August 28, 2002
Startup founders likely to be replaced if company thrives
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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For more information contact Boeker at (206) 543-8731, (206) 780-9965 or wboeker@u.washington.edu. For more information about the UW Business School’s Center for Technology Entrepreneurship, see http://depts.washington.edu/cte/
