The Smart Execs Leave Before The Fall.

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When a smart, ambitious executive who isn’t the CEO leaves a company, it isn’t necessarily a sign of trouble. Sometimes that executive isn’t performing all that well, or he/she wants to see if they can make it at their own startup where they call the shots. Top execs leaving to start their own companies is the story of Silicon Valley.

But when bunches of them leave, watch out. With obvious exceptions, like a sale that results in a lot of liquidity being sloshed around the founder ranks, fleeing talent is an indication that a company is about to go sideways, or worse. There’s a reason why most of Yahoo’s executive talent bailed out in 2007 and 2008. And that’s just a high profile example. Whenever we hear about multiple executives leaving a startup, there’s always trouble brewing.

Today’s news that MySpace’s COO, SVP Product Strategy and VP Technology are leaving to take some time off and then start a new company isn’t an exception. I know each of these guys personally, and they are all highly talented execs with a lot of competitive fire. MySpace needed these guys. Sure, they’ll find replacements. But the real news is that they voted with their feet, and decided that now is the best time for them to branch out on their own. The fact that we’re in the middle of one of the biggest economic downturns that any of us have seen just reinforces the point – the sun is setting on MySpace. There’s no way to deny it any more.

MySpace had a banner revenue year in 2008, and they are still by far the largest social network in the U.S. But within a year Facebook will have taken that trophy. And it may not be long after before Facebook revenues eclipse MySpace, too.

I won’t go through all of MySpace’s missteps, but there were a few big ones. They’ve generally trailed Facebook in taking risks with new products (News Feed, self serve ads, Facebook Connect), and they made a crucial strategic mistake in how they handled international expansion (Facebook gets its own users to create local translations of the site, MySpace opens offices in every country they want a presence in – guess which one scales).

And the things MySpace did right, they didn’t capitalize on. MySpace Music, so promising a few months ago, remains in slow motion development for new features. And it only works in the U.S.

But worst of all, MySpace is bogged down in a ridiculous corporate structure. MySpace reports to Fox Interactive Media (FIM), which in turn reports to News Corp. FIM appears to be, little more than another layer of bureaucracy to slow things down. We’ve heard repeatedly that FIM head Peter Levinsohn and MySpace CEO Chris DeWolfe both try to exert direct power over MySpace, leaving employee’s heads spinning. DeWolfe theoretically reports to Levinsohn, but in reality he’s Murdoch’s guy. FIM’s original purpose was to acquire a variety of Internet companies, but those days are gone and we can’t figure out what it actually does any more besides muddle things up at MySpace and get in the middle of petty turf wars. Their best bet would have been to leave the damn thing alone and let DeWolfe do his thing.

Add to that the fact that MySpace employees have no stock incentive to stay, and its no wonder top talent is fleeing. Founders Chris DeWolfe and Tom Anderson have employment contracts that come up for renewal later this year. Unless News Corp. pays them a bundle (their current contract pays them an aggregate of $30 million/year already), they’ll likely be gone before 2010, too. They may have already made the decision to leave, which would make today’s defections unsurprising.

This is the way of things with tech startups (remember that MySpace is only 5ish years old). In this case FIM may have acted as a big speed bump in MySpace’s race with Facebook, hobbling them and ensuring that it wasn’t even close. But the result is the same. And good news comes out of this – all of these talented execs and engineers will start and grow new companies, and the cycle continues.

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