Founder-CEO Succession and the Paradox of Entrepreneurial Success

Abstract

In the last few decades, we have developed a substantial body of knowledge about CEO succession. However, except for some studies of family businesses that lack direct applicability to nonfamily CEO succession, the past studies of succession have not examined the very first succession event in a firm, when the Founder-CEO is replaced, on a largescale basis. The critical differences between later-stage succession and Founder-CEO succession include the higher level of attachment between Founder-CEOs and the firms they create, the much larger equity holdings of Founder-CEOs (which give them much more control of the firm), the fact that many Founder-CEOs remain in the firm (even though it is being run by their successors), and the fact that nearly all earlystage succession events involve outside successors (in contrast to later-stage succession research, which has focused on the insider-outsider distinction). These differences make it hard to extrapolate from later-stage succession findings to Founder-CEO succession. Therefore, in order to examine Founder-CEO succession, I used field research and grounded theory building to study the factors that should affect Founder-CEO succession in Internet start-ups. I find that there are two central intertemporal events that may affect Founder-CEO succession: The completion of product development and the raising of each round of financing from outside investors. I develop testable hypotheses about how each of these events affect the rate of succession, and then test these hypotheses using an eventhistory analysis of a unique dataset containing the succession histories of 202 Internet firms. My findings point to multiple "paradoxes of success" in which the Founder-CEO's success at achieving critical milestones actually causes the chance of Founder-CEO succession to rise dramatically.

Founder Versus Family Owners’ Impact on Pay Dispersion Among Non-CEO Top Managers: Implications for Firm Performance

“…Founders often make great personal sacrifices in the pursuit of firm performance, such as taking less compensation (He, 2008) 2 or diluting their control (Wasserman, 2003). They even focus their nonfinancial resources (such as their social capital) on enhancing firm performance and survival (Fischer & Pollock, 2004;Kroll, Walters, & Le, 2007).…”

“…A high performing firm marks founders as high performing individuals (He, 2008); this applies in particular to founders who grew their firms successfully into some of the largest publicly listed firms. Even giving up the CEO position or selling ownership can be acceptable to founders if it enables their firms to garner important resources for enhanced growth and performance (Wasserman, 2003). Not surprisingly, founders' superior R&D spending, merger and acquisition activities, and capital expenditures have been related to enhanced firm performance (Fahlenbrach, 2009;Hunter et al, 2009).…”

The Causes and Consequences of the Initial Network Positions of New Organizations: From Whom Do Entrepreneurs Receive Investments?

“…Unlike founders' human capital, though, a new organization's accomplishments (e.g., releasing products or receiving awards) signal the progress that a new organization has already made in resolving the market, technology, and organizational challenges that it faced initially (Spence, 1974;Wasserman, 2003). Like both organizational status and founders' human capital, an organization's accomplishments is a positional attribute that can be used to rank an organization relative to other organizations in the same population.…”

Crossing the threshold from founder management to professional management in Russian firms

“…First, whereas most prior research has examined initial succession from the internal perspective taking into consideration a variety of firm's characteristics including firm performance, firm size, characteristics of the particular founder, completion of new product development or new financing, ownership structure and governance characteristics (Boeker and Karichilil, 2002;Bruton et al, 2000;DeTienne and Cardon, 2012;Gedajlovic et al, 2004;Rubenson and Gupta, 1997;Wasserman, 2003) we emphasize the role of the external institutional environment and provide theoretical elaboration of how a founder-CEO's perception of the institutional environment affects the process of delegating authority to a professional CEO in an emerging market context.…”

“…Another example of an empirical study of factors influencing founder-CEO departure is presented by Wasserman (2003), who found that contingencies such as completion of product development or new financing trigger founder-CEO succession. This finding pointed to multiple "paradoxes of success" in which the founder-CEO's success in achieving critical milestones actually caused the likelihood of founder-CEO succession to rise dramatically.…”