John Foley’s fall from Peloton and the market’s big founding problem

Peloton Interactive Inc. co-founder and CEO John Foley stands for a photograph during the company’s initial public offering (IPO) outside the Nasdaq MarketSite in New York, U.S., Thursday, September 26, 2019.

Michael Nagle | Bloomberg | Getty Images

About two months after Peloton’s IPO, founder John Foley appeared on CNBC’s “Closing Bell” where he touted the connected fitness company’s “revenue predictability.”

“We know how to grow and stick the landings on what we say to the street, what we say to our board and to our investors. [about] how we’re going to grow,” Foley said in that Nov. 5, 2019, interview.

It’s a very different tone than what Foley said during the company’s second quarter fiscal 2022 conference call on Feb. 8, where he acknowledged the company had “made missteps along the way. “, that she “held herself accountable”, and he was going to “own” that – which included her departure as CEO, several management and board changes and a wide range of cost-cutting measures, including the removal of approximately 20% of its workforce.

Peloton, a two-time CNBC Disruptor 50 company, had been led by Foley since its inception in 2012, and fellow founders Tom Cortese, Yony Feng and Hisao Kushi remained as senior executives. The other co-founder, Graham Stanton, left in March 2020 but stayed on as an advisor, according to his LinkedIn.

Peloton’s bumpy road that has seen its stock price drop more than 73% in the past year has raised questions about how long a founder-CEO like Foley should hang on after the IPO , especially if that trip starts to look more like a HIIT and hill climb than an easy one.

The track record is very varied. On one side you have a founder like Jeff Bezos who remained CEO for over 20 years after Amazon went public with massive growth along the way. Of course, there’s Steve Jobs, who ended up leaving Apple amid boardroom tensions after hiring “professional CEO” John Sculley, only to return to oversee one of Apple’s most notable business turnarounds. market history. On the other side you have Groupon founder Andrew Mason, who was fired as CEO in 2013, some 18 months after the company went public, following a series of failures on Wall Street, a drop in the share price and very public incidents.

Jeffrey Sonnenfeld, senior associate dean for leadership studies at the Yale School of Management, said that 20 to 30 years ago the trend for many venture capitalists was to push back on founding management for critical change in the life phase of a business, “then quotation mark ‘professional management’ came along,” he said.

That’s happening less now, and Sonnenfeld said it’s partly for good reasons, like bringing in a more seasoned leadership group that has experience leading companies through various cycles. of life. Foley did, along with Barnes & Noble and other start-ups. But there are bad reasons, such as “founder shares that guarantee your lifelong leadership status in the empire,” he said. In the case of Peloton, where Foley will remain chairman, he and other company insiders still control about 60% of the company’s voting stock.

Peloton responded to one request for comment by press time.

When is it time for a founder to retire?

More and more founders, especially in technology, are replacing each other. Manish Sood, who founded cloud data management company Reltio, wrote in a 2020 CNBC op-ed that the reason he replaced himself as CEO after nearly a decade at the helm is that he “recognized that sustaining predictable hyper-growth requires a set special skills, and Reltio would need a CEO with experience running public companies.”

“Preparing for growth takes courage at every stage,” Sood wrote. “Early on, entrepreneurs often risk everything to start businesses because they believe in a new or different vision. They often face seemingly insurmountable obstacles. It takes a lot of insight to recognize when an emerging growing business needs to pivot. or change direction as it grows.”

Jack Dorsey shared a similar sentiment when he suddenly resigned as CEO of Twitter in November.

“There is a lot of talk about how important it is for a business to be ‘founder-led’. Ultimately, I think that’s severely limiting and a single point of failure. I think it’s essential that a company can stand on its own, free from the influence or direction of its founder,” Dorsey written in a note to Twitter employees.

Efforts have been made to try to determine exactly what the lifespan of this founder-CEO is. A recent Harvard Business Review study of the financial performance of more than 2,000 publicly traded companies found that, on average, companies run by founders outperform those with non-founding CEOs.

However, this difference essentially drops to zero three years after the company’s IPO, and by then the founder-CEOs “actually start to hurt the value of the company.”

“Our data shows that having a founder-CEO increases company value before and during the IPO, suggesting that a founder-friendly approach actually makes a lot of sense for VCs. who typically invest while companies are still in their early stages and cash out soon after their IPO,” the authors wrote. “However, given that we found that on average, post-IPO performance are lower for companies with founder-CEOs, investors seeking entry after a company has already gone public would be wise to take a less founder-friendly approach – and investors, board members and Leadership teams will benefit from proactively encouraging founder-CEOs to leave before they reach their expiration dates.”

It’s unclear what the future holds for Peloton and if he can regain the momentum that saw him disrupt the fitness industry.

The company’s new CEO, Barry McCarthy, cited his experience working with two “visionary founders” in Reed Hastings and Daniel Ek at Netflix and Spotify, respectively, in his first email to Peloton staff, which was obtained by CNBC, saying he is “now partnered with John [Foley] to create the same kind of magic.”

“Finding product/market fit is incredibly hard to do. It’s extremely rare. And I believe we have it,” McCarthy wrote. “The challenge for us now is to understand the rest of the business model so that we can win in the market and on Wall Street.”

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