Startup founders likely to be replaced if company thrives

Startup founders likely to be replaced if company thrives

Aug. 28, 2002

Jeff Bezos, president and chief executive officer of Amazon.com, is an
anomaly among modern-day entrepreneurs. He still has his job.

Unlike
Bezos, many founders are replaced after launching a successful company,
say Warren Boeker, a professor of management and organization at the
University of Washington Business School, and graduate student Rushi
Karichalil. Ironically, the founders who do remain in control usually
launch only moderate performing ventures.

Boeker and Karichalil
tracked 434 entrepreneurs from 1983 to 1999 and found that 35 percent
were replaced in the first five years, after employee and sales growth
skyrocketed.

"The irony is that it is the successful founders who
are the ones at great risk of being replaced," Boeker said. "Executives
are replaced when a company doesn’t do well. This happens obviously at
any company. What is counterintuitive here is that founders are
actually replaced more often when their company does extraordinarily
well.

"Because they are doing so well these founders attracted
the attention and focus of the most venture capitalists," Boeker said.
"But it’s a double-edged sword. If you are an entrepreneur and you have
a great idea, you are going to be able to attract more money easily,
but you are probably going to have to give up your control and
position."

Boeker theorizes that venture capitalists seek out new
managers to ensure a return on investments. "When the outside investor,
and especially board members, see a company with real success they
realize they need to push for professional managers right away," he
said.

Controlling for the age of each firm, the composition of
its board of directors, and the individual characteristics of founders
and the number of managers reporting to chief executive of the founding
group, the researchers made adjustments to account for industry
inflation to reach their findings.

Boeker suspects the fallout in 2000 from the dot-com bust has likely increased founder turnover even more.

"Four
years ago venture capitalists were practically throwing money at
whatever came before them," Boeker said. "But then the dot-com collapse
forced them to recoup their investments on ventures that had declined
in value. Because of even greater pressures now, angel investors and
venture capitalists are less permissive in terms of letting founders do
what they want, and more apt to hire new management."

Founders
like Bezos, who successfully endured sweeping changes were more likely
to have ties to the company’s board of directors or have
research-and-development backgrounds.

New ventures with a higher proportion of inside ownership also demonstrated lower founder turnover, Boeker said.

The
researcher’s study, funded by the UW Business School’s Center for
Technology Entrepreneurship, was published this month in the Academy of
Management Journal.

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