Entrepreneurs often seek external capital to accelerate their growth. This is especially true in hotly contested markets where fast growth can be the difference between success or failure. And yet this outside funding may come with strings attached, which can (and perhaps should) give entrepreneurs pause. Founders will likely find their influence diluted, in terms of both financial equity and their control over the board of directors. They may even find themselves out of a job if their investors decide to fire them and find a replacement.
Research: What Happens to a Startup When Venture Capitalists Replace the Founder
It actually makes success more likely.
February 14, 2018
GABRIEL BOUYS/Staff/Getty Images/Hayon Thapaliya
Summary.
When a startup founder seeks external funding, they may worry about losing control over their company — with good reason. Between 20% and 40% of startup founders are replaced at the behest of their investors. But what happens to the company after the founder is ousted? An initial look at the data reveals that startups where a founder is replaced are less likely to have a successful exit, but that may be because founders are more likely to get replaced when a startup is struggling. Noncompete clauses may also make it tough for investors in some states and industries to find a good replacement CEO. A closer look at the data shows that when it’s easier to find a replacement CEO — in a state that has banned noncompetes, for example — replacing the founder actually improves the startup’s chances for success.