How business founders maintain their company’s success
Received wisdom states that business founders should withdraw from their company once it achieves a certain size. A study conducted by researchers from the University of Passau, from Frankfurt and Heilbronn comes to a different conclusion.
Among researchers, it is known as the Founders’ Dilemma: once a start-up has achieved a certain size, it would be better for the founding team to withdraw from the company and leave the running of it to professional management – this is the prevailing recommendation.
Yet the research has hitherto focused on executive boards. In the study ‘Founder-Inventors and Their Investors: Spurring Firm Survival and Growth’, Professor Carolin Häussler (University of Passau) and her co-authors Maria Hennicke (Frankfurt School of Finance and Management) and Professor Elisabeth Müller (German Graduate School of Management and Law, Heilbronn) show that research-conducting founders in particular should definitely continue being involved in the company, though in an area that reflects their key skill: research and development.
An overview of the findings
Companies with founders who are engaged in research are less likely to fail. In fact, the risk of failure in these companies is a third less than in firms whose founders are no longer actively engaged in research. ‘Founder inventive involvement has a considerable influence on survival’, the authors write.
Venture capital heightens this effect. When investors get involved in companies with research-conducting founders, this leads to increased growth. The authors highlighted this effect in numerous analyses. ‘Venture Capital investors are well aware of founders‘ importance for setting the firm’s future path.’ Investors frequently expand and strengthen the executive board, so that founders can once more concentrate on their key skill in the area of research and development.
‘(..) the inventive activity of founders, which is idiosyncratic to their firms, provides continuity, guides resource orchestration, and thus increases the chances of those firms to prosper’, the authors conclude. Yet founders often lack the requisite managerial experience once a certain growth phase is achieved. However, they shouldn’t withdraw from the company at this stage, but instead continue to do the thing they do best: identify gaps in the market and develop appropriate solutions.
Study conducted as part of a DFG project
The study was conducted as part of the project ‘The originality of entrepreneurs along the life cycle of firms: Understanding the attributes of entrepreneurial decision making’ at the University of Passau, which the German Research Foundation (DFG) is already funding in its second phase. In this project, the researchers are working with data from 1,498 German SMEs founded between 1998 and 2007, and observe these over a 10-year period. They focus on knowledge-intensive industries in the technology sector and on companies that were neither in the top tier of growth nor which failed immediately after being founded. The economists are comparing these data with patent data to identify whether and how founders were involved in the inventions of their companies.
The study ‘Founder-Inventors and Their Investors: Spurring Firm Survival and Growth’ will be published in the prestigious Strategic Entrepreneurship Journal in September. The publisher is the Strategic Management Society. As the name suggests, this is a leading specialist society for the promotion of strategic management. It represents 3,000 members from over 80 countries with different backgrounds, including researchers and practitioners.
About the authors
Professor Carolin Häussler holds the Chair of Organisation, Technology Management and Entrepreneurship and is leading the DFG project at the University of Passau. She is a member of the German government’s Commission of Experts for Research and Innovation. She is also a DFG academic adviser at the University of Passau.
Dr Elisabeth Müller is the Professor of Entrepreneurship and Family Firms at the German Graduate School of Finance and Law in Heilbronn heads its Institute for Entrepreneurship.
Maria Hennicke is a PhD student at the Frankfurt School of Finance & Management.