Some founders are synonymous with their startups, so it can come as a shock when they leave.
Sometimes it’s a personal choice, like Jeff Bezos’ decision to step down as Amazon’s CEO. Sometimes it’s through acquisition, like Lisa Price selling her Carol’s Daughter line to L’Oréal. But most often, investors fire the founder because they want the company to grow in a different direction.
New research from Wharton management professor Danny Kim suggests that investors may not want to show founders the door. It turns out most entrepreneurs have a wealth of creativity, insight, and leadership to guide their startups into the next phase.
“These individuals are particularly the ones who have the authority and the vision to make the changes from within,” Kim said. “For VCs, I’m not saying you should never fire the founders, but instead don’t see it as an automatic lever to help the companies. Rather, have conversations with the founders about the future of the startup, because they might be the best allies for making those big changes.”
Kim spoke with Wharton Business Daily on SiriusXM about his latest paper, “Founder Turnover and Organizational Change.” The paper was co-authored by Minjae Kim, management and organizational behavior professor at Rice University’s Jones Graduate School of Business.
What Happens to a Business When the Owner Dies?
Roughly 40% of founders leave before their startups reach an initial public offering (IPO). It’s a common occurrence, yet it’s difficult to study because the reasons for founder exits are so varied. The scholars went looking for an apples-to-apples comparison and discovered a trove of federal administrative data on businesses whose founders died, enough to cull a large sample of thousands of firms. They compared startups that experience a founder loss to nearly identical firms within the same region, operating with a similar business model and in the same industry but without such loss.
“For us to study this in a rigorous way, we needed unexpected founder departures,” Kim said. “That use of premature death is a way to isolate these unexpected events which help us to interpret the causal, not merely correlational, effects of founder loss.”
“I’m not saying you should never fire the founders, but instead don’t see it as an automatic lever to help the companies.”— Danny Kim
Their analysis determined that startups are about 50% less likely to change after the loss of a founder, especially if the loss happens during a recession or time of economic uncertainty. Kim said the results point to the importance of the founder’s role in leading organizational change.
“We often think founders are really good at coming up with ideas, then as the company grows up, perhaps they are not the right people to execute it and operate the company,” Kim said. “This research actually stands in sharp contrast to what we know generally about established organizations and leadership at the top, because in that space what we have seen is that when there is a change in that leadership, there is often corporate renewal.”
Pros and Cons of Founder Turnover
The professor emphasized that not all firms benefit from the long reign of a founder or top executive. There are many cases in which founders and CEOs held back their companies from success because pivoting didn’t align with their personal goals, incentives, or careers, or they simply couldn’t read the writing on the wall.
He pointed to Pandora co-founder Tim Westergren, an amateur musician who wanted to curate music in a way that would help online listeners discover emerging artists. The company had initial success, but it struggled with competition from new entrants such as Spotify which proved on-demand streaming was more popular than a radio-style service.
“However, for years, Tim Westergren refused to change Pandora’s business model because he was committed to his founding vision of allowing less well-known musicians to be discovered through a curated radio service,” the scholars wrote in the paper.
Founders Are Also Leaders
Kim said the paper’s findings should not be misinterpreted to mean that all founders are agents of change. But the results contribute to a broader understanding of organizational behavior and correct the assumption that founders eventually stand in the way of growth and must be removed. In fact, their analysis did not find evidence that non-founders had a meaningful effect on change.
“Startups seem to be a unique organization where the leader and the founding team really have to drive the strategic direction, because they are brittle companies that need that guidance,” he said. “Founders play a huge role even after founding in allowing their startups to reach their maximum potential.”