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VCs with a struggling investment, take heart: HBR has found that replacing the founder increases the likelihood of a successful exit of a startup. In fact, the poorer the company performance, the greater chance that a replacement will improve the business. But beware the common compromise of relegating a founder to an advisory or sideline role. Given the risk of confusion or poor morale, research suggests that investors should exit the founder from the company altogether.
We all know that founders may be extremely strong technically or as innovators. Moreover, it takes a remarkable person to create a promising company that can successfully attract investment. It is a tough transition, however, to take a company from concept to a complex enterprise generating hundreds of millions in revenue. Many founders are not the person best equipped to lead that kind of growth.
VCs need to cultivate a founder's operational abilities to drive growth and then monitor their performance. When a founder can't make that transition, the right move is to search for a replacement.
Therefore, we conclude that founder replacement, although it typically takes place among struggling startups, is beneficial on the whole. In our estimates, a 14% increase in the probability of a founder being replaced (one standard deviation) predicts a 25% higher probability of a successful exit. ...More interesting is what happens when a founder remains at the company, or doesn’t. It might seem ideal for the founder to step down but remain with the company, but in fact startups perform better when the replaced founder leaves the company. We speculate that this might be because a deposed founder’s sticking around may lead to confusion among the remaining employees, or the founder may even (attempt to) undermine their replacement, although we lack direct evidence on this point.
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