When an “irreplaceable” founder-CEO is fired, does the venture’s long-term growth suffer? Conversely, if the board waits a long time to replace the founder-CEO with a more experienced CEO, does the venture suffer? In each case, if the fired founder leaves the venture completely, does the venture’s chance of surviving decrease or increase?
Sparked both by a query from Tim Connors and by the upcoming next phase of my founder-CEO succession project, it’s time for us to delve into the “After the Firing” research.
The initial phase of the “Founder-CEO Succession” project examined the antecedents — i.e., events and conditions that affect the chances — of founder-CEO succession. The goal of the “After the Firing” follow-up research is to understand the post-succession implications for the company.
Guided by an initial set of research questions, Vishesh Kumar and I collected additional data on the same companies studied in my Organization Science succession paper, 3 years later. The data we added included the company’s status after 3 years (still independent/private, public, acquired, not in business) and the former founder-CEO’s status after 3 years (still on the board, still an executive in the company, not involved as a director or executive).
Our initial research questions included the following:
1. Timing of Succession: If the founder is replaced before initial product development is completed (or, alternatively, when the company is younger), does the company’s chance of surviving (remaining in business) go up or down? Does the company’s chance of being acquired (or of going public) go up or down? Does the company’s chance of surviving change if the founder isn’t replaced until after initial product development is completed (alternatively, when the company is older)? How? Why?
2. Post-succession Status of Founder: Does the company’s chance of surviving (or of being acquired or going public) change if the founder leaves the company completely after the succession event? Leaves the executive team but remains as a member of the board? Stays as a (non-CEO) executive? How? Why?
3. Founder Characteristics: Does the background (e.g., years of prior work experience, technical vs. business background) of the founder affect the post-succession status of the founder, or the company’s post-succession growth and survival? How? Why?
In the original paper, I found that the likelihood of founder-CEO succession jumps significantly just after each round of financing. Tim’s comment adds a potential tie between the timing of financing rounds, the timing of succession, and subsequent firm performance. (Extending Tim’s point: Does the first round in which VCs participate have a disproportionate impact? Any round in which a new VC — who might spark a CEO-change movement — participates?)
Are there other important issues or patterns we should try to examine? Thoughts on what patterns will emerge regarding the 3 areas listed above, and why you think they will?
Many, many issues to discuss here:Regarding post succsession status, I beleive a significant factor is the size of the founder ownership stake. Not all founders are created equal in this regard. Nor are they always in complete agreement with the BoD which influences they choice of staying or going. A secondary factor here are the “give backs”, e.g. lower comp, extended vesting etc or “carve outs” i.e. dilution protection necessary to get teh founder to go along with the decison.On the issue of timing, the timing of new funding and a Founder/CEO transition is almost never a coincidence, particularly post-Series A. This is due to the fact that both the transition and funding event are driven by the same root cause, i.e. poor operating performance. In today’s market no saavy CEO candidate will sign up with a troubled company that’s underfinanced and running out of cash. In most cases, the insiders have to commit to a financing round (12-18 mos. of runway) in order to close a top candidate. You can try to do ot the other way around but this often leades to adverse selection for your CEO.It would be interesting to look at the data for round size and new money related to the transition and imeadiately after. My hypothesis is that the round htat is tied to the transitin would be a small insider round, followed by a much larger round that includes new money about 12 to 18 mos. later. Further, I’m imagining that your “after the firing study” will address the “first time” vs “serial founder” issues. (Assuming that your data supports the analysis.) The skills, experience, expectations and issues of each are quite different and have an direct influence on who initiates the transition, as well as, the “when, why and how” of the transition.On your point of “hiring the right CEO”, there are two factors that that we pay particular attention to if the founder is staying on board: 1) The get along factor, as in will the founder “get along well with the new CEO”, and 2) the mentor factor, as in “Can the CEO be a coach/mentor to the founder, and is he/she willing to play that role?” I’d be intereted in hearing your and others thoughts on these topics.
I think a good question to ask is “Why do founders need to be replaced?”. With his aritcle in this month’s Sloan Managment Review titled “Getting the Right People at the Top”, Claudio Fernández-Aráoz provides insight into the challenges that Founders face in growing their business. In the start-up world, the growth in managerial complexity of the business is geometrical and requires founders to display abilites that are 2 or 3 sigma (perhaps even higher) above average. A tall order for all but a select few; e.g. Olsen, Dell, Branson,
Some terrific insights, Paul! I was wondering if you could elaborate along the “size of the founder ownership stake” dimension further. The founder’s equity stake was an important variable in the original Founder-CEO Succession paper and we have pretty detailed data on ownership stakes overall, so it would be good to delve into the issues involved.First, why would you expect a founder with a large ownership stake to behave differently than a founder with a small ownership stake? Next, how would you expect this difference in behavior to impact the succession process? Finally, how would the different types of succession affect the chances that the company succeeds or fails?For example, a founder with a large ownership stake may feel that they have too much to lose, as compared to a founder with a small ownership stake. This might make the founder with a large ownership stake less at ease with other people running their company, and more reluctant to turn over control to a professional CEO. This might result in a messy succession process, which could be harmful to the development of the company.As a counterexample, many founders run companies not just for the financial gains, but because they find it to be fulfilling and rewarding in many other ways. These founders may be unwilling to handover control, even if they are not the best candidates for the role of CEO. However, since they have more on the line financially, founders with large ownership stakes might be more concerned about the financial angle. This may make them more willing to turn over control to a professional CEO, since they have more to lose. This could result in a cleaner succession, which might be good for the development of the company.While these are just examples, it would be great to hear your (and everyone else’s) thoughts on whether and what the relationship is between 1. founder ownership stakes and founder behavior 2. founder behavior and impact on succession and finally 3. type of succession and impact on company.Vishesh
Vishesh,You’ve hit the nail on the head on each point. Founders with large equity positions also tend to want to have a high degree of influence of the strategy/direction/operations of the company. They tend to be less comfortable with other running things and do feel that they have more to lose. This can and often does make transiton messyier and although no longer part of the management team, the founder often wants to maintain some level of influence (particularly around financing or exit transaction) either formally at the BoD level or informally through their vote as part of the common. One could see that if the transition was particularly acrimonious it could be very distracting for the mgt team and BoD. At its worst, it might impact the company’s ability to raise money or execute an exit transatction. Both situtations have an impact of company’s long term success.
While the size of the founder’s ownership matters, another influence can be the investor’s perceived reliance on the founder for the company’s “special sauce.” I’ve found (pardon the pun) that founders often promote central decision making - some may call this micromanagement. Often the technical genius founder hires worker bees to complete his or her vision while not sharing the “whys” of his or her decision making or the grander picture. When its time to go commercial and the technical CEO doesn’t “get it” and may need to be replaced, the investors may find it difficult to reconcile the conflict of a reluctant founder vs. the leadership necessary to reach the next phase of maturation.
I think your work in this area is very interesting and relevant to enterpreneurs and investors.I don’t think it is a coincidence that founder/ceo’s leaving seems to correlate with the raising of a new round. The way the vc’s will negotiate a round is that they will add a clause in the term sheet that says that upon conclusion of the financing, the company will hire an executive search firm to recruit a new ceo.
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