Founder-CEO Succession and the Paradox of Entrepreneurial Success

In the last few decades, we have developed a substantial body of knowledge about CEO succession. However, except for some studies of family businesses that lack direct applicability to nonfamily CEO succession, the past studies of succession have not examined the very first succession event in a firm, when the Founder-CEO is replaced, on a largescale basis. The critical differences between later-stage succession and Founder-CEO succession include the higher level of attachment between Founder-CEOs and the firms they create, the much larger equity holdings of Founder-CEOs (which give them much more control of the firm), the fact that many Founder-CEOs remain in the firm (even though it is being run by their successors), and the fact that nearly all earlystage succession events involve outside successors (in contrast to later-stage succession research, which has focused on the insider-outsider distinction). These differences make it hard to extrapolate from later-stage succession findings to FounderCEO succession. Therefore, in order to examine Founder-CEO succession, I used field research and grounded theory building to study the factors that should affect Founder-CEO succession in Internet start-ups. I find that there are two central intertemporal events that may affect Founder-CEO succession: The completion of product development and the raising of each round of financing from outside investors. I develop testable hypotheses about how each of these events affect the rate of succession, and then test these hypotheses using an eventhistory analysis of a unique dataset containing the succession histories of 202 Internet firms. My findings point to multiple “paradoxes of success” in which the Founder-CEO’s success at achieving critical milestones actually causes the chance of Founder-CEO succession to rise dramatically. (Entrepreneurship; Founder-CEO Succession; CEOs; Founding Teams; CEO Succession; Top Management Teams; Venture Capital; Entrepreneurial Finance; Private Companies; Information Technologies) Introduction Chief executive officers (CEOs) are critical players in their organizations. From their perch at the top of a company, CEOs are able to direct their companies in the active pursuit of opportunities (Barnard 1938), and can control the company’s strategy and structure (Woodward 1965, Lawrence and Lorsch 1967, Thompson 1967). More specifically, CEOs make material strategic choices that can influence firm performance (Child 1972), and the quality and performance of an organization’s top managers is often the single most important determinant of both the success and survival of the organization (Drucker 1954). In short, the CEO of an organization is a critical factor in its direction and performance. As a result, changes in CEOs—“CEO succession events”— are critical junctures for organizations. In the last few decades we have developed a substantial body of knowledge about CEO succession. For example, studies have examined the performance consequences of CEO succession (e.g., Khurana and Nohria 1999), the institutional/symbolic view of CEO succession (e.g., Gamson and Scotch 1964, Pfeffer and Salancik 1978), and stock market reactions to CEO turnover (e.g., Furtado and Karan 1990). However, nearly all past studies of CEO succession have focused on large, public companies. These companies are more visible than their smaller brethren, and it is much easier to get data on their histories, executives, and succession events. However, even though “research on the effects of managerial succession has focused on large bureaucracies” (Haveman 1993, p. 864), there are some marked differences between large bureaucracies and small companies that prevent us from extrapolating from research findings about large-company succession to small-company succession. This is particularly true for the first succession event in an organization, where the Founder-CEO is replaced by a “professional” successor. Although succession is especially critical “for smaller organizations that are in the process of moving from founder to professional management” (Kesner and Sebora 1994, p. 363), large-scale studies have not focused on Founder-CEO succession. The past “early-stage” succession studies were either case-level explorations of succession issues (McGivern 1978, Tashakori 1980, Hofer and Charan 1984, Marino 1047-7039/03/1402/0149$05.0