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May 15, 2008

Hey, What if the Founder Gets Hit By a Bus? Nada

One of the questions investors in early-stage companies -- both private and public -- often ask is this: What if the founder gets hit by a bus? It is, of course, an investor's way of saying, "How much of this company's continuing success requires this man/women at the helm?"

Most investors skew toward believing that founders of successful companies matter a great deal. A new paper, however, makes the argument that founders are largely expendable. By looking at what happens when founders die, the author concludes that founders are good for ideas, but dispensable for managing the company -- even early in its life:

I analyze the causal effect of the founder for firms in their infancy by using variation in the occurrence of founder death. Both cross-sectional and within-firm estimates suggest that founder death has only a slight effect on firm performance, as measured by firm survival, profitability, or growth. I interpret this as the founder being substitutable even in a firm's infancy and that the main function of the founder is to discover new opportunities and setting up the firm rather than managing it. [Emphasis mine]

Source:

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