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From Founders to Firm: Examining the Retention of Founder-CEO Social Capital in Venture-Backed Firms

Bret R. Fund

Published 2014 in The Journal of Entrepreneurial Finance

ABSTRACT

This paper examines how organizations protect themselves from the negative social and economic consequences associated with the loss of a key member and their social capital. Drawing on the social capital and upper echelons literatures, the author(s) hypothesize that social capital can be institutionalized. The corresponding hypotheses are tested on a sample of 125 venture-backed software firms and the results demonstrate that the institutionalization of a founder-CEO’s social capital leads to better performance for a firm. The results provide a basis for understanding how social mechanisms influence economic organization as well as succession and compensation in a new venture context. INTRODUCTION Scholars have argued that the transition from a Founder-CEO to an outsider is potentially the most critical succession event in the history of the firm (Hofer and Charan, 1982; Haveman and Khaire, 2004). This is, in part, the case because the identities of the founders are more tightly linked to the organization’s identity than are the identities of later-stage managers (Dobrev and Barnett, 2005). Founders also often control a sizeable portion of the venture’s assets, so ownership and control are less separated in firms managed by founders than those run by nonfounders (Berle and Means, 1932). A final reason why this first succession event is so critical is that the founder’s social capital, which has been shown to be beneficial to an organization (e.g. Cao, Simsek & Jansen, 2012; Bamford, Bruton, and Hinson, 2006), could be lost as a result of the succession event. In regards to this last reason, inasmuch as new ventures are dependent on a founder-CEO’s social capital for its growth and survival and that these founderCEO’s can often be replaced and/or exit the firm (Hofer and Charan, 1982; Haveman and Khaire, 2004), it presents an organization with the problem of protecting itself

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