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

The fall of Peloton’s John Foley and the stock market’s big founder problem
  • Peloton founder John Foley stepped down from his CEO role on Feb. 8 following a tumultuous period for the connected fitness company.
  • The departure of Foley, who led the company since its iteration in 2012, resurfaces the question of how long a company needs to be “founder-led.”
  • A recent study suggests that while founder-CEOs increase the value of a company before and during an IPO, that boost starts to diminish compared to a non-founder CEO.

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

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

That’s a very different tone from what Foley said on the company’s second-quarter fiscal 2022 conference call on Feb. 8, where he acknowledged that the company had “made missteps along the way,” that it was “holding ourselves accountable,” and he was going to “own” that — which included his departure as CEO, several executive and board changes, and a wide range of cost-saving measures, including cutting roughly 20% of its corporate workforce.

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

Peloton’s bumpy road that has seen its stock price drop more than 73% over the last year has raised the question of how long a founder-CEO like Foley should hang on post-IPO, especially if that journey starts to look more like a HIIT and hills ride than an easy one.

The track record is very varied. On one side, you have a founder like Jeff Bezos who stayed on as CEO for more than 20 years after Amazon’s IPO with massive growth along the way. Of course, there’s Steve Jobs, who ended up leaving Apple amid board tensions after he hired “professional CEO” John Sculley, only to ultimately return to oversee one of the most remarkable business turnarounds in market history. On the other side, you have Groupon founder Andrew Mason, who was fired as CEO in 2013, roughly 18 months after the company went public, following a series of Wall Street misses, a declining stock price and very-public mishaps.

Jeffrey Sonnenfeld, senior associate dean for leadership studies at Yale School of Management, said that 20 to 30 years ago, the trend from many venture capitalists would be to push out founding management at a critical change in the life stage of a company, “then the quote-unquote ‘professional management’ came in,” he said.

That’s happening less now, and Sonnenfeld said that some of that is for good reasons, like having a more experienced leadership group in place that has experience leading companies through various lifecycles. Foley did, with Barnes & Noble and other start-ups. But there are bad reasons, such as “founder shares that secure your leader-for-life 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 did respond to a request for comment by press time.

When is it time for a founder to step aside?

More founders, especially in tech, are replacing themselves. 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 in charge is that he “recognized that to sustain predictable hyper-growth requires a special set of skills, and Reltio would require a CEO with experience leading public companies.”

“Preparing for growth takes courage at all phases,” Sood wrote. “In the beginning, entrepreneurs often risk everything to start companies because they believe in a new or different vision. They often face seemingly insurmountable obstacles. It takes a great deal of insight to recognize when an emerging growth company needs to pivot or change direction as it grows.”

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

“There’s a lot of talk about the importance of a company being ‘founder-led.’ Ultimately I believe that’s severely limiting and a single point of failure…I believe it’s critical a company can stand on its own, free of its founder’s influence or direction,” Dorsey wrote in a memo to Twitter employees.

There have been some efforts to try to figure out exactly what that founder-CEO shelf life is. A recent Harvard Business Review study of the financial performance of more than 2,000 publicly traded companies found that on average, founder-led companies outperform those with non-founder CEOs.

However, that difference essentially drops to zero three years after the company’s IPO, and at that point, the founder-CEOs “actually start detracting from firm value.”

“Our data shows that the presence of a founder-CEO increases firm value before and during IPO, suggesting that a founder-friendly approach actually makes a lot of sense for VCs, who typically invest while companies are still in their earlier stages and cash out shortly after they IPO,” the authors wrote. “However, given our finding that on average, post-IPO performance is lower for firms with founder-CEOs, investors looking to get in after a company has already gone public would be wise to take a less founder-friendly approach — and investors, board members, and executive teams alike will benefit from proactively encouraging founder-CEOs to move on before they reach their expiration dates.”

It’s unclear what the future holds for Peloton and if it can regain the momentum that saw it 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 that he is “now partnering 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 figure out the rest of the business model so that we can win in the marketplace and on Wall Street.”

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