Try this: Read through Marc’s excellent argument, but whenever he says “dual-class shares,” insert the word “dictatorship” in there instead, and I think you will see what I mean. In effect, Marc is arguing that dual-class shares are a fantastic way of running a technology company — provided nothing goes wrong. That is, if the ones with the voting control are also majority shareholders, and if they have a long-term vision for the company, and if shareholders go in with their eyes open, and if the founders don’t suddenly become… well, dictators.
I now believe that dual-class stock structures are a great idea for a technology company that is in the process of going public, under the following conditions:
* The key leaders of the company — typically the founders — who will own the controlling Class B shares, are also major economic shareholders in the company. They own a significant portion of the company and are therefore highly incented to maximize the value of the company over time.
* The key leaders of the company who own the controlling Class B shares have a long-term goal of building a major franchise, and the commitment required to execute against that goal.
* The controlling Class B shareholders have a commitment to treat Class A shareholders fairly and equally in all respects other than voting power.
* All public shareholders understand what they are getting into up front — no bait and switch.
This seems to me to be the equivalent of the old saying about how Mussolini was bad, but at least he “made the trains run on time.” In other words, on the whole the complete centralization of power in the hands of a dictator was for the best. I would never compare Larry Page or Sergey Brin — or even Jerry Yang and David Filo — to an evil dictator, but my point is that just as a benevolent dictatorship is seen by some as the best political structure for a country (“best” meaning the most efficient), so dual-class shares might seem like the best share structure for a company, right up until something goes wrong.
As I said in my previous post, dual-class shares are an attempt to get around Darwinâ€™s Law as it applies to the marketplace. Multiple-voting shares protect incompetent, complacent or simply unsuccessful companies that should be taken over and either remade or dismantled. If your company is agile enough and creative enough, it shouldnâ€™t need them. And if you don’t want to bow to the whims of the marketplace, then there’s a simple solution that Marc ignores: Don’t go public.
Maybe it wasn’t the best something — maybe DR-DOS was better, or whichever flavour you happened to like if you are old enough to remember those days (and yes, I am; thanks for asking), or IBM’s various tries at recapturing its lost glory. But that doesn’t really matter. You may think DOS was bad and Windows was worse, but at least Microsoft stabilized what was a fragmented and chaotic market, and that arguably pushed us further ahead faster. If they hadn’t done it, someone else would have had to, and it might have taken longer and been even worse. More from Marc Andreessen’s chat with John Battelle here.
I think the killer point is that while the elephants are mating (as I think my friend Paul Kedrosky described it), the field will be more or less completely open for Web companies to do whatever they can to develop a killer service or own a particular segment of the market, without having to worry about a gigantic beast lumbering into their business sector and squashing everything in sight. As Marc describes it:
In practice, that will be two years in which both Microsoft and Yahoo will most likely be considerably less aggressive on rolling out new products and new initiatives — because the key people at both companies will be consumed with the merger.
And, just think, if they are buying fewer companies as a consequence, that also means they’re less likely to buy one of your competitors and come after you while you are building your thing of value.
Marc has some other great points as well, including the fact that building a company just to get acquired is a dumb thing to do anyway, and rarely works out the way you want. In fact, building a company because you sense an opportunity or a need or a hole in the market — without focusing on getting acquired — is a far better way to actually ensure that you get acquired. Take your eye off the destination and focus on the journey, and pretty soon you will find that you’ve arrived.
Marc has responded in a lengthy post at his blog, and I have to say that I’m glad he did. He takes a refreshingly clear-headed look at the issue, and says several things that I think are worth saying — including the fact that you can’t take as gospel any of the numbers that come from Quantcast or Alexa (especially Alexa) or any of the other traffic measuring firms. Surely we should all know that by now.
His other point is that Ning is content-agnostic — and so it should be. There are social networks based around porn? Big surprise. The Internet is a social network based around porn, for pity’s sake. The reaction from some bloggers has a real high-school tone to it, as though they were reporting Ning to the principal because they caught him looking at a Playboy magazine out behind the portables.