Founder Replacement and Startup Performance

51 Pages Posted: 19 Jan 2016 Last revised: 22 Nov 2018

See all articles by Michael Ewens

Michael Ewens

California Institute of Technology - Division of the Humanities and Social Sciences; National Bureau of Economic Research (NBER)

Matt Marx

Boston University - Questrom School of Business

Date Written: May 15, 2017

Abstract

We provide causal evidence that venture capitalists (VCs) improve the performance of their portfolio companies by replacing founders. Augmenting a database of U.S.-based, VC-backed startups founded from 1995-2008 with hand-collected information regarding turnover, we exploit shocks to the supply of outside executives via 14 state-level changes to the enforceability of employee non-compete agreements. Although naive regressions of startup performance on founder replacement would suggest a negative correlation, this may be due to selection as founders are likely to leave or be pushed out of poorly-performing startups. Indeed, instrumented regressions reverse the sign of this e ect, suggesting that replacing founders instead improves the performance of venture-backed startups. Replacement helps more when founders are C-level executives or when they leave the startup after relinquishing their role. The evidence points to the replacement of founders as a specific mechanism by which VCs add value.

Keywords: Executive turnover, venture capital, financial intermediation, entrepreneurship

JEL Classification: G24, G34, L2, M12

Suggested Citation

Ewens, Michael and Marx, Matt, Founder Replacement and Startup Performance (May 15, 2017). Review of Financial Economics, Vol. 31, No. 4, 2018. Available at SSRN: https://ssrn.com/abstract=2717124 or http://dx.doi.org/10.2139/ssrn.2717124

Michael Ewens (Contact Author)

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Matt Marx

Boston University - Questrom School of Business ( email )

595 Commonwealth Ave
Boston, MA 02466
United States

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