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, none of the past studies of succession has examined the very first succession event in a firm, when the Founder-CEO is replaced. There are at least four critical differences between later-stage succession and Founder-CEO succession: 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 early-stage succession events involve outside successors (in contrast to later-stage succession, 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 inter-temporal 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 event-history analysis of a unique dataset containing the succession histories of 202 Internet firms. My findings point to several central 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.