Interview with HR.com, part four: T.J. Rodgers on Perpetual Entrepeneurship | Cypress Semiconductor
Interview with HR.com, part four: T.J. Rodgers on Perpetual Entrepeneurship
Ten years ago in his book No Excuses Management, T.J. Rodgers described the philosophy and management methods he used to build Cypress Semiconductor Corporation. In this series of interviews with Rodgers, he discussed management philosophy, attracting and retaining talent, goal setting mechanisms and capital allocation. In this final article, Rodgers describes his theory of perpetual entrepreneurship.
Part 1: Losing the Edge
At the time I wrote No Excuses Management, Cypress Semiconductor Corporation was about a quarter of its present size, and had revenues of a few hundred million dollars. I was shocked and worried because my company that had been so lean and focused was starting to show signs of big company disease – bureaucracies and a lack of visceral attachment to getting the job done and getting it done right.
I started to implement an idea to maintain the original entrepreneurial spirit. I decided that instead of becoming a bureaucratic billion-dollar company, we would be ten $100 million-companies, each operating with the same drive that Cypress originally had. My job would be like a roving member of the board of directors making sure each of those little companies ran right.
This federation of entrepreneurs would have the benefits of a large company in raising capital and sharing resources, but the individual product lines would still act like start-up companies.
We formed independent corporations, incorporated in different states, each with its own president. I met with the presidents weekly and I reviewed them as if they were startups.
The employees were given founder shares, and funding came in rounds from Cypress in a venture-like model. We used objective methods for valuing the company. The liquidity event occurred when they hit some predetermined revenue goal, typically something like ten million dollars a quarter and a certain pre-tax profitability, say 20%.
At that point they had a synthetic initial public offering in which the founders shares were bought by Cypress based on a price formula. So for example, if they had a $40 million business valued at 3x revenue, the company valuation would be $120 million. If the employees had 10% of the shares then at the liquidity event employees would get $12 million in cash. That's a big incentive.
We paid out close to $10 million dollars on four occasions. We also handed out new Cypress options so that once the company was bought out by Cypress, there would be a continuity mechanism for employee retention.
Part 2: Setbacks in Practice
That story, as I re-iterate it, still sounds pretty good to me. However, a few years after I wrote the book, when we had four companies following this model, someone asked me about the book and I said, "I still stand by the book except for one thing, the chapter on perpetual entrepreneurship is bullshit."
Just because a would-be division manager becomes a president and gets some founder's shares doesn't mean he or she has the right stuff to do the job. The entrepreneurs who start companies and take them public are special people. There aren't a lot of them. You can't start four companies and expect to get four good CEOs.
None of the CEOs in our first three companies worked out. None of them had the right stuff. One was fired for being an outright liar who had stolen intellectual property from his former company. One was a subtle liar who didn't believe in Cypress's value of honesty. He destroyed his relationship with people in mother Cypress to the point where I couldn't get them to support his company even though I put my own weight behind it. The third CEO was a lightweight who just didn't cut it. All three of them had one very non-Cypress attribute, being a politician. They'd say what they thought people wanted to hear not what was true.
In addition, the people in the new ventures were motivated in a way that wasn't always aligned with Cypress's best interests. Unlike a true startup they were sharing resources, like manufacturing and sales, with the parent. The CEOs had several million dollars riding on the success of the venture and they would screw Cypress to the benefit of the new venture.
That's why I said my chapter was bullshit. The ideas failed in practice because I failed to get the right people as president.
Part 3: Trying Again
Despite those initial problems we didn't give up entirely on the idea of setting up independent new ventures. We changed the incentive so that we gave CEOs Cypress options at startup and incremental Cypress options linked to performance. They could still make a ton of money without have an incentive to abuse Cypress.
Since that time, we've launched two more start-ups, both of which have independent equity, along with the Cypress options we described earlier. In both cases, we felt we needed independent equity to attract the talent we needed. Both ventures working pretty well, though they haven't reached the point where they have been bought out.
The secret ingredient wasn't as much about the incentives as it was putting Cypress people in the new organizations. In these new ventures 10 to 33% of the employees are Cypress people. By having enough key Cypress people in the new company we could get the right culture.
One benefit of having start-ups is that it can be a good mechanism for retaining talent. I have saved 30 top Cypress people who wanted to do something new and exciting by being able to let them move to a startup. It turns out startups are a great way of reinvigorating people who wanted to do something new.
I've also become tougher on the presidents of new ventures. If a Cypress manager is not performing, but is aligned with our values, we stay with the guy and help him. I can't afford that luxury with a startup. If a manager isn't performing, he'll be replaced. It's a more brutal free market approach but that's what is needed.
Despite the ups and downs, I now feel the basic theory of a federation of entrepreneurs works if you do it right.