Founder Replacement and Startup Performance

45 Pages Posted: 19 Jan 2016 Last revised: 12 Oct 2016

Michael Ewens

California Institute of Technology - Division of the Humanities and Social Sciences

Matt Marx

Massachusetts Institute of Technology (MIT)

Date Written: October 11, 2016

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 from 1995-2008 with hand-collected information regarding turnover, we exploit shocks to the supply of outside executives via state-level changes in 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 effect, suggesting that replacing founders improves the performance of venture-backed entrepreneurial firms. Replacement helps more when founders hold CXO roles and when the incoming replacement has substantial work experience. 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 (October 11, 2016). 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

Matt Marx

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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