Hang On to Those Founders

Company founders are like parents—essential to their youthful progeny but treated as superfluous once the offspring mature. To inspire confidence among investors, companies preparing for IPOs often replace their CEO founders with executives experienced at running public firms. That strategy is sound for the short term: On average, companies with professional management boast higher IPO valuations than do entrepreneur-led firms. Research suggests, however, that not only do founder-led companies regain their luster after their IPOs, but, over time, their valuations surpass those of professionally managed businesses. Concordia University graduate student Jean-Philippe Arcand and I, aided by assistant professor Thomas J. Walker, studied the short-term and midterm performances of 435 North American high-tech firms that issued IPOs between June 1996 and December 2000. We discovered that founder-led firms received an average valuation of $67 million, while companies that installed professional leadership and moved the founder to another spot on the top management team averaged $72 million. Three years later, however, the numbers told a different story. Stocks of the founder-led firms had significantly better returns over that time and were more likely to remain listed than stocks of professionally led firms. Founder-led companies had a market-adjusted return of 12% over the course of three years and a survival rate of 73%, compared with a return of -26% and a survival rate of 60% for firms that hired a new CEO and moved the founder to a different position on the top management team. (Companies whose founders left altogether performed somewhat better than those in which founders remained on the management team, although not as well as companies whose founders stayed at the helm.) Those findings, which hold true for smaller samples of firms in other industries as well, suggest some interesting possibilities. First, the founder—though unproven, in the minds of investors—may in many cases be best qualified to run his or her own firm. Second, the introduction of a professional CEO may create troubling rifts between the new management and the old guard and disrupt a culture established during the company’s start-up years. Interviews we conducted with executives bear out those hypotheses. Despite these results, the practice of moving founders down a rung has grown. Between 1996 and 1998, just 6% of high-tech firms that replaced their founder-CEOs gave those former leaders other roles on the top management team or on the board; in 1999 and 2000, 20% did so. For companies intent on such a strategy, the lesson is to act quickly. Those that made the switch early generally fared better: Just look at Google and Yahoo.

Hang On to Those Founders

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