Can Successful Founders Hold on to Their Seats after Going Public? The Impact of Venture Capitalists on Founder Turnover
In this study, we explore the impact of venture capitalist involvement on the relationship between a new venture's pre-IPO performance and the subsequent likelihood of founder turnover. Using new venture perspectives, and the life cycle and agency theories of the firm, we argue that owner-venture capitalists act as effective governance mechanisms to induce changes in new ventures from founder management to professional management. We argue that in the absence of venture capitalist involvement, founder turnovers occur only when the firm underperforms at the pre-IPO stage, whereas when venture capitalists are involved, the relationship between pre-IPO performance and turnover becomes U-shaped. In the presence of venture capitalist involvement, founders may be encouraged to step down even when the firm is performing well. We contribute to the entrepreneurship literature in two ways. First, we investigate how the involvement of venture capitalists changes the dynamics of founder-CEO turnover and performance in entrepreneurial firms. Secondly, we explore the role played by venture capitalists in the evolution of a firm beyond the earliest stage of its life cycle, particularly when the firm is about to transition from a private to a public entity. From the practitioner's point of view this study provides insights for the founding team, their incentives, and choices about their role in the firm they created after it goes public. In particular, if the propositions are empirically tested and confirmed, one can conclude that bringing in VCs guarantees departure for founder-CEOs.