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.
