Hiring people is the single most important thing you can do at a start-up. The kind of people you need in technology-based start-ups are in tremendous demand by other companies. You have to be able to show them why they're better off working for you, even if they could earn more money somewhere else. That takes a tremendous amount of selling and positioning on the part of the executive. So we look for somebody who has a record of hiring people who have gone on to be promoted. That's something you can actually quantify."
3. Has already made a successful career transition. "Barksdale was brought to Netscape because he had already proven his ability to adapt. By going from Federal Express to McCaw, he had changed industries entirely."
4. Evinces paranoia. "Often, people aren't paranoid enough. They think that because they do all the right things, everything will work out. So they get a plan, execute it, and feel they've done enough. But it doesn't do much good to double in sales and then find out a year from now that you've been outflanked by all your competition. It's kind of like Star Wars. Yoda says, 'Don't try, do.' Being willing to try is not sufficient."
5. Shows an independent compulsion to work for a small company. "George Balanchine--one of the great choreographers of 20th-century ballet--used to say, 'I don't want people that want to dance. I want people that have to dance.' Persuading people to go to early-stage companies is not my business. It's finding people who know they belong at one. We want people for whom working in a large company is no longer an alternative. If people are compelled to be entrepreneurs, they're not waiting to be recruited; they're getting involved in small companies."
6. Hails from the right functional area. "I've seen a lot of people from finance backgrounds make the transition very well to smaller companies, better than people from any other functional area--engineering, for instance. It's partly because finance people desire cash over everything--it's in their bloodstream. Plus, in small companies you need creative financial transactions."
7. Doesn't come from America's stiffest corporations. "Companies like IBM, EDS, McDonnell Douglas, Boeing--I would still say that very few people out of those companies make the transition successfully."
8. Doesn't mind cleaning toilets. "In a small company--this sounds trite, and everybody in big companies denies it, but-- there is nobody to do anything. Frequently, from executives who don't make a successful transition, we'll hear things like, 'Look, I can focus on the execution of the company, or I can focus on the long-term planning, but I can't do both.' In a small company, that's too ba