The fall of Peloton’s John Foley and the market founder’s big problem

John Foley, co-founder and CEO of Peloton Interactive Inc., is photographed during the company’s initial public offering (IPO) in front of the Nasdaq MarketSite in New York, USA on 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 land on what we say to the Street, what we say to our board of directors and our investors. [about] how we will grow,” Foley said in an interview on November 5, 2019.

This is very different from what Foley said on the company’s FY 2022 Q2 conference call on Feb. 8, where he acknowledged that the company “made mistakes along the way”, that it “holds itself responsible” and he was going to “own” this, which included his resignation as CEO, several management and board changes, and a wide range of austerity measures, including cutting roughly 20% of the corporate workforce.

A two-time CNBC Disruptor 50 member, Peloton has been led by Foley since its founding in 2012, with fellow founding members Tom Cortese, Yoni Feng and Hisao Kushi remaining as senior executives. Another co-founder, Graham Stanton, left in March 2020 but remained an advisor, according to his LinkedIn.

Peloton’s bumpy path, with its share price dropping more than 73% over the past year, has raised the question of how long a founder-CEO like Foley should hold out after an IPO, especially if that journey is starting to look more like HIIT and the hills. ride than easy.

The track record is very varied. On the one hand, you have a founder like Jeff Bezos, who remained CEO for over 20 years after Amazon’s IPO, and saw significant growth along the way. Of course, there’s Steve Jobs, who ended up leaving Apple due to board tensions after hiring “professional CEO” John Sculley, only to end up back to oversee one of the most remarkable businesses in the world. -turns in the history of the market. On the other hand, you have Groupon founder Andrew Mason, who was fired as CEO in 2013, about 18 months after the company went public, after a series of Wall Street slips, stock price crashes, and setbacks that got wide publicity.

Jeffrey Sonnenfeld, senior associate dean for leadership studies at the Yale School of Management, said that 20 to 30 years ago, many venture capitalists were looking to supplant founding leadership at a critical stage in a company’s life, “then the word ‘professional management’ appeared in quotation marks,” he said.

It’s less common now, and Sonnenfeld said it’s happening in part for good reasons, like having a more experienced management team that has experience leading companies through various life cycles. Foley did it with Barnes & Noble and other startups. But there are also bad reasons, such as “founder shares that guarantee you the status of a lifetime leader 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 shares.

The peloton responded to a request for comment in time for press.

When should a founder retire?

More founders, especially in technology, are replacing themselves. Manish Sood, founder of cloud data management company Reltio, wrote in a 2020 CNBC article that the reason he replaced himself as CEO after nearly a decade in charge is because he “realized that sustaining predictable hypergrowth required a specific set of skills and Reltio would need a CEO with experience.” management of state-owned companies.

“Preparing for growth requires courage at all stages,” Sud wrote. “In the beginning, entrepreneurs often risk everything to build a company because they believe in a new or different vision. They often face seemingly insurmountable obstacles. it grows.”

Jack Dorsey shared a similar sentiment when he abruptly stepped down as CEO of Twitter in November.

“There is a lot of talk about the importance of a founder-led company. Ultimately, I believe that this is a serious limitation and the only point of failure … I believe that it is very important that a company can exist on its own, independent of the influence or leadership of its founder, ”Dorsey. wrote in a memo Twitter staff.

Some attempts have been made to figure out exactly what this founder-CEO expiration date is. Recent Harvard Business Review research results of more than 2,000 public companies found that, on average, founder-led companies outperformed non-founder-led companies.

However, this difference is almost nil three years after the company’s IPO, at which point the founding executives “actually begin to drive down the value of the company.”

“Our data shows that the presence of a founder-CEO adds value to a company before and during an IPO, suggesting that a founder-centric approach actually makes a lot of sense for VCs, who typically invest while companies are still in their early stages. and cash them out. shortly after the IPO,” the authors wrote. “However, given our finding that, on average, post-IPO results are lower for firms with a founding CEO, investors looking to enter after the company has already gone public would be wise to take a less founder-friendly approach—and investors, board members and executive teams will benefit from actively encouraging founding CEOs to leave before they expire.”

It’s unclear what the future holds for Peloton and whether it can regain the momentum that allowed it to destroy the fitness industry.

The company’s new CEO, Barry McCarthy, mentioned his experience with two “forward-thinking founders” in Reed Hastings and Daniel Ek at Netflix and Spotify respectively in his first email to Peloton employees that was obtained by CNBC, saying he “now in partnership with John [Foley] to create the same magic.”

“Finding product-to-market fit is incredibly difficult. This is extremely rare. And I believe we have it,” wrote McCarthy. “The challenge for us now is to figure out the rest of the business model so we can win the market and Wall Street.”

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