Qubit: Research on Startup CEO Replacement
According to this research paper, if you are a startup founder CEO who raised from a reputable VC, you are more likely to be replaced with a more experienced startup CEO unless:
you possess unique technical know-how, or
you have a large board with more external members.
Of course, all of this can be avoided if you have a fast-growing startup in the first place.
“Our main results show that, conditional on raising VC financing, central VC participation significantly increases the likelihood that startups replace their incumbent CEO by approximately 6 percentage points, a 23% increase relative to the mean. We obtain similar results by estimating an instrumental variable model, where the probability of receiving funds from central VCs is modeled as a function of plausible exogenous instruments. These instruments are predetermined measures of the non-financial capital that VCs accumulated in deals outside the focal startup’s industry. Interestingly, the effect that central VC participation has on CEO replacement remains significant even after controlling for two other VC-prominence measures: investment deal experience and investment success ratio. This result suggests that attributes specific to VC network centrality, such as ties to other prominent investors, are a meaningful determinant of CEO turnover in startups. As a complement, we also estimate a hazard model relating central VC participation to the timing of CEO replacement. Consistent with our earlier results, central VC participation increases the hazard of CEO turnover by approximately 36% relative to other VCs. Taken together, our findings suggest that central VCs are comparatively advantaged in startup CEO replacement.”
“…we find that CEO replacement increases the likelihood that a startup survives by 11 percentage points and the probability it patents by 5.6 percentage points. Interestingly, these gains are concentrated in those startups with outsider CEO replacements. When we focus on startup survival alone, we find that the largest performance gains are associated with outsider CEO replacements possessing previous startup-CEO experience. This finding is consistent with central VCs pursuing an overall value-enhancing strategy in CEO replacement: when central VCs participate in a startup, the incidence of CEO replacement rises, and is focused on a particular type of replacement candidate – the experienced outsider. And experienced outsider replacements are in turn associated with the largest startup performance gains.”
“Overall, these startup performance results bring our exploration full circle, and support our thesis that central VCs play an important professionalization role in the startups they fund. Our analysis established that when central VCs participate in startups, incumbent CEOs are replaced with higher probability, faster, and these replacement CEOs are disproportionately experienced outsiders. Our findings relating experienced outsider replacement CEOs to startup survival are economically and statistically significant. These results, along with our broadly-consistent findings on startup patenting, provide meaningful evidence that the replacement CEOs predominantly brought in when central VCs participate are associated with the largest startup performance gains.”
Source:
Valuable Choices: Prominent Venture Capitalists' Influence on Startup CEO Replacements
Tweets and Posts:
Qubits are insights that we find and share with you.