So Long, Been Good to Know Ya

Successful start-ups often give their founders the boot.

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Entrepreneurial success is often chalked up to being first to market, or having the lowest prices or the best customer service. But what about the management team: Does who's running a start-up make any difference in whether it succeeds? It's a question investors make a point of asking—anyone who has presented to a group of venture capitalists can attest to that—but there is surprisingly little research on how much impact the management team has on a start-up's chances of going public.

Until now, that is. In "Early Team: The Impact of Team Demography on VC Financing and Going Public," published in a recent issue of the Journal of Business Venturing, three business school professors from the University of California-Irvine and the Stanford Graduate School of Business examine how different kinds of management teams at 170 Silicon Valley start-ups performed between 1994 and 2002. The paper highlights some characteristics most highly correlated with success.

Diversity, they found, is paramount. It may be a painful cliché in college admissions offices, but the more functional diversity on the management team, the better, it turns out. The authors, Christine Beckman of Irvine and Diane Burton and Charles O'Reilly of Stanford, found that companies managed by a mix of engineers, marketing experts, and finance specialists, for example, would have a significantly higher likelihood of getting venture capital funding and going public than those businesses with a group of like-minded people at the top.

Turnover among managers also seemed to play a significant role in a company's success—but not necessarily in the way you might expect. In start-ups, turnover is often viewed as an indication of turmoil within the team, but the authors point out that it also has its positive side: As companies grow and, by necessity, require new perspectives and experience, more turnover can coincide with more growth.

The study's biggest surprise is that high turnover among founders, in particular, significantly increases a company's chances of going public. When the founder leaves, in other words, it often makes the company better. There are obviously plenty of counterexamples to this—HP's William Hewlett and David Packard certainly seem to have done right by their company by sticking around. Still, the authors found, while a founder's passion and big ideas are vital to putting a company on the right track, bringing in new ideas and expertise at the top is more often than not just as vital to the company's long-term prospects. In the study, the companies that went public were far more likely to do so without their founders running the business.

The paper's conclusions certainly jibe with the practices of investors, who often push out charismatic founders and replace them with "grown-ups" who can run the business. Outraged entrepreneurs, be advised: The powers that be have yet another piece of ammunition to use against you.


TAGS:
entrepreneurship
venture capitalism

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